The government’s commitment to policies that will stimulate local economic growth and job creation, thereby helping to stabilise the rapidly deteriorating fiscal position, faces a stern test. The ‘Covid-19 loan’ has brought to the fore the politically contentious issue of whether the time for National Treasury to turn to the International Monetary Fund (IMF) for budget support – regarded as a distant possibility as recently as February 2020 – has finally dawned. If that is so, is it time for South Africa to be immersed in the conditionalities of IMF fully fledged budget support, and more so the restrictions meted out on those who do not put in the effort to pass the test?

The IMF’s 5-year, US$4.3 billion loan to South Africa was extended under the support programme for countries in need of emergency assistance to ameliorate the economic effects of the Covid-19 pandemic − the multilateral agency’s first facility to the country since 1993. South Africa is the first and only economy so far with a well-developed bond market and without an IMF-monitored macroeconomic reform programme in place to tap the emergency facility. Absent are the onerous lending conditions that specify benchmarks for budget deficits and the public sector wage bill, limit social transfers and continuous financial assistance for state-owned enterprises, and prescribe debt thresholds. These are the very tests that South Africa has not passed in recent years, despite the urgency to reduce the budget deficit and contain the rapidly expanding public debt burden. The emergency loan can be rolled over within its maturity period only in cases where the country has undertaken a staff-monitored programme. Therefore, nations in need of further assistance will have to be sign up for fully fledged budget support.

The economic impact of Covid-19 is severe. National Treasury’s ‘slow’ scenario, under which real GDP plunges by 12.1% in 2020, seems plausible, although our forecast is a lower -8.1%. Government projects the main budget deficit to more than double to 14.6% in 2020/21 compared with the 6.8% estimated in the February 2020 budget, with wider outcomes also expected in 2021/22 and 2022/23 (chart 1). National Treasury predicts that prioritising measures to stabilise and reduce the public debt stock will help to contain the debt-to-GDP ratio to a peak of 87.4% in 2023/24 (‘active scenario’), without which the ratio will surge to 140.7% by 2028/29 (’passive scenario’) (chart 2).

Reducing the budget deficit will be necessary to stabilise the public debt stock. Financial assistance to key state-owned enterprises was a key contributor to budget deficits since 2008/09. In 2019/20 bailouts amounted to R59.8 billion and accounted for 18% of the main budget shortfall, and they totalled R187.4 billion between 2000/01 and 2019/20 per National Treasury figures. Eskom absorbed R132.7 billion of the R162 billion bailouts between 2008/09 and 2019/20. The electricity utility, which is not able to service its debt obligations from cash generated from its operations, has reported that its debt stock rose to R488 billion in March 2020 from R440 billion a year earlier, an 11% rise which strongly suggests that Eskom will require bailouts higher than the R122 billion (for the fiscal years 2020/21 to 2022/23) estimated in the February 2020 budget.