IMF Endorses South Africa's Fiscal Plans

by Mike Godfrey, Tax-News.com, Washington

22 September 2010

In its Article IV consultation with South Africa, the International Monetary Fund (IMF) said the country's medium-term fiscal consolidation plan "struck the right balance between supporting the ongoing recovery and rebuilding fiscal space".

The IMF said that sizeable fiscal easing had helped ameliorate the impact of the crisis, albeit at some cost. According to IMF estimates, the structural fiscal deficit widened from 2.25% to 6% of GDP between 2008/09 and 2009/10, almost entirely on account of discretionary spending increases.

Part of it (about 0.75% of GDP) was due to lending to the state-owned electricity company (Eskom) and is thus expected to be a one-off. Another 2% of GDP, however, went towards public sector salary increases as well as increased coverage of social transfer programs and was, in the IMF view, of a more permanent nature.

The plan to reduce the fiscal deficit through substantially lower real spending growth was welcomed. On the revenue side, the IMF thought that the decline in collections was mainly due to the output gap, and should reverse as the gap gradually closes.

The IMF noted that 2010/11 budget spending growth would be curbed ambitiously from the 9% or so growth rate of the past three years to 2–3% going forward. Under the lower economic growth assumptions of the budget, this would permit a gradual reduction in the fiscal deficit.

With more evidence now that economic growth, at least in 2010, is likely to be higher than earlier envisaged, the IMF pointed to the feasibility of a lower deficit path, provided that the government stuck to its announced spending growth path. The IMF argued that such a spending path would help:

• Prevent a pro-cyclical bias in fiscal policy;
• Rebuild public savings more quickly with a view to containing the current account deficit and alleviating the burden on monetary and exchange rate policy; and
• Avoid allocating still more resources to the public sector wage bill, in particular before the effectiveness of the last round of large increases in improving public service delivery had been ascertained.

The IMF stressed that it did not want to see another round of public sector wage increases exceeding inflation expectations and productivity gains, which could jeopardize the fiscal targets and distort wage negotiations in other sectors. The IMF thought any revenue over-performance should be saved or else directed only toward urgent development spending.

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