When Statistics South Africa (Stats SA) released the latest GDP growth figures for Q4 2023 in February 2024, an exuberant Ms Khumbudzo Ntshavheni, Minister in the Presidency, could hardly contain her pleasure. Growth had increased by 0.1% in the quarter, translating to an annual GDP growth of 0.6% in 2023 after an expansion of 1.9% in 2022.
“This growth is particularly encouraging as it surpasses pre-pandemic levels. It indicates a resilient economy showing signs of recovery and bettering previous strength. We are pleased to see the transport, storage, and communication industries leading the growth.
“This modest uptick in GDP is a testament to the concerted efforts of various sectors and stakeholders in navigating the complexities that were posed by the Covid-19 pandemic and other domestic and global challenges,” she declared.
The eagerness with which the government has leapt to brandish even modest growth is testament that it needs all the good news it can muster in the run-up to the general election, scheduled for 29 May. South Africa is one of 64 countries that will be holding elections before the year is out – making it a record year in terms of the polls. The election also marks the 30th anniversary of continuous ANC rule since 1994. The post-apartheid generations have only experienced ANC rule.
What impact the economic growth announcement may have on voters is difficult to judge, given that the country’s poor and low-income populations have had to endure half a decade of tough economic times.
The South African backstory is still uniquely beholden to ‘the legacy of apartheid’. In his National Budget 2024 speech to parliament in Cape Town in February, Finance Minister Enoch Godongwana reiterated: “The budgets we have tabled since democracy in 1994 have been about securing the goal of growing the economy, so that we can do more to address the inequalities and deprivation that still scar our society and undermine the promise of democracy.
“The government is making the most out of very limited resources. We continue to support GDP growth; reduce the growth of government debt and the cost of debt; allocate more funds for core services; provide for the social wage and preserve infrastructure budgets.”
As it is the ruling ANC has borne the brunt of a relentless onslaught of negative sentiments and pessimism over the state of the economy, the country’s finances and society. Some of it is the usual hurly-burly caused by electoral cycles but a good deal of the criticism is well deserved.
The split from the ANC of erstwhile President Jacob Zuma, who recently launched his new uMkhonto WeSizwe Party – which according to the latest poll has 13% of the popular vote – along with perceived ‘ANC fatigue’, has raised speculation that the party of Madiba may lose its absolute majority for the first time since 1994. However, only someone very poorly informed would write off the ANC’s dominance of the South African body politic. It would require a change of seismic proportions for the ANC not to be heading the next government come the end of May 2024.
No one, including President Cyril Ramaphosa and Finance Minister Enoch Godongwana, is in any real doubt that despite the modest growth, the economy is in a dire state. However, with sustained efforts to get out of adversity coupled with the government’s anti-corruption drive – which has started to bear results – and a projected upward growth trajectory over the next three years, there is cautious optimism.
A good deal of this will depend on being able to iron out operational logjams such as tangled transport logistics and delays, especially at the port of Durban, and the persistent power cuts. If this can be successfully done, it could generate a real GDP growth scenario of 4-5% per annum in the medium term.
But South Africa’s economy – like other economies, African and elsewhere – is hostage to the global economy, which is still in the recovery phase, although the outlook is brightening.
The updated IMF World Economic Outlook in January 2024 projects global real GDP growth at 3.1% in 2024 and 3.2% in 2025. To IMF Managing Director Kristalina Georgieva this represents resilience, supported by inflation falling faster than expected. The emerging and developing markets are leading the growth rates table, which the advanced economies can only dream of, but double digit rates have been as rare as unicorns.
The average annual GDP growth projection for the advanced economies is 1.6%, in contrast to 3.7% for sub-Saharan Africa (SSA) and 4.1% for the emerging and developing economies. GDP growth for SSA is estimated at 3.3% in 2023, projected to rise to 3.8% in 2024 and 4.1% in 2025. South Africa’s GDP growth, estimated at 0.6% in 2023, is projected to rise to 1.0% in 2024 and 1.3% in 2025.
The fact that Stats SA confirmed the actual 2023 figure suggests that the economy is on track towards an improved growth trajectory, albeit modest, over the next two years. This is further supported by the fact that the electricity, gas and water sectors scored a second consecutive quarter of positive growth, expanding by 2.3%.
“The country,” added Stats SA, “experienced fewer days of loadshedding in Q4 (63 days) compared with Q3 (91 days), with the rise in electricity production and consumption reflecting positively in the GDP numbers.” Similarly, finance, real estate and business services fared even better, growing by 1.8% and contributing 0.4% to GDP growth in 2023.
Tackling public debt
Public debt is an integral part of the government’s fund-raising mix. But it has to be sustainable, and expectations well managed. To be fair to Godongwana, he inherited most of the current position. His fiscal strategy is based on several positive assumptions – government gross borrowing requirement will decline from R457.7bn ($24.67bn) in 2024/25 to R428.5bn ($22.47bn) in 2026/27. This led him to revise downwards projections for gross debt/GDP to 75.3% in FY25, lower than the forecast of 77.7% in his medium-term budget statement at end 2023. The changes are mainly revenue-driven, with revenue/GDP projected at 27.5% in FY25.
The budget deficit too is projected on a declining trajectory over the next four years, from 4.9% or R347.4bn ($18.72bn) for FY2023/24 to 3.3% or R274.2bn ($14.78bn) in 2026/27.
Debt has to be paid back through costly interest servicing. The Treasury’s own projections put the average annual growth of debt service costs at 7.3% for the next four years. Debt service costs as a share of revenue will increase from 20.7% in 2023/24 to 22.1% in 2026/27. This translates into debt interest servicing costs of R385.9bn ($20.80bn) in 2024 alone.
In its response to the budget, Fitch Ratings said that the projections appear optimistic. It however questions Godongwana’s intention of tapping the government’s gold and foreign exchange reserves to the tune of R150bn ($8.08bn) over the next three years, adding that it could undermine the Treasury’s fiscal buffers and would only lower the gross debt/GDP by a projected 2 percentage points.
But Fitch remains optimistic that the “introduction of new fiscal rules by the Treasury could help promote fiscal sustainability in the longer term, but their influence on the sovereign credit profile would depend on how binding the constraints are and the depth of political support for them.”
One way to mitigate the challenge of paying for infrastructure investment, social grants and costly debt servicing is to deepen resource mobilisation by broadening the country’s tax base. Hanan Morsy, Deputy Executive Secretary and Chief Economist at the UN Economic Commission for Africa (ECA) is a champion of this strategy for South Africa and the continent in general.
“Africa has the lowest tax to GDP ratio across the regions [16.8% in 2019 compared to 35.1% for the OECD countries]. Optimising our tax collection efforts is imperative for sustainable development,” she said at the African Conference of Ministers in Victoria Falls in early March.
“Countries can begin by improving their efficiency of public spending, ensuring that every dollar invested delivers maximum returns. It is not just about investing in the right areas; it is also about doing things in the best possible way to minimise waste and maximise impact,” she stressed.
Her recommendations on adopting a progressive tax system, digitalisation through electronic tax filing, removing ineffective tax exemptions and assessing optimal taxation of the digital and technology sectors, have not gone unheeded.
Godongwana in his Budget speech revealed that the Treasury “is implementing a global minimum corporate tax to limit the negative effects of tax competition. Multinational corporations with annual revenue exceeding €750m will be subject to an effective tax rate of at least 15%, regardless of where their profits are generated,” he said. The reform is expected to yield “an additional R8bn ($430m) in corporate tax revenue in 2026/27”.
The South African Revenue Service (SARS) is perhaps the most advanced in Africa despite a period of relapse during the state capture years under President Zuma. The reputation of SARS has been restored to a large extent under the watch of the current Commissioner, Edward Kieswetter, whose term was extended by Ramaphosa in February for a further two years. Not surprisingly, SARS’ total tax intake increased from R216.5bn ($11.6bn) in 2017/18 to R563.8bn ($30.2bn) in 2021/22, a compound annual growth rate of 6.5%.
In the 2024/25 National Budget, the Treasury projects a total tax intake for the financial year of R1,862.9bn ($100.4bn), of which R738.7bn ($39.81bn) is to come from personal income tax. “Our long-term tax policy strategy remains focused on broadening the tax base while improving tax compliance and administrative efficiency. Visible progress has been made in rebuilding and modernising SARS,” added Godongwana.
SARS has expanded the tax register, improved debt collections and reduced fraudulent refunds and trade valuations. This has led to improvements in revenue collection and also stabilised the rating outlook for the country, and the cost of finance raised in the financial markets. In the clampdown on the illicit tobacco and gold trades, SARS has raised R10bn ($540m) through additional assessments.
Positive developments
Other positive developments that temper Godongwana’s optimism include the approval of a Draft National State Enterprises Bill. This will create the new State Asset Management SOC Ltd – which will manage the finances of various state-owned enterprises to prevent state capture of government entities; the recouping of R91.4bn ($4.93bn) stolen money related to state capture; and progress in getting South Africa off the Anti-Money Laundering Grey List of the Financial Action Task Force (FATF), of which it is a member.
As the election war-drum begins to sound more frantically, the principal anti-ANC sentiment is that the party does not have the experience or the capacity to steward a modern economy. This is neo-colonialist poppycock. Madiba’s first two terms in the aftermath of centuries of colonial and apartheid rule were based on the ethos of “a new era of hope, reconciliation and nation-building.”
And how he delivered – economic growth rose to an average 5% per year between 1994 and 2007 – the first time it had done so since 1970. Government debt levels halved, and a budget surplus was recorded – achievements for which the ANC government never received due credit or recognition, especially from sections of the local and international media.