What South Africa must do...

South Africa is at a crossroads. To save its democratic project, it needs to put itself on a path to inclusive, dynamic growth, creating a virtuous cycle that delivers on Nelson Mandela’s promise of “a better life for all.”

For the past decade, the country has been locked in a low-growth trap, with falling per capita income, rising inequality, and skyrocketing unemployment, which is now at a record-high 34 per cent. In a world beset by economic vulnerabilities, South Africa still manages to stand out for its poor performance and racially skewed outcomes – a tragic legacy of centuries of colonialism and apartheid.

The combination of low growth, high unemployment, large deficits and debt ratios, and a lack of effective structural reforms has created an unstable disequilibrium. After being skillfully managed by Mandela and then by Thabo Mbeki, the country was torn asunder by Jacob Zuma’s decade-long reign of state capture and corruption. Zuma’s successor, Cyril Ramaphosa, is now trying to turn things around, but the challenge is enormous.

The economy could go one of two ways. In one direction, weak growth leads to a fiscal crisis, further reducing incomes and employment, and inviting more civil unrest like that in July, when riots and looting swept the country.

There is good reason to worry that South Africa is already on this path, given its troubled medium-term debt outlook. When a country runs a flat or negative primary budget balance (excluding interest payments), real (inflation-adjusted) growth must exceed the real rate of interest on its debt stock. Otherwise, its debt-to-GDP ratio will grow continuously. That is what is now happening in South Africa. To avoid a debt crisis, real yields must decrease and/or real growth must increase.

Austerity alone cannot fix the problem. To put itself on a firmer economic footing, South Africa needs a program to expand social welfare and recapitalize businesses while also undertaking structural reforms and pursuing fiscal consolidation.

Social welfare can be expanded with a $55 monthly Unemployed Relief Grant. Costing 2 per cent of GDP, this should be a multi-year, if not permanent, replacement for the $24 monthly Social Relief of Distress Grant that expires in April 2022. That program has been highly effective and thus merits being doubled. It would put more money into the hands of the 12 million unemployed, who would then spend it (unlike wealthy savers), stimulating economic activity and job creation.

The new grant could be financed in part by government saving measures and tax reforms to remove deductions targeted at higher-income taxpayers. In the short term, however, it will require around $7 billion of additional debt on the government’s balance sheet. Fortuitously, that is roughly equal to the anticipated incremental corporate-tax revenues this year, following the recent commodity boom.

Grants are not a panacea; but they have an integral role to play in attacking the unemployment and growth crisis, as do other interventions such as wage subsidization, when properly applied. There is ample evidence to show that grants alleviate poverty and hunger, and help recipients start new businesses. Expanding this form of support is a no-brainer.

South African businesses also need support in the form of recapitalisation. Here, a sizable hybrid equity funding scheme for small and medium-size enterprises could go a long way, as would grants funded by the national treasury, in partnership with financial institutions. An injection of risk-sharing equity into eligible businesses would help to stimulate both investment and job creation.

The government also should work with the state electricity utility, Eskom, to devise a credible operational and structural plan that includes recapitalizing the company’s balance sheet. The aim should be to normalize Eskom’s debt within a five-year period, thereby defusing a ticking financial time bomb while enabling a green energy transition with concessional funding.

Ultimately, the government must demonstrate to rating agencies and investors that it has a credible growth plan that includes structural reforms, and that resets the fiscal path to align with faster medium-term consolidation as growth kicks in.

Other reforms must target higher rates of fixed investment. Aside from a Covid-19 vaccination program, policymakers should focus on aggressive tourism marketing; fast-tracking bankable public-private infrastructure, including ports and railways; implementing spectrum allocation; creating new incentives to adopt renewables, embrace electric-vehicle production, establish data centers, and transform agriculture and mining; and reviewing industrial and labor policies to draw investment into both labour-intensive and high-skilled production.

Copy right: Project Syndicate 2021