South Africa: Analyzing South Africa's Debt Trap

1 November 2022

Debts are quite effective economic tools when used correctly. However, debts have been seen to hold people and nations accountable over time and space and sometimes push developing countries to the edge of economic crisis.

In the case of Africa, debt has evolved to become a phenomenon that nations such as South Africa, Sudan, Tanzania and Zambia battle with every inch of their economic prowess.

The African Report argued that the number of African countries at risk of debt distress has doubled since the COVID-19 pandemic, but only three of them have opted for debt restructuring.

  • South Africa has been hit with most brutal power outages which hurt the economy significantly
  • Recently, the finance ministry of South Africa stated that it will transfer state energy provide Eskom to government to empower the utility performance
  • South Africa's debts will peak at just over 71 per cent of gross domestic product this year

In the case of South Africa, one of Africa's diverse economic debt is hurting the nation massively. South Africa's government debt accounted for 70.1 per cent of the country's Nominal GDP in June 2022, compared with the 68 per cent clocked in in the previous quarter (CEIC Data).

Interestingly, compared to other debt-driven nations such as Sudan and Zambia, South Africa is data-friendly regarding debt records. The South African government debt to GDP ratio is updated quarterly and available as far back as from December 1960 to June 2022 (CEIC Data).

Further, the debt reached an all-time high of 70.2 per cent in March 2021 and a record low of 23.5 per cent in September 2008. This reflection is crucial as it gives nations a clear insight into how debt when used appropriately towards public investment can serve as an economic tool that can impact the economy and vice versa.

It is without a doubt that before the pandemic, African countries were already in debt distress, and the pandemic only worsened this condition. The situation became stiff when average debt-to-GDP ratios rose from about 60 per cent to 70 per cent.

The South African government has been working towards disentangling itself from debt issues destabilising its economic systems. In 2020, speaking as the African Union Chairperson, South African President Cyril Ramaphosa said that government revenues in Africa were estimated to drop by $45 billion from the pre-COVID forecast.

READ: IMF says Zambia debt relief pledge clears way for US$1.4 billion programme

South Africa's economic situation

The South African Presidential Economic Advisory Council (PEAC) publication "How Should South Africa Deal With Rising National Debt" highlighted three critical burdens on the budget contributing to rising debt levels.

Rising government remuneration costs are one of them, as South Africa's government wage bill grew by 70 per cent between 2007 and 2019.

"About four-fifths of this increase was caused by the increase in real remuneration rates for public sector employees, and about one-fifth of the increase was due to increased employment," the PEAC publication pointed out.

Progression of mismanagement, wastage and corruption in all three spheres of government (legislature, executive and judiciary) have contributed to rising debt and slowing growth.

Further down the second reason--mismanagement, corruption, fraud and nepotism in state-owned companies such as Eskom, Transnet, SAA, and Denel--have impacted South Africa negatively and cost billions in wasted funds where poor delivery of critical infrastructure and services is hurting production.

South Africa has dipped in and out of recession over the past year. Further, the nation has been beset by strike action in recent months, mainly regarding wage disputes. At the same time, rising living costs caused by increased interest rates and rising inflation are concerns for unions and their members (Business Tech).

Inflation is noted to have shaved much of the economic resources and efforts in South Africa. According to data from the South African Reserve Bank's Quarterly Bulletin the nation lost nearly 1.6 million work days due to industrial action in the first half of 2022, up from 45,000 in the previous year.

Electricity, essential for any modern civilization to enhance its economy, has become a nuisance in South Africa as a series of load shedding is causing severe economic problems.

The state-owned utility Eskom confirmed the possibility of a new intense power cut, pointing out "a high level of load shedding ... ". This situation could undoubtedly worsen the already dire economic problems of many South Africans who are already plagued by mass unemployment and spending cuts.

Bloomberg News pointed out that the ongoing blackouts--the worst year on record--were a significant contributor to the economy's 0.7 per cent contraction in the second quarter.

"Severe outages are hazardous to workers in deep-level mines and hurt manufacturing across Africa's most-industrialized nation. Eskom also poses a significant risk to public finances, with the government guaranteeing as much as 350 billion rand ($19.9 billion) of its debt," Bloomberg News reported.

This situation does not only call for a serious sustainable energy generation approach but also a sound economic approach that considers people's welfare.

READ: TICAD8: Billions to support African debt restructuring

Dealing with debt

First and foremost, carefully managing opportunities, costs and risks of different sources of borrowing is crucial for low-income countries.

This has been evident throughout the past years for South Africa as its capacity for debt management remains weak. This ought to be reflected in nations' commitment towards handling their debt, as lack of demand by citizens on accountability and political responsibility must be addressed.

Mismanagement of expenditures robs South Africa of the chance to excel. The nation needs to downplay government hiring of overpaid and excess staff.

Consequently, turning appointment processes overseen by the Minister of Public Service and Administration is an ideal approach for South Africa as overstaffing in government offices sucks significant amount of funds that can be channeled to useful services. It was found through a series of questions during a parliamentary session that in the past three years, over $76 million was spent on catering and entertainment - an act perceived as betrayal of responsible public spending.

Further, having budget rules could be another great tool to help South Africa escape the debt trap.

This would feature implementing a well-designed fiscal policy rule at the national, provincial and local levels to help to raise confidence in the short term and reduce risks over the long term (PEAC), and boost consumer and business confidence, which will in turn stimulate private spending and sustain economic activity.

Investment in sound and sustainable energy infrastructures could impact nationwide power surges. However, borrowing for infrastructure in a weak governance setting is detrimental to the economy's welfare and the overall debt.

South Africa's switch from coal to renewable energy investment stands to revitalize the economy and increase job creation.

Further, shifting from public expenditures to investment in sustainable energy infrastructure and effective utilization of industrial and small business policies could prevent South Africa from the debt trap.

"More consistent and systematic support for high potential labour absorbing sectors such as tourism and agriculture, including investment incentives for export-oriented agriculture and food processing and other labour-intensive sectors, to support expanded employment and improvements in working conditions," the PEAC report argued.

South Africa, one of Africa's competitive economies, stands a chance to turn the table and regain its economic glory. The past two years have shown how mismanagement of government funds, poor political commitment and energy challenges in a heavily industrial complex developing nation can cripple the economy.

READ: Ghana sovereign debt crisis tip of African countries loan mess

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