South Africa: Country's Fiscal Policies Have Reduced Public Debt, Grew Economy
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BuaNews (Tshwane)
15 July 2008
Posted to the web 15 July 2008
Michael Appel
Johannesburg
The democratic government, which inherited economic and fiscal problems from the previous government, has managed to reduce the public debt burden and grow the economy through prudent fiscal policies.
This is according to the latest Organisation for Economic Co-operation and Development (OECD) economic assessment report on South Africa.
The budget deficit in 1993/1994 was equivalent to over 7 percent of Gross Domestic Product (GDP), and was still above 5 percent higher when determined macroeconomic stabalisation efforts began, read the report.
The authorities had notable success in strengthening revenue collection - but also succeeded in restraining expenditure growth between 1997 and 2003, according to the OECD on Tuesday.
The report added that the independent revenue authority is seen as a model of effective government policy implementation.
The report highlighted that as a result of prudent fiscal policies employed by the new dispensation, that economic growth was accelerated from 2003 onwards.
By 2006/07, the budget was in surplus, and the current Midterm Budget Plan projects further surpluses through 2010/11.
The turnaround in budgetary performance has given rise to a sharp reduction in the ratio of public debt to GDP since 1996.
This has contributed to an improvement in investor sentiment towards South African assets, which has seen its reflection in strong portfolio inflows since 2003.
The major credit rating agencies have upgraded South Africa several times since the mid-1990s, and Standard and Poor's recently reaffirmed its BBB+ sovereign rating, despite the financial market turbulence and Rand weakness in late 2007 and early 2008, citing South Africa's solid coordination of fiscal and monetary policies and the continued build-up of international reserves, the report read.
While the South African government has earned its reputation for fiscal prudence, the OECD does, however, say that part of the reason for the improvement in the country's budgetary position is the fact that commodities have experienced a stark increase in prices allowing for greater economic growth.
They form the back bone of the South African economy.
According to National Treasury, the structural balance of the country's account has remained in deficit even while the unadjusted balance has swung into surplus.
The Treasury's projection showed a continued widening of the cyclically adjusted account deficit in 2008/09, then experiencing a moderate reduction through 2010/11.
Put simply, an account deficit is when a country's imports outweigh their exports therefore not allowing that country to cover the costs of the imported goods.
Government has noted the widening account deficit, highlighting that it was in part due to its massive infrastructure projects linked to the 2010 FIFA World Cup.
Trade and Industry Minister Mandisi Mpahlwa, while speaking at an economic cluster briefing at the Union Buildings recently said local manufacturers were operating at full capacity and could not handle the local increased demand for capital goods.
Government, therefore needs to source the materials needed for the Gautrain, stadia, and public transport projects, among others, from oversees at a greater cost.
Mr Mpahlwa highlighted, however, that South Africa was able to finance its account deficit through increased foreign investment in the country.
"A major achievement of the post-apartheid governments was to maintain a strong and independent bank, which has helped it to underpin confidence in macroeconomic stability.
"Inflation has been as high as 16 percent in the early 1990s, and was still high around 10 percent in early 1994 before the new government took office.
"The independence of the South Africa Reserve Bank was enshrined in the Constitution in 1996, and inflation control was moderately successful in the late 1990s.
"In 1998-99, however, the bank's eclectic approach, using mixed monetary and inflation indicators, came under stress from another upturn in inflation.
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"In the Budget speech in February 2000 the government announced the decision to adopt pure inflation targeting, with a target range of 3 to 6 percent for the Consumer Price Index excluding interest on mortgage payments (CPIX)," the OECD said.
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