SOUTH AFRICA

Background:
South Africa suffered with apartheid regime till 1994 which left it with unequal distributions of
income, imbalances in skills, distorted patterns of population settlement, large and inefficient
bureaucracy and low productivity. To combat years of years of financial sanctions and economic
isolation enforced by the international community, Reconstruction and development Programme
was made the primary socio-economic programme which aimed to address and recompense the
inherited gross disparities of apartheid, socially, spatially and economically.

Now, after more than 25 years of democratic rule, south Africa has the second largest economy in
the continent of Africa only after Nigeria thanks to it being a regional manufacturing hub and most
industrialized on the continent. In addition, has the continents largest stock exchange. Though in the
recent years south Africa has been struggling with high level of unemployment soaring above 25%
and slow economic growth as compared to other developing counter parts. Economic growth in the
country has been mostly anaemic in the fast five years. Coming to 2019, the economy of south Africa
contracted in the fourth quarter by 1.4% with seven out of ten industries contracting in the same
quarter and the inflation increasing to 4.5% in the January of 2020 up by 0.5% as compared to
December 2019.

Fiscal and Monetary Policy:

One of the targets in the budget for the financial year 2016/17 was to narrow budget deficit from an
estimated 3.4% of the GDP in 2016/17 to 2.6% by 2019/20 by deploying a combination of higher
taxes and a lower expenditure ceiling whereas the budget deficit is set to widen to 6.8% of the GDP
at the end of fiscal year 2021.

In the budget 2020, reductions have been proposed over the next three years’ worth R261 billion,
which includes reduction in the wage bill of provincial and national departments worth R160.2
billion. In addition, a total of R111.1 billion for reallocations and additions over the medium term.
The idea behind is to reduce the consolidated deficit to 5.7% of the GDP by 2022/23 from the deficit
of 6.8% in the year 2020/21, with debt rising over the same period to 71.6% of the GDP. The total
consolidated spending is proposed at R1.95 billions in the year 2020/21 and subsequently to R2.04
and R2.14 in 2021/22 and 2022/23 respectively. The personal income tax brackets and rebates has
seen an above inflation increase and an increase of R3000 in the annual contribution limit to tax free
savings from March 1st 2020. Relative to the 2019 Budget, the 2020 Budget proposes a total of
R156.1 billion net non-interest spending reductions over medium term expenditure framework
[MTEF] period.
The Fiscal Challenge in front of South Africa is the widening gap between expenditure and revenue.
Revenue remains largely stable at around 26 per cent of the GDP. Since 2007/08, expenditure has
increased as a share of the GDP. The spike in ratio for the year 2019/20 mirrors lower economic
growth, a substantial increase in support to the state-owned companies and a downward
adjustment to the nominal GDP.
The graph shows Monetary Fiscal Policy Mix of South Africa from the year 1994 to 2015 wherein the
bubble size is correspondent to the GDP growth rate.

The four main blocks in the graph can be interpreted as:

 Top Right: Expansionary Monetary Policy (Green Block), Expansionary Fiscal policy
 Top Left: Contractionary Monetary Policy, Expansionary Fiscal Policy
 Bottom Right: Expansionary Monetary Policy, Contractionary Fiscal Policy
 Bottom Left: Contractionary Monetary Policy (Red Block), Contractionary Fiscal Policy

One thing is clear from the graph, there have been lot of expansionary monetary policy whereas in
contrast fiscal policy has been less expansionary. Of the 22 years being analyzed, there
were seven years where both fiscal and monetary policy was seen as contractionary, and five years
where both fiscal and monetary policy was seen as expansionary. Another observation from the
graph is that fiscal and monetary policy of South Africa has been disjointed over the years with no
clear evidence that fiscal and monetary policy is coordinated as coordinated fiscal and monetary
policy would see the bubbles cluster together whereas here, they can be seen spread out. In terms
of effectiveness, a coordinated fiscal and monetary policy would have better effect in both cases
where target is growing the economy and slowing it down when there is likelihood or qualms of
economy getting overheated.

In the year 2012, South Africa government presented the main budget expenditure ceiling, with the
aim of regulating spending growth and stabilising debt. Between the years 2013/14 and 2018/19, in
retort to lower revenue and economic growth, expenditure ceiling was repeatedly reduced by the
government. Goods and services and capital budgets were the areas where majority of the
reductions were applied, whereas wage bill was left relatively unchanged. Increased support for
higher education and larger Unemployment Insurance Fund payments are the main reason for
growth in current transfers. Consequently, the composition of spending has diverted from capital
towards consumption.

External Account:
External debt of South Africa has risen to $185.2 billion in December, 2019 as compared to previous
quarter figure of $177.7 billion. Latest reports for south Africa report:

 Current Account logged a deficit of 1.2 USD billion in December 2019

 Foreign Direct Investment (FDI) increased by 716.3 USD million in December 2019
 Direct Investment Abroad expanded by 846.7 USD million in December 2019
 Its Foreign Portfolio Investment increased by 635.9 USD million in December 2019
 Nominal GDP was reported at 88.2 USD billion in December 2019

South Africa had total export amounting to USD 93,597 million of and total imports amounting to

USD 92616 million leading to a positive trade balance of 981,122 in thousands of USD.

Exports are expected to be 65700.00 ZAR Million by the end of last quarter of the fiscal 2019/2020,
as stated by Trading Economics global macro models and analysts’ expectations.
 Unit- ZAR Million
Fig - Forecast for South Africa Exports

Bibliography:

https://tradingeconomics.com/south-africa/exports

http://pubdocs.worldbank.org/en/798731523331698204/South-Africa-Economic-Update-April-
2018.pdf

https://www.southafricanmi.com/south-africas-monetary-fiscal-policy-mix.html