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July 16, 2020

SOUTH AFRICA: Treasury loses another spending battle

BY Anne Frühauf

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In a 15 July letter of commitment to South African Airways (SAA)’s business rescue practitioners, the ministers of finance and public enterprises committed “to mobilize funding for the short-, medium- and long-term requirements to create a viable and sustainable national airline.” While Finance Minister Tito Mboweni had refused to provide any additional funding for SAA in his June supplementary budget, he now appears to have lost yet another fiscal battle.

A 14 July vote by creditors that approved the latest business rescue plan required an immediate funding commitment. Without this, another creditors’ meeting on 24 July would have become necessary and would have resulted in SAA’s liquidation. The latest plan requires ZAR 10.1bn in funding to provide start-up capital for a new, drastically reduced airline and retrenchment packages for about 80% of current staff. The Treasury is also on the hook for repaying ZAR 16.4bn of accumulated debt and interest over the next three years, though this had already been budgeted.

SAA also represents a broader bellwether of the Ramaphosa government’s approach to state-owned enterprises and its willingness to finally brave reforms. Recent signals do not inspire much confidence. After the cabinet supported the business rescue plan on 24 June, it had already become clear that Mboweni would lose another fiscal battle. Nonetheless, it is still uncertain whether or how much of the funding will be mobilized solely from the Treasury’s empty coffers, or other sources, for example via the Development Bank of Southern Africa (DBSA) or Public Enterprises Minister Pravin Gordhan’s much-vaunted “potential equity partners” if they ever materialize.

Despite making all the right noises around the need for zero budgeting and structural reforms, the finance minister cuts an increasingly lonely figure in his battle to rein in South Africa’s dramatic fiscal slide. The Treasury’s ability to hold the line on fast slipping public finances is in growing doubt amid the pandemic emergency and among a cabinet where many ministers do not fully appreciate or support the necessity of fiscal prudence. Mboweni’s supplementary budget already generated opposition, and risks of further fiscal slippage may intensify in the coming months. One example is the public-sector wage bill, where it is still uncertain whether the Treasury can achieve the envisaged savings of ZAR 160bn over three years.

Another emerging issue is the question of social grants. Emergency top-up and special Covid-19 grants provided under April’s ZAR 500bn fiscal stimulus package are due to end in October, as Mboweni has repeatedly stressed. Yet Social Development Minister Lindiwe Zulu announced this week that the government was “considering” introducing a more permanent basic income grant (BIG) for people aged 18-59 who are ineligible for currently available grants. Although the debate has been on the back burner for years, thanks to the pandemic shock, the BIG will likely find broad support within the cabinet and among the ANC alliance amid devastating unemployment figures and ahead of local elections looming in 2021. The BIG debate will thus set the Treasury up for another significant spending battle, at a time when it faces a ZAR 300bn revenue shortfall and little hope of an economic bounce-back given structural constraints (including fresh electricity shortages).

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