South Africa: Policy for growth

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South Africa has unveiled a blueprint for economic recovery, with increased funding to support industry, job creation and a much-needed boost for infrastructure, although marginal rises in inflation and exogenous instability may hamper the ability of the government to provide any immediate palliatives.

On October 25, finance minister Pravin Gordhan handed down the Medium-Term Budget Policy Statement (MTBPS), which outlines a mix of increased spending on projects seen as essential to underpin economic growth, such as improving transport, power, health and education services, while at the same time stressing the need to reduce the state’s wages bill and to moderate salary increases in the public sector.

“This means that we must see a moderation in the growth of the wage bill and spending on goods and services,” Gordhan said. “We must do more with less.”

Over the coming three years, there will be $37.3bn worth of investments made in the energy sector, $29bn for transport and logistics, a further $4.9bn spent on building hospitals and health facilities, and $4bn for education infrastructure.

Another of the core elements of the MTBPS is a $3.1bn package to strengthen the country’s industrial base, with the funding to be staged over a six-year period. The package aims to enhance industrial development zones, boost investments in enterprises and job creation, support green initiatives and encourage the private sector to partner with the public sector to invest in infrastructure, Gordhan said.

However, more than just laying the foundations for growth, Gordhan also said the government was making preparations against the risk of future global economic downturns, which he warned were inevitable.

“There will be another crisis and we have to make sure that we have the fiscal space to work ourselves out of it,” he told the parliament.

Though acknowledging that even with reduced spending in some areas and increased productivity by state agencies, there would have to be a moderate widening of the deficit and a rise in debt levels overall to tackle the country’s structural issues, the minister said such measures were necessary to build longer-term expansion and stability.

“For the next three years, the aim is to moderate spending growth, combined with a recovery in tax revenue, so that national debt will be stabilised,” he said. “We must borrow to invest in infrastructure – not for government consumption – and that’s the key shift we need to make.”

Hopes for wage restraint will come under increased pressure, should inflation continue to rise, as many analysts fear it will. Data issued by Statistics South Africa on October 27 showed that producer inflation climbed in the previous month, hitting 10.5% year-on-year in September, up from August’s 9.6%. While consumer inflation was well below this, running at 5.7% in September, it too is on the rise, having been 5.3% the month before. Rising inflation, and with it interest rates kept high by the central bank as its preferred measure to keep consumer demand in check, will likely fuel calls for wage increases well beyond the 5% cap proposed by Gordhan for state workers.

The government has also lowered its forecast for GDP for this year, predicting economic growth of 3.1% in 2011, down from earlier projections of 3.4%. Though the forecast for the following three years is better, at 3.4%, 4.1% and 4.3%, respectively, GDP growth is well shy of the 7% the government and analysts estimate is needed to cut deeply into current unemployment levels of around 25% and create jobs for the increasing numbers of young South Africans entering the workforce each year.

The government will also have to grapple with the continuing global volatility, which has an impact on demand for locally produced goods and services. With many of South Africa’s traditional trading partners, such as Europe and the US, teetering on the brink of recession, there is a risk of a decline in exports, which would have significant ramifications on output and employment – one of the issues the minister is hoping the MTBPS will be able to prevent in the future.

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