Is a failure to implement reforms quickly enough putting the economy at further risk?

A failure on government’s part to exhibit any sense of urgency to make hard decisions regarding South Africa’s recovery process will exacerbate the country’s current economic challenges.

Is a failure to implement reforms quickly enough putting the economy at further risk?



A lack of economic growth over close to a decade – particularly compared to South Africa’s emerging market peers – has meant that the country’s income has not been able to accommodate either population growth or spending patterns. Slow economic growth is being exacerbated by policy uncertainty, onerous regulation, high levels of taxation and a controversial and questionable commitment to reform. Investment tends to gravitate to countries where there is more certainty and where, for example, investors are assured of property rights and where government’s messaging is less ambiguous.

South Africa’s economy is heavily reliant on a handful of key sectors including finance, services, manufacturing, mining, agriculture and tourism, many of which are being negatively impacted by ill-conceived policy decisions and service delivery failures at a local government level. In the tourism sector, for example, the decision to provide financial support based on BEE criteria is counter-productive.

Agriculture and agro-processing, for example, has been identified as one of the drivers of economic growth and job creation. Commercial farming activities and agricultural businesses play an important role in ensuring the economic survival of many small towns across the country, as well as ensuring food security for the economically marginalised.

However, these sectors are frequently constrained by poor service delivery by municipalities. Take, for example, the decision by Clover to close its cheese production facility in Lichtenburg in the North West province as a result of service delivery failures. The knock-on effect of this decision is significant given that hundreds of permanent jobs have now been lost in the town, impacting both breadwinners and their dependants, as well as farmers who supplied the factory and now no longer have access to this convenient market.

Or Astral Foods in the Lekwa Municipality which has lost millions as a result of the municipality’s failure to provide water and electricity.

Agriculture and agri-processing are not the only sectors reliant on service delivery – in fact, the majority of sectors rely on the efficient and reliable delivery of services such as water, electricity and roads.

At a national government level, inefficiencies and a lack of capacity are also having a negative impact. The mining industry estimates that approximately 5 000 applications have been held up by the Department of Mineral Resources and Energy with the result that exploration and new mining development has come to an almost complete standstill.

In 1980 mining contributed 21% to South Africa’s GDP, the second biggest contributor behind manufacturing. By 2016 this figure had fallen to just 7%, recovering slightly to 8.3% in 2019 and 8.2% in 2020.

Inefficiencies have long plagued South African ports with negative consequences for both importers and exporters. The World Bank ranks South Africa’s container ports lower than all other ports in Africa in terms of performance. According to the Container Port Performance Index 2020, the Port of Cape Town, the most highly rated of South Africa’s ports, is ranked a dismal 347 out of a total of 351 ports.

Although government has promised to overhaul the country’s logistics infrastructure network, including ports and rail transport, Public Enterprises Minister Pravin Gordhan says this could take 10 to 15 years to achieve.

The release of spectrum – which government has recognised is a key reform required to aid the country’s recovery – is another area where the state has failed to deliver on its mandate, causing much frustration to the telecommunications sector and constraining investment.

Government’s failure to recognise just how urgently it needs to get its house in order is one of the biggest risks facing the country. It has failed to deliver against a range of metrics including economic growth, policy and regulatory certainty, employment and fiscal health.

Despite the fact that government revenues are up as a result of better than expected tax collections and a commodities boom which positively impacted the mining sector, the reality is that the country’s actual debt quantum – and debt trajectory – has not changed. While National Treasury is pointing to a primary surplus, this is being driven primarily by commodity price related tax receipts. While this is a welcome windfall it has not removed South Africa’s historical structural deficit. On the contrary, the windfall tax collection – an amount estimated to be between R60 billion and R80 billion – has to a large part been committed to expenditure items (R18 billion to public servants and R30 billion to additional social grants) that may prove to be recurrent expenditure items. Issues such as a universal basic income grant as well as the proposed National Health Insurance (NHI) would be very difficult to implement without perpetuating this deficit.

With economic growth expected to moderate back to sub potential levels of 1.5% to 2% in the years to come, South Africa is vulnerable to a cooling commodity cycle.

While National Treasury and some commentators may point to improved debt metrics, the question that really needs to be asked is ‘what has really changed?’ Without a meaningful change to our growth path the trajectory remains the same.

The key to South Africa navigating and emerging from the position it finds itself in, lies in growth. Notwithstanding the positive tailwinds we have seen in the last year or so - which we will gladly accept - the only sustainable solution to South Africa’s social and economic challenges lies in growth. South Africa simply cannot regresses back to its ‘sub-potential’ growth trajectory if it is to overcome the challenges that it faces.

 

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