Why South Africa May Give in to IMF By Introducing Debt Ceiling

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  • Country ‘open to’ a debt limit, Mboweni and Kganyago say
  •  Measures to rein in debt to be introduced from fiscal 2022

South Africa may introduce a debt limit in its budget, bowing to a suggestion proposed by the International Monetary Fund almost two years ago.

The government is “open to introducing a debt ceiling in addition to the nominal spending ceiling currently in place,” Finance Minister Tito Mboweni and Reserve Bank Governor Lesetja Kganyago said in a letter to the lender, in which it asked for an emergency loan to fight the coronavirus pandemic. The IMF has agreed to provide South Africa with $4.3 billion.

An increase in virus-related spending, including a 500 billion-rand ($30.2 billion) stimulus package, is set to add pressure to an already strained fiscus. Government debt is projected to peak at close to 90% of gross domestic product by 2023-24, if the government takes active steps to manage its finances. Failing that, the debt trajectory will keep rising, topping 140% by the end of the decade.

Mboweni has warned that the country could slump into a sovereign-debt crisis unless it reins in borrowing. Once the impact of the pandemic subsides, authorities will take action to “reverse the upward trajectory of the public debt-to GDP ratio,” Mboweni and Kganyago said in the letter of intent. Steps will be introduced in the fiscal year through March 2022 and beyond, they said.

The Washington-based lender said in November 2018, after a staff visit to South Africa, the country should consider introducing a debt anchor in its budget. Public debt was reaching uncomfortable levels and a ceiling on that would signal the government’s commitment to reduce its obligations and help tighten fiscal policy, it said at the time.

 

 

 

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