Further exchange control reforms, the possibility of tougher controls over the financial sector, and a recovery in tax revenue, are some of the highlights of Finance Minister Pravin Gordhan’s Medium-Term Budget Policy Statement tabled on Wednesday.
He also announced increased government spending, predicted a stable inflation outlook, and raised the possibility of increased taxes.
Gordhan again warned against currency devaluation and trade protectionism as a response to the strong rand.
He said South Africa would follow the established course of mitigating the negative impacts of the local currency’s gains by boosting foreign currency reserves and easing restrictions on capital outflows.
Gordhan cautioned that South Africa, as a small economy, could not fully offset the ravages of massive global capital movement, and needed greater productivity and competitiveness to cope with the rise of the rand.
“Inappropriate short-term responses to global currency adjustments, such as competitive devaluations or increased trade protectionism, will entail longer-term costs to economic growth.
“A coordinated international agreement on currency alignment would help to minimise the negative effects of this rebalancing, especially for developing countries.”
The minister’s remarks echo his warning last week that devaluations by separate nations could spark a trade war, which appeared at odds with a call by Reserve Bank Governor Gill Marcus for “extraordinary measures” to mitigate rand strength.
Gordhan noted that the real effective exchange rate has risen to 12% above its average level for the past decade, posing a threat to stable growth.
“Sustained exchange rate overvaluation will lead to unbalanced growth, widening the current account deficit and increasing the economy’s vulnerability to shocks.
“Fiscal consolidation and lower interest rates are the macroeconomic prerequisites for a more competitive real exchange rate.
“The combination of tighter fiscal policy and looser monetary policy will support demand while moderating the build-up of imbalances arising from strong capital inflows.
“Short-term exchange rate risks can also be mitigated more directly through stepped-up purchases of foreign exchange reserves and reduced restrictions on capital outflows to encourage an increase in foreign assets.”
Gordhan said South Africa must strive to take advantage of the surge of capital flows to emerging markets, while minimising the risks that go along with such volatile investments.
Net capital flows continued to rise, reaching 5,5% of GDP in the first half of this year, compared to 4,7% in 2009.
“The investment pattern over the past decade suggests that a structural change is under way in global savings allocations.
“This shift may result in a long-term rise in levels of fixed and portfolio investments held in well-managed developing countries, providing an important source of funding for private-sector growth and infrastructure development.
“At the same time, low interest rates in advanced economies are supporting a short-term investment wave motivated by the prospect of quick gains.
“Such short-term investments are inherently volatile. The policy challenge is how to benefit from these capital inflows while minimising the attendant risks.”
Gordhan warned again that South Africa could not afford to embark on an aggressive forex buying spree.
“The rand has appreciated by 7,5% against the US dollar since December 2009, and by 6,1% against a trade-weighted basket of currencies.
“Because South Africa has higher inflation than its major trading partners, the real effective rand exchange rate, which reflects losses or gains in competitiveness, is now about 12% above its average level for the past decade.
“Fiscal and monetary policy have adjusted to take account of these circumstances.
“As a small, open economy with low domestic savings and relatively high financing needs, South Africa cannot fully offset the impact of massive global capital flows, barring a much sharper tightening of fiscal policy that diverts resources towards substantially larger reserve purchases.
“Complementary policies to support sustainable gains in productivity and international competitiveness are also necessary,” he said.
Spending on health to grow
Government spending on health would grow to over R127-billion by 2013, as the National Health Insurance (NHI) scheme starts to take shape.
The statement details an increase in the current financial year’s health budget to R101,9-billion.
The medium-term spending figure, set in February’s Budget, for 2011/12 of R109,7-billion will grow by R3,1-billion, while the 2012/13 projection of R116,6-billion is to rise by R4,7-billion.
In 2013/14, consolidated health spending will total R127,1-billion.
The figures appear to fall short of estimates released by the African National Congress at its national general council meeting last month.
The party said then that preliminary estimates by a ministerial advisory committee indicated that resources needed for NHI “increase from R128-billion in 2012, to R267-billion in 2020, and R376-billion in 2025”.
Experts have differed on the affordability of the scheme, with consultancy Econometrix warning last week that it would require that the South African economy grow by an “improbable” 7% a year.
The statement said the groundwork was already being laid for the scheme.
It said changes had already been made to the equitable share formula, which governs distribution of cash to provinces.
This made provision for a “more specific and detailed health component”, with subcomponents for primary health care and hospitals.
“Amendments to improve the fairness of the tax treatment of medical scheme constitutions will be introduced,” it said.
Consideration was being given to ways of piloting improved family health care as part of an enhanced primary care system, including district-based contracts with general practitioners.
Options had to be explored for “aligning” medicine procurement to make the most of economies of scale from bulk purchases.
The statement said there was potential for private hospital participation in training doctors and nurses in conjunction with academic institutions, and for bringing private sector management capacity into public health delivery.
The ANC said last month that NHI would kick off in the rural areas and would be staggered over three phases, starting in 2012.
Police, military, courts get more money
Gordhan also announced an increase in funding for the police, courts and military over the next three years.
The allocation for the police will rise by an average 7,5% annually, with the bulk going towards improving detective and intelligence services.
“Tactical response teams will be established in each of the provinces over the next three years to conduct medium-risk policing operations and make use of available intelligence to prevent crime,” the statement said.
The state’s corruption-busting capacity will also be boosted, with the Special Investigative Unit’s ranks set to increase to more than 650 staff by 2013/14.
Gordhan’s mid-term blueprint indicates the defence department’s budget will increase by an average 8,9% annually over the next three years.
The additional funds will help the military to carry out its new tasks of safeguarding South Africa’s borders and preventing illegal immigration.
The courts’ budget allocation will go up by 8,4% annually over the medium-term framework period.
The revised national expenditure estimates for this year includes R320-million for salary adjustments in the department of justice, the National Prosecuting Authority and Legal Aid South Africa.
R20m to bury pebble bed
An amount of R20-million has been set aside this year to help see the pebble bed reactor into its grave.
According to the adjusted spending estimates tabled in Parliament on Wednesday, the money will reimburse the SA Nuclear Energy Corporation for “dismantling and decommissioning the fuel development laboratories”.
The project, intended to establish South Africa as a leader in nuclear technology, has cost R9,2-billion over ten years, 80% of which came from the state.
Public Enterprises Minister Barbara Hogan last month killed off the reactor when she announced that the government would “no longer invest” in the project.
She said the project, which began in 2000, would continue on a “care and maintenance” basis with drastically reduced staff, and a focus on the retention of its intellectual property and of certain skills, and the preservation of its assets.
Further investment could well have been in excess of R30-billion, she said.
Ends of arms-deal loan payments in sight
The last foreign loan repayments for South Africa’s multibillion-rand arms deal were in sight, according to Gordhan.
The statement details how the repayments, which totalled R800-million in 2009/10, would shrink to R352-million this year, grow again to R511-million in 2011/12, then dwindle to R38-million the following year, before vanishing as an item on the national accounts.
The deal, worth R30-billion in 1999, included the purchase of corvettes, submarines, light helicopters, fighter trainers and advanced fighter aircraft.
The loan agreements were controversial, more so after a leaked Cabinet document warning that spending of even half that amount could create a situation in which government “could be confronted by mounting economic, fiscal and financial difficulties at some future point”.
Arms deal activist Terry Crawford-Browne tried unsuccessfully to show in court that then-finance Minister Trevor Manuel had acted illegally in signing off the agreements.
The police’s Hawks investigating unit earlier this month announced that it was shutting down a long-running but inconclusive probe into allegations of corruption in the deal. – Sapa