OECD report calls for caution

Thursday, August 25, 2022

South Africa faces the threat of reversing social gains if it does not adequately address potential future shocks.

This is if the country does not address challenges in health, infrastructure and education.

This warning was fired by the Organisation for Economic Co-operation and Development (OECD) while presenting the country’s 2022 economic survey.

The 2022 OECD Economic Survey provides detailed policy recommendations for reforming the energy sector, state owned enterprises, social protection, labour market and infrastructure.

Addressing a virtual media briefing on Thursday, OECD Acting Chief Economist, Álvaro Pereira, said these were long term and structural challenges that need to be addressed.

He said: “If not tackled adequately, they could threaten the social gains achieved so far. And this will require improving considerably the efficiency of public spending through better public procurement and the management of public funds.”

In the medium to long term, he says, tax revenue mobilisation will be critical, saying lifting tax revenues will be necessary to restore the sustainability of public finances and to finance growth in housing reforms.

The survey proposes several ways to increase tax revenues while reducing distortions and enhancing fairness.

Beyond this, Pereira said the country faces a long-term challenge of low productivity.

“South Africa's productivity is comparatively low when declining, which is detrimental to living standards. When a country has lower productivity levels, living standards are not going to rise as much as they could,” he said.

The report states that better skills are required to lift productivity and potential growth.

Despite these challenges, the report concedes that the country has in the past two decades, accomplished enormous social progress. These have brought access to key public services to millions of citizens, including in education, health and housing.

He said the OECD remains committed to working with South Africa, in designing, developing and delivering better policies for better lives.

In the short-run, growth is slowing down and is expected to reach 1.8% in 2022 and 1.3% in 2023.

He said electricity shortages have become the most internal pressing bottleneck to growth.

“This is why it's so important to hasten reforms in the energy sector in the near future. The 2022 OECD Economic Theory of South Africa provides detailed policy recommendations for reforming the energy sector, such as for example, facilitating the entry of renewable energy producers in the electricity market,” he said.

Deputy Finance Minister David Masondo said the trade-offs government and the country face are becoming increasingly more necessary and urgent in the current economic environment.

He said the persistent energy supply constraints are being addressed. This is being done through urgent plans in the short to medium term to address generation and capacity problems directly through the fast tracking of energy reforms and encouraging private sector participation in the energy sector.

 “The global arena, rising inflation and global risks surrounding the Russia Ukraine conflict also pose a risk to the recovery of our economy. Consumption and exports are driving our country's recovery. South Africa's exports have benefited from global demand and favourable commodity prices,” he said.

Growing the economy

The Deputy Minister said the government remains focused on “unlocking the necessary growth in order to set our economy on a sustainable path”.

Having lifted COVID 19 restrictions on the economy, government is now focused on addressing the critical issues in electricity supply.

Public finances, he said, reached an unsustainable position before the pandemic and were now overstretched.

“Failure to contain unsustainable debt and debt service costs will damage the country's long term economic prospects. Our progress in tackling unemployment, poverty and inequality remains insufficient.

“The roots of our growth challenges are well understood. Low levels of productivity and competitiveness are inhibiting job creation and investment. It is for this reason that our government is focused on implementing structural reforms to raise growth while embarking on the path of stabilising our debt,” said Masondo.

Government is also aware of the importance of a sustainable fiscal situation to manage the cost of borrowing.

“Interest rate costs have been the fastest growing component of our government expenditure for some time. It is of paramount importance that we ensure the cost of borrowing does not raise this burden further. Debt service costs limits our capacity and our ability as government to spend on critical social priorities and programs to elevate the worst effects of the current crisis as well as our long term poverty, unemployment and inequality strategy to reduce these problems.” – SAnews.gov.za

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