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South Africa Faces Tough Choices as Budget Deficit Widens Economy

Finance minister warns of fiscal deterioration and calls for reforms

by Motoni Olodun

South Africa’s finance minister, Enoch Godongwana, has warned that the country’s budget deficit will be larger than expected due to lower tax revenues and higher spending pressures. In his medium-term budget statement on Nov. 1, Godongwana said the consolidated budget shortfall would decline from 4.6% of gross domestic product (GDP) in 2021/22 to 4.2% in 2022/23 but will remain above the target of 3.2% by 2025/26.

The main reasons for the fiscal deterioration are the weak economic recovery from the COVID-19 pandemic, which has reduced tax collections, and the rising demand for social services and infrastructure, which has increased expenditure. Godongwana said the government would have to borrow an additional R254 billion ($16.9 billion) over the next three years to fund the extension of a temporary welfare grant for poor households, the debt relief for struggling power utility Eskom, and other priority programs.

The increased borrowing will result in a higher debt burden for South Africa, which already has one of the highest debt-to-GDP ratios among emerging markets. Godongwana said the government debt will stabilize at 73.6% of GDP in 2025/26, later and at a higher level than previously projected. This will also raise the cost of servicing the debt, consuming about 20% of the main budget revenue by 2025/26.

Godongwana said the government is committed to fiscal consolidation and debt sustainability but acknowledged that achieving these goals will require difficult trade-offs and reforms. He said the government will have to trim spending in some areas, such as public sector wages and non-essential goods and services while boosting revenue through tax policy changes and improved administration. He also said the government must implement structural reforms to enhance economic growth, competitiveness, and investment.

The minister’s budget statement received mixed reactions from analysts, rating agencies, and social groups. Some praised his honesty and realism in acknowledging the fiscal challenges and risks, while others criticized his lack of concrete measures and targets to address them. Some also expressed concern about the social and political implications of cutting spending and raising taxes in a country with high levels of poverty, inequality, and unemployment.

South Africa’s economic outlook remains subdued and uncertain as the country faces headwinds from power shortages, labor unrest, corruption, and policy uncertainty. The country also remains vulnerable to external shocks, such as changes in global financial conditions, commodity prices, and trade tensions.

Despite these challenges, Godongwana said South Africa has the potential to achieve faster and more inclusive growth if it can overcome its structural constraints and leverage its strengths. He said the government is working on several initiatives to improve the business environment, support key sectors such as mining, manufacturing, tourism, and agriculture, and promote regional integration and cooperation.

Godongwana ended his speech on a note of hope, saying South Africa has a history of resilience and innovation in times of crisis. He urged all stakeholders to build a more prosperous and equitable society.

Source: Bloomberg

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