IMF urges careful design of SA’s planned fiscal rule

South Africa’s plan to control public finances via a so-called fiscal rule will help restore policy credibility, but will need significant support to succeed, according to the International Monetary Fund (IMF).

National Treasury announced last month it would propose binding guidelines by October to keep public finances in Africa’s largest economy on a sustainable path by introducing a principles-based fiscal anchor.

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Details of what this would look like are to be fleshed out in the coming months.

But the goal is to control spending and put debt, as a percentage of gross domestic product, on a downward path after a projected peak of around 79% in the fiscal year that ends 31 March.

“Establishing a principles-based fiscal framework in legislation is an appropriate first step toward policy credibility and debt-reduction objectives,” the IMF said in a note published by National Treasury on Thursday.

It added that success will require the support of “strong supporting public financial management institutions”.

This includes the need to reprioritise government spending and ensure the Treasury can monitor and help manage fiscal risks stemming from state enterprises.

Finance Minister Enoch Godongwana hopes to present the proposal to lawmakers when he tables the mid-term budget in October.

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South Africa’s finances worsened dramatically during former president Jacob Zuma’s rule, when mismanagement and the looting of state power utility Eskom and freight-rail and ports operator Transnet led to major taxpayer bailouts.

Combined with the aftermath of the 2008 global financial crisis and feeble economic growth, this saw the nation’s debt-to-GDP ratio more than triple, driving borrowing costs to around 21% of total revenue from less than 9%.

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“Strong management of fiscal risks remains of paramount importance to securing South Africa’s fiscal sustainability, given the history of negative budget shocks from state-owned companies,” the IMF said.

It acknowledged that such rules should also include a so-called escape clause that would allow the government to loosen the purse strings in case of a shock to the economy, but cautioned that these need to be carefully designed.

“There is no one-size-fits-all approach to escape clauses, but to prevent it from being triggered too easily, there should be clear principles established,” the Washington-based lender added.

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