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Africa|Business|Efficiency|Road|Service
Africa|Business|Efficiency|Road|Service
africa|business|efficiency|road|service

Minerals Council looks forward to more detail following supplementary budget

25th June 2020

By: Marleny Arnoldi

Deputy Editor Online

     

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The Minerals Council South Africa says Finance Minister Tito Mboweni’s Supplementary Budget speech expressed the right perspectives on the management of the country’s deepening fiscal crisis, but lacked detail on the steps that have to be taken to rescue the economy.

“It is important to remember that our economy was already showing significant signs of strain, for example, subinvestment-grade ratings, growing public sector wage bills and shrinking tax collection, all before the Covid-19 crisis.”

The South African economy is expected to contract by 7.2% this year, which will be the largest contraction in nearly 90 years.

The government’s response to the economic carnage caused by the lockdown and its ongoing ramifications for business and the people of South Africa has been to announce a R500-billion support package – one of the largest economic packages in the developing world.  

This, together with debt service costs, will take projected total consolidated budget spending to more than R2-trillion for the first time in the country’s history. Gross tax revenue collection will never cover this with gross tax revenue collection revised to R1.12-trillion for the 2020/21 fiscal year.

About a quarter of the R500-billion provisional Covid-19 fiscal response package is reprioritisation of government spending.

The Supplementary Budget, presented on June 24, has indicated that the main revisions to non-interest spending will free up R145-billion. This will come from small cuts to government employee compensation as well as transfers and subsidies – particularly in provinces and municipalities.

Taken together the measures and adjustments presented by the National Treasury translate into a consolidated budget deficit of R761.7-billion, or 15.7% of gross domestic product (GDP) in 2020/21, which is more than double February’s projection.

More significantly, early projections are that gross national debt will be close to R4-trillion, or 81.8% of GDP in 2020/21, from 65.6% projected in February.

“Without external support, this debt will almost entirely consume the country’s annual domestic savings. What is heartening is that the Minister plans to have debt stabilising at 87% of GDP; the fear is that several lofty targets announced in the last year have been missed. It is absolutely vital that this target is not exceeded.

“This is why the government has little choice but to turn to new sources of funding. What concerns us is the degree to which we will be borrowing internationally. Treasury had previously indicated that it would be going to the international market for about R95-billion,” the Minerals Council explains.

In the budget document, government clarified that it intends to borrow about $7-billion from international finance institutions to support the pandemic response. At today’s exchange rate that is about R125-billion.

“The difference is significant and we look forward to receiving details on how this came about,” says the council.

Infrastructural development was the one source of renewed growth identified, as the President had stressed on the day before the budget was tabled.

“Again, a good idea. It will be some time before we will see this coming to fruition, however. And then it will need to be set in motion on a basis of maximum efficiency and minimal cost.

“The other source of support for the private sector engine of growth is the restructuring of the credit guarantee scheme, announced in April but which has not yet enjoyed significant uptake,” the Minerals Council points out.

The council adds that Mboweni’s references to zero-based budgeting and State-owned enterprises will be critical on the road ahead.

The task to rescue the economy is indeed gargantuan and will require the kinds of fundamental changes outlined by Mboweni, the council states.

“We hope government, and the rest of the country will have the will to do what is needed. Otherwise the spectre he raised of pre-war Germany and, more recently, Argentina, Zimbabwe and Greece are indeed what lies before us.

“South Africa is at a fork in the road and faces a slip to a sovereign debt crisis unless tough choices are made. To take the fork to the high road South Africa requires significant structural economic and institutional reforms to steady the ship, and create the space for much faster growth,” says Minerals Council CEO Roger Baxter.

To achieve this will require a significant increase in investment. This, in turn, will require a significant improvement in the competitiveness of the economy, which will be driven by proper structural and institutional reforms.

“We commend Mboweni for taking some of the tough first steps in this journey to allow South Africa to take the fork to the high road,” Baxter concludes.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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