by Gregory Penfold

ED'S NOTE

Call for action

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A statement released by the International Monetary Fund (IMF) following a recent visit to South Africa identifies three significant challenges to the country's economic prosperity:

  • Persistently weak economic growth. Subdued growth is largely attributable to stagnant private investment and exports and declining productivity, mainly due to the slow pace of reform to address weaknesses in the business climate, including regulatory constraints, labor market rigidities, and inefficient infrastructure. Unreliable electricity supply has exacerbated the growth constraints. Small and medium-sized enterprises (SMEs) are especially disadvantaged in this environment.
  • Deteriorating fiscal and government debt. Weak revenue and increased current expenditure have worsened the budget composition, and raised deficits and borrowing requirements, undermining the sustainability of public finances. This fiscal trajectory has also lifted financing costs across the economy.
  • Major difficulties in the operations of state-owned enterprises (SOEs). Inefficiencies in SOEs operating in network industries such as electricity and transport, translate into costly inputs for businesses, and repeatedly require financial support from the fiscus.

The IMF notes that "reliance on government spending to boost growth has not delivered the anticipated results as the supply-side nature of the growth constraints has not been addressed" and that "government financing of SOE current spending is not growth-enhancing and has increased debt service costs that are now the fastest growing expenditure item, crowding out other forms of public spending". Urgent action is required from the authorities, including "substantive and coordinated reform implementation ... to lift South Africa from the low-growth trap". The report recommends expediting the following reforms as a matter of priority:

  • Renewed focus needs to be placed on reducing the cost of doing business. Streamlining SOE operations and sharing existing infrastructure in electricity, telecoms, and transportation with private operators will reduce high input costs and improve competitiveness. Untargeted subsidies and tax incentives for selected sectors should be replaced by a business-friendly environment that attracts competitive and innovative firms.
  • Dominant market players need to be subject to healthy competition to reduce the high mark-ups in sectors lacking contestation and alleviate constraints that inhibit the emergence of SMEs. The pertinence of a range of regulatory requirements that unduly inflate production costs need to be reconsidered.
  • Labor market rigidities should be tackled by decentralizing wage bargaining to help align wages more closely with productivity and reducing workforce management restrictions to align hiring and other operational decisions with business needs.

It is to be hoped that the FY20/21 budget in February will "articulate measures to address fiscal and SOE challenges and stabilise government debt".

If the Integrated Resource Plan and Eskom Road move to the implementation state, the economy will benefit from reliable electricity generation, pricing certainty and investment opportunities. Now is the time for coordinated action among all stakeholders to deliver the efficient energy sector that South Africa deserves.

 

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