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SA's fiscal policies has reduced public debt, grew economy

by Michael Appel
on 15 Jul 2008
BuaNews Online
BuaNews Online

The democratic government, which inherited economic and fiscal problems from the previous government, has managed to reduce the public debt burden and grow the economy through prudent fiscal policies.

This is according to the latest Organisation for Economic Co-operation and Development (OECD) economic assessment report on South Africa.

The budget deficit in 1993/1994 was equivalent to over 7 percent of Gross Domestic Product (GDP), and was still above 5 percent higher when determined macroeconomic stabalisation efforts began, read the report.

The authorities had notable success in strengthening revenue collection - but also succeeded in restraining expenditure growth between 1997 and 2003, according to the OECD on Tuesday.

The report added that the independent revenue authority is seen as a model of effective government policy implementation.

The report highlighted that as a result of prudent fiscal policies employed by the new dispensation, that economic growth was accelerated from 2003 onwards.

By 2006/07, the budget was in surplus, and the current Midterm Budget Plan projects further surpluses through 2010/11.

The turnaround in budgetary performance has given rise to a sharp reduction in the ratio of public debt to GDP since 1996.

This has contributed to an improvement in investor sentiment towards South African assets, which has seen its reflection in strong portfolio inflows since 2003.

The major credit rating agencies have upgraded South Africa several times since the mid-1990s, and Standard and Poor's recently reaffirmed its BBB+ sovereign rating, despite the financial market turbulence and Rand weakness in late 2007 and early 2008, citing South Africa's solid coordination of fiscal and monetary policies and the continued build-up of international reserves, the report read.

While the South African government has earned its reputation for fiscal prudence, the OECD does, however, say that part of the reason for the improvement in the country's budgetary position is the fact that commodities have experienced a stark increase in prices allowing for greater economic growth.

They form the back bone of the South African economy.

According to National Treasury, the structural balance of the country's account has remained in deficit even while the unadjusted balance has swung into surplus.

The Treasury's projection showed a continued widening of the cyclically adjusted account deficit in 2008/09, then experiencing a moderate reduction through 2010/11.

Put simply, an account deficit is when a country's imports outweigh their exports therefore not allowing that country to cover the costs of the imported goods.

Government has noted the widening account deficit, highlighting that it was in part due to its massive infrastructure projects linked to the 2010 FIFA World Cup.

Trade and Industry Minister Mandisi Mpahlwa, while speaking at an economic cluster briefing at the Union Buildings recently said local manufacturers were operating at full capacity and could not handle the local increased demand for capital goods.

Government, therefore needs to source the materials needed for the Gautrain, stadia, and public transport projects, among others, from oversees at a greater cost.

Mr Mpahlwa highlighted, however, that South Africa was able to finance its account deficit through increased foreign investment in the country.

"A major achievement of the post-apartheid governments was to maintain a strong and independent bank, which has helped it to underpin confidence in macroeconomic stability.

"Inflation has been as high as 16 percent in the early 1990s, and was still high around 10 percent in early 1994 before the new government took office.

"The independence of the South Africa Reserve Bank was enshrined in the Constitution in 1996, and inflation control was moderately successful in the late 1990s.

"In 1998-99, however, the bank's eclectic approach, using mixed monetary and inflation indicators, came under stress from another upturn in inflation.

"In the Budget speech in February 2000 the government announced the decision to adopt pure inflation targeting, with a target range of 3 to 6 percent for the Consumer Price Index excluding interest on mortgage payments (CPIX)," the OECD said.

The 2007 collapse of the sub-prime mortgage market in the United States in mid-2007, along with the global liquidity crisis which ensued, as well as massive spikes in global food and crude oil prices has presented the SARB and central banks around the world with great challenges.

The SARB's Monetary Policy Committee (MPC) has since 2006 announced 10 interest rate hikes in an effort to halt the ever-rising interest rate which topped 10.4 percent in April 2008.

"Nonetheless, inflation has continued to rise, and a combination of global and domestic economic circumstances are providing a stern test to monetary policy.

"South Africa is exposed to considerable inflationary pressures from surging food prices and energy prices, import price pass-through from the recent weakness of the Rand, and electricity tariffs which are likely to rise rapidly this year and next.

"The bank itself now expects inflation to remain above the target range [of 3 to 6 percent] until the second half of 2010," the OECD said.

Some of the greatest challenges facing South Africa are the high rate of unemployment, social inequality and poverty, and social problems such as HIV and AIDS and the continuing battle against crime which has had a noted effect on the economy.

One challenge for the future will be to maintain the macroeconomic prudence which has fostered fiscal and external sustainability while dealing with the above problems.

Once this is achieved, "[it will make] it easier to tackle some of the legacies of apartheid which are still holding back progress for many black South Africans.

"This is especially true as regards education, competition policy, and the functioning of labour markets," the report said. - BuaNews


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