South Africa is caught in the grip of a financial tempest, with its debt spiraling from 27.6 billion USD in 2006 to a staggering 299 billion USD in 2022. The ominous trajectory suggests a further increase, with projections indicating a potential surge of 20 % by March 2026.

Among Africa’s Most Indebted Countries

Since 2006, South Africa’s debt has doubled in the space of five years. It quadrupled between 2011 and 2022. According to forecasts, this debt will reach 6,000 billion ZAR by 2026.

Worrying Public Debt-to-GDP Ratio

Nedbank, a financial heavyweight, sounds the alarm, revealing that debt servicing costs will devour approximately 18 % of revenue at the onset of the 2023 financial year. According to the South African National Treasury, this financial burden is on track to peak at a staggering 25 % of revenue by 2025/2026. Economists amplify the concern, with Dawie Roodt of the Efficient Group projecting an unsettling scenario where each South African citizen would carry an accumulated national debt of 3 750 USD by August 2023.

Nevertheless, in 2023, the country’s budget deficit is set to fluctuate between 6 % and 6.5 %, a stark departure from the minister’s conservative forecast of 4 %. Simultaneously, despite the National Treasury’s targeted cap of public debt at 70 % of GDP, the fiscal burden has already breached 72 %.

South Africa’s External Debt Ratio

By 2022, South Africa’s external debt hit an unprecedented 53.43 billion USD, placing it among the most indebted nations, alongside Egypt, with an external debt of 97.5 billion USD in the same period. The South African government, as per the latest IMF data, aims to stabilize its debt at 88.6 % by 2025/2026, striving to avert further erosion of the national economy. In the face of this delicate situation, urgent and effective strategies are imperative to slash South Africa’s mounting debt levels.

However, amid the looming crisis, some advantageous elements emerge. Only 11 % of the country’s total debt is denominated in foreign currency, and the debt enjoys an extended repayment horizon of more than 11 years. Despite these silver linings, the nation’s significant dependence on foreign investors, holding approximately 25 % of the country’s local currency debt, signals a precarious economic future. The depreciation of the South African Rand could exacerbate the situation if timely and apt measures are not taken.

Economic Impact of the Debt

Nedbank emphasizes the toll on the economy, disclosing that for every 5.4 USD of public funds, 1 USD is consumed by debt servicing. This staggering figure, nearly double the amount required for growth investment in emerging markets, must be deducted from resources earmarked for social services and infrastructure.

This relentless cycle of debt repayment threatens to drain resources from South Africa’s economy, diverting funds away from socio-economic priorities and casting a shadow over the nation’s global standing.

Strategies for Debt Reduction

Debt servicing stands as the third-largest expenditure category in South Africa, poised to worsen over the next three years. This mounting fiscal deficit stems from inefficient expenditure management and the pursuit of ambitious growth targets amidst dwindling revenues. The Treasury is left with the unenviable task of either:

• Raising more funds from a tax base already under pressure
• Cutting spending
• Increasing debt

In the latter scenario, domestic bond issuance is set to surge by 14 % in the current fiscal year. None of these options, however, present an attractive or easy solution for policymakers. The ominous scenario could push local governments toward adopting risky policies, endangering the stability of the state. The only plausible remedy appears to be a drastic 20–30 % cut in government spending, a challenging yet essential measure.

Alternatives to Budget Spending

The Ministry of Finance, cognizant of the urgency, has reportedly crafted a project proposal introducing government-wide austerity measures. These measures include hiring freezes and the suspension of new projects. The Treasury not only expresses its intent to curtail government spending but also envisions an increase in borrowing and taxes to offset the burgeoning budget deficit.

Contrarily, South Africa’s president, Cyril Ramaphosa, signals a divergent stance. Opponents of spending cuts explore alternatives, suggesting measures such as:

• Introducing a wealth tax
• Raising taxes on high-income earners
• Adjusting corporate taxes to compensate for the shortfall

Curiously absent from the discourse are measures to augment the civil service wage bill. It is worth noting that the government, merely a month after adopting the 2023/24 budget, raised civil servants’ salaries by 7.5 %, a stark contrast to the allocated increase of only 1.6 %. The financial tightrope South Africa treads demands not just immediate action but a delicate balance between fiscal responsibility and sustaining essential services.