South Africa’s current fiscal predicament is partly due to the severity of economic shocks but also because of the inefficiency of product and labour markets that has exacerbated the impact of these shocks.
This was according to Abebe Selassie, assistant director for International Monetary Fund’s (IMF) Africa Department who presented to Parliament’s standing committee on finance on Wednesday.
Selassie said SA’s recovery had been markedly slower than in other comparable countries due to three factors: economic shocks that occurred in two main rounds in 2007-2009 and again in 2010, compounded by monetary, fiscal and exchange rate policies and the institutionalised structures in the labour and product markets.
He said the first round of exogenous shocks during 2007-2009 were compounded by the electricity shortage that began in 2007, followed by the food and fuel price spike of 2007/2008 and these were followed by the monetary tightening cycle, plus the tightening up of lending standards that occurred with the implementation of the National Consumer Act.
Exogenous shocks
Selassie said the result was that inflation rose and that SA slipped into recession from which it has been slowly climbing out of since 2009.
These exogenous shocks led to an ebb and flow of portfolio capital, and, more recently increased turmoil on global financial markets resulting in a building of financial stress, he said.
Supportive fiscal policies have helped cushion the turmoil but Selassie said that government could not afford to increase its spending much beyond 2%.
He said that gross government debt had risen from 23% of GDP in 2007/2008 to a projected 40% in 2011/2012.
The IMF assessment said that monetary policy had been on par with that of other emerging markets and that the SA Reserve Bank had kept rates low in response to a weaker economy.
Modest reserves
As far as the exchange rate was concerned, the IMF said that the real exchange rate had appreciated as it reflected nominal appreciation but also rising domestic production costs.
However, foreign exchange reserves remained modest relative to the country’s peers.
Selassie heavily criticised SA’s market competition using the example of the country’s high telecommunications costs as increasing the burden of production and doing business and on the consumer purse.
The IMF presentation said that SA ranked fifth in the world after countries such as China, Russia, India and Israel for having the most restrictive market regulation policies.
It said that some features in the labour market had also aggravated the impact of the exogenous shocks.
Global trend
“Bargaining outcomes in recent years have emphasised wage increases ahead of productivity growth,” Selassie said.
He pointed out that the decline of labours’ share of income was a global trend and not unique to this country.
The IMF presentation said that it would be critical for SA to address the structural problems in order to enhance competitiveness, make economic growth more labour intensive and raise potential growth rates. — I-Net Bridge