2022 MTBPS: PBO & FFC briefing

Meeting report

The Chairperson welcomed everyone in attendance.

He recognised the Chairpersons of the other committees.

The apologies were noted.

The Chairperson noted that there were representatives from the provinces and welcomed them.

He indicated that the joint committee will receive presentations from 2 entities: each will be given 30 minutes to present and Members will engage afterwards.

Briefing by the Financial and Fiscal Commission (FFC)

Dr Patience Nombeko Mbava, Chairperson, Mr Chen Tseng, Head of Research, Mr Thando Ngozo, Senior Researcher, Ms Noxolo Mahlalela and Ms Gianni Delle Donne, Researchers, and Ms Shafeeqa Davids, Specialist: Division of Revenue Local Government, gave the presentation.

Growth has reverted to pre-pandemic levels. Load shedding is intensifying and deepening the energy crisis, and is also threatening growth recovery. The inflation rate has breached the upper limit of the 3–6% SARB inflation target range reaching a 13-year high of 7.8% in July this year. The SARB responded by hiking the repo rate by a cumulative 275 basis points to 6.25%. High inflation and lower growth forecasts present a risk of global stagflation. Inflation has risen faster and weighing in on global growth prospects.

With regard to fiscal policy, public service salary negotiations are still ongoing and uncertainty about this constitutes fiscal risk. The transfer of up to two thirds of Eskom’s debt to the government balance sheet to make it fundable is necessary but will increase government debt.

Total in-year spending adjustments amount to R13 billion. Total declared unspent funds amount to R1.96 billion and is largely driven by the Social Development Vote where R1.8 billion was unspent due to lower than anticipated take-up of the Social Relief of Distress (SRD) grant. While the FFC agrees with the decision to extend the SRD grant, policy certainty is required insofar as adopting a permanent and fiscally sustainable solution to the provision of comprehensive support for economically vulnerable and working-aged individuals, is concerned. The FFC is currently researching the fiscal incidence of social grants and specifically whether a BIG is feasible in the current fiscal climate.

The 2022 Special Appropriation Bill proposes additional funding, amounting to R30 billion, to three SOCs located across the Public Enterprises and Transport votes. R23.7 billion is in respect of the South African National Roads Agency (SANRAL), Denel (R3.4 billion) and Transnet (R2.9 billion). The challenges of SOCs have resulted in poor service delivery, poor financial management, less growth, massive unemployment, corruption and low business confidence. The maturity of SOCs debt payments coupled with poor functionality poses a substantial risk to the fiscus.

In terms of the Special Appropriation Bill, the FFC cautions against perpetuating a cycle of bailouts for poorly performing SOCs. The National Treasury must apply stringent conditions to the provision of this funding and for the sake of transparency, all reports and conditions must be publicly available.

A slight decrease is projected with respect to provincial total allocation between 2022/23 and 2023/24 budget allocation. The equitable share to provinces and conditional grants growth rates remain marginally -2.5% and 4.3% respectively over the 2023 MTEF.

Compensation of Employees remains one of the largest expenditure items from the fiscus. On the Public Sector Wage Bill, the Commission reiterates its recommendation in its 2021 MTBPS submission that the government should develop a long-term plan to address unsustainable public sector wage bill and that the plan should seek to improve public sector productivity at a lower cost.

(See the presentation for more details).

Briefing by Parliamentary Budget Office (PBO)

Dr Dumisani Jantjies, Head, PBO, Dr Nelia Orlandi, Deputy Director: Finance, Dr Seeraj Mohamed, Deputy Director: Economics, and Mr Tshepo Moloi, Ms Sbusisiwe Sibeko and Dr Mmapula Sekatane, Analysts, gave the presentation.

South Africa’s economic outlook over the medium term is relatively poor. Efforts to fight inflation and reduce government debt levels will likely hurt small businesses and the poorest households much more than they help.

Improved market sentiment related to lower government debt levels and work on structural reforms is insufficient for economic recovery and growth. The South African economy has much deeper structural problems than those outlined in the 2022 MTBPS: electricity, inefficient network industries, high cost of doing business and concentration, crime and corruption. The financial sector may be sophisticated but it has not been associated with productive investment and capital formation and it is associated with misallocation of capital and de-industrialization. The sectoral reforms will not reduce the high levels of economic concentration across most sectors of the economy, including financial services. The structural reforms may further entrench structural weaknesses.

Performance indicators to measure performance on the 2019-2024 MTSF are not presented in departmental APPs. Oversight bodies cannot determine the progress made on the priorities if regular
reports are not available. If the MTSF indicators are not reflected in the APPs they will also not be audited.

With regards to priority two in the MTSF, between 2019/20 and 2021/22, 2.95 million work opportunities have been created through the Expanded Public Works Programme. Performance measures on the implementation of interventions, such as the Jobs Summit, the Mass Employment Stimulus Programme and Operation Phakisa, have not been included in the relevant departmental APPs. Funding has been allocated to establish a broadband access fund for household connectivity, but progress to ensure that 80 per cent of the population would have access to the internet by 2024 or the competitive reduction in data costs has not been reported on in the APP.

With regards to SOEs, the announcement that the government will take over part of Eskom’s debt is an important move in the correct direction However, the MTBPS and other government plans do not explain the government’s long-term plans for Eskom and the fiscal implication.

(See the presentation for more details).

Discussion

Mr O Mathafa (ANC) said that there was a reduction in the division of revenue in relation to the allocation to provinces. Why is there a contradiction? One of the slides showed that revenue collection from corporate tax increased. Is there another reason that would have led to a reduction to provinces? He noted that there is a slight increase to municipalities, but will this type of revenue collection be sustainable in the long run?

His second issue was about economic growth. Something that he had been raising for a long time is that South Africa is an economy over-relies on global commodity prices. He was happy that both the FFC and the PBO agree with this view. Has there been a study to investigate other factors that could be economic drivers, other than low-carbon electricity generation and infrastructure spending? When the President spoke of the economic reconstruction and recovery plan, he also spoke about pillars and these two pillars appear there about what will be needed to take the economy on an upward trend. He noted that much emphasis has been put on electricity and infrastructure spending. He thinks that two other factors which are critical are not given the necessary attention. This is the employment stimulus to create jobs and support livelihoods and support to grow South African businesses.

Is there a view that promotes taking localisation, industrialisation and export promotion seriously? The PBO stated clearly that South Africa is importing more than it is exporting. South Africa is relying on international products and some of them can be produced locally given the size of the research organisations in the country.

Ms D Peters (ANC) asked if the presenters believe that there will be further extensions for the SRD grant. She noted the comments about BIG and asked if taxing the rich to contribute to this is something that is feasible The FFC raised the issue of R1.8 billion unspent by the Department of Social Development mainly due to lower than expected SRD. There are many people who claim that they have applied but have not been approved or their claims have not gone through. What needs to be done to make sure that departments and entities are not saving money whilst people are going hungry? With regards to the Special Appropriation Bill, what do they suggest should be the stringent conditions that are attached to SANRAL and Denel with regard to the additional money that they would be getting? The FFC said that local government is the lowest in terms of allocations. What can be done so that local government, despite the skills challenges, can be allocated more? Local government is the sphere closest to the people and feels the impact of potholes and infrequent supply of energy etc. The FFC also spoke about climate change adaptation. The Department of Environmental Affairs projected that South Africa’s emissions will plateau by 2025. Can the impact of the floods be attributed to the inability of South Africa to reach its emission goals? There has been talk of low-cost low-carbon emissions. How does the government explain to South Africans that it has coal, but it cannot be used to provide South Africans with much-needed electricity? Is this something that can be told to South Africans: We do have coal but we are unfortunately unable to provide you with the power that we need because the coal we have is dirty?

Mr M Moletsane (EFF, Free State) said that the presentation on TBPS was quiet about the Free State Jagersfontein disaster, in terms of interventions and assistance. What are their views on the silence of the Treasury on the Jagersfontein issue? Secondly, Treasury continues bailing out Eskom. This is not a permanent solution and it is not dealing with the cause. What is their view on how to deal with the Eskom problem?

Mr N Kwankwa (UDM) said his question concerns the structural transformation vs structural reforms that need to be undertaken. One of the issues that the government and Parliament have failed to do is

to deal with the PBO has cited. It indicated that the financial sector may be sophisticated but it has not been associated with productive investment and capital formation. This is associated the misallocation of capital and de-industrialisation. What kind of policy interventions would have to be put into place to address this? It has been a problem for a long time and needs to be addressed. One of the slides also talks about the impact of fiscal consolidation and how it makes it difficult for the government to deal with some of the social challenges facing the country. There needs to be an assessment of past consolidation episodes, their effectiveness and whether they have worked. There was a period after 2008 when the government embarked on a counter cyclical fiscal policy stance. Later, for obvious reasons the country had to embark on a fiscal consolidation programme. To what extent have the fiscal consolidation episodes been effective in improving the underlying cyclical adjusted primary balance and the variables that it sought to influence? On slide 34, the PBO talks about performance measures on the implementation of interventions such as the job summit, the mass employment stimulus, operation Phakisa, etc. These have not been included in the relevant departmental APPs. This is a failure on Parliament’s part. They need to make sure that they do this and that the government implements. The FFC talks about the unbundling of Eskom. From an operational point of view, this strategy makes sense. However, the impact of this on the balance sheet of Eskom needs to be spoken about. They need to source funding based on a consolidated budget rather than a balance sheet which shows strength to the market. Eskom is going to end up with a weak balance sheet because of the fragmentation that is going to take place. How can this be mitigated? It could mean that Eskom might not be able to source funding from the financial sector once that has happened.

Mr W Aucamp (DA, Northern Cape) said the presentations were worrying. Government guarantees have more than doubled in the last six years. They need to do some introspection on what they are doing with state-owned enterprises. Yes, a lot of Eskom’s debt will be taken over now. However, what will the stringent conditions be for Eskom to get the debt written off? Eskom is still under the hands of state capture. Mr De Ruyter, the CEO, is not captured. However, the whole institution has become captured over the years. How can Eskom all of a sudden be in a situation where it can borrow more money? These funds will then fall into the “tentacles” of the people who are still captured. They need to make sure that the money that Eskom now gets does not enable them to get more debt that will be spent in the wrong way. They need to create an environment that is conducive to attracting investments. The unemployment rate is sky-high and a Public Wage Bill that takes up 31.4% of the budget. This is very worrying. The people that led the country to be where it is are still the people that are still in public service. There was very little consequence management. There are still the same managers earning extremely high salaries, which make up a huge portion of the 31.4% dedicated to public salaries. This needs to be revised. They need to ensure that there is no cadre deployment and that people with proper skills are employed in these positions. Cadre deployment is the reason for the situation that the country is in. The infrastructure development referred to in this meeting is a good thing and it must happen. The government’s position should be that they are there to enable the private sector to thrive. They need to focus on attracting investments. Now, there are rumours of another state-owned enterprise that will be involved in the infrastructure development. Worrying things could happen if this goes through. What is the FFC’s and PBO’s view on this proposed SOE?

Mr D Ryder (DA, Gauteng) said that they are expecting an infrastructure-led recovery. This is what the President promised in the ERRP. It seems like they are taking money away from infrastructure, especially if they consider the DORA and allocation of funds to provinces. He is not sure if this indicates an inability to fulfil the mandate given to them by the President. Can the PBO and FFC comment on this matter? There has not been a follow-through on the promises made. If one considers the overall impacts of DORA, there is minimal effect on the adjustments. There is a massive internal shifting of funds between projects and departments. This indicates that there may be a massive change in priorities or there has been an absence of planning and provinces have not come through with what they initially intended and what they laid out at the beginning of the financial year. The FFC’s comments on the Public Wage Bill are interesting. They said that even on the 3% that has been projected going forward, the effort is insufficient to achieve the needed outcome. COSATU is still digging their feet in at 10%. He would love to hear further comments on this. There is a genuine risk with the coming election that there is going to be a substantially higher settlement from the government. What is the risk associated with this? It doesn’t seem like there is going to be a debt reduction if the funds have to go towards settling the Public Wage Bill instead. There has been no mention of grey-listing at all and the impact that this may have in the medium term. This is a risk that is too great to ignore. There was a comment about high interest rates. He is concerned about this narrative. There is currently a cycle where the interest rates are certainly on the up. However, they remain lower than they have been for a long time. The last time they were this low was around 2014. Before that, they were substantially higher. The country has been in a period of very low interest rates to stimulate growth post COVID. He is concerned about the narrative that there is a high interest rate environment. It is increasing and compared to more stable economies, it is high. However, it is not a high interest rate environment. There is room to increase it.

He appreciated that the PBO brought the entities into its projections and calculations on the salary bill. This was important and is something that is often missed. The impact of state entities at all levels is quite big.

Sanral has “stuck with bloody-mindedness” to the project of e tolls, despite all of the advice that they received from the outset. It has been proven that it does not work. Is there an impact of this, such as fruitless and wasteful expenditure for all of the money that they have spent on this project? Shouldn’t there be some sort of consequence for Sanral? It seems like they are getting a total bailout and evading responsibility entirely. It was a bad decision from their senior management at the time and they are escaping scot-free. This was not appropriate. They should be shouldering some of the financial fall out from their action or lack of action

Mr A Sarupen (DA) said that the proposed debt swap from Eskom onto the government balance sheet would have the consequence of fundamentally changing the debt to GDP ratio. This means all of the projections that they have been given by the Treasury on containing the debt to GDP ratio and bringing it down by 2024 do not take this into account. Have the FFC and PBO done any modelling on the consequences of the debt to GDP ratio, as well as what it would do to the government bond markets and the state’s capacity to borrow and fund essential services? A large chunk of the state’s work is funded through deficits and borrowing. This debt swap will completely destroy this. What is the economic impact of this and has it been modelled?

Mr X Qayiso (ANC) noted the extension of the SRD and the potential of the budget consolidation, which seems to be narrowing.

He recalled that a special appropriation has been made for R400 billion to Eskom in the past and they did propose some conditions and Treasury has been monitoring them based on these conditions. There were extra conditions which would be proposed. Are there more effective conditions than the ones that already exist? Do they advise any changes to these conditions attached to the R400 billion?

There is a crisis that predates COVID-19. The FFC made a general statement on the preconditions but he failed to capture categorically what those are which Members could be advised are being ignored. Some of the current measures are only in place because of Covid-19. Are there any other measures that should be put into place, or measures that have predated Covid-19 and have not been fulfilled? The FFC mentioned the dangers of the high interest rates. What is their advice regarding it? On the structural transformation versus structural reform, it was not clear what the FFC’s recommendations were. Over the past two years, the Landbank has not been able to meet the required conditions to access the money that has been allocated to it. It is also an issue for small and emerging farmers. This issue needs to be probed.

Ms Peters asked the entities if a 72% expenditure for compensation of employees in one of the provinces is sustainable. What plans is the FFC talking about to address the unsustainability of the public sector wage? After the rejection of the user pay principle, can the FFC recommend an alternative? Is the Road Accident Fund fuel levy an option for funding road infrastructure?

Mr Qayiso said he needed to make a correction about something that was said. He noted Mr Aucamp spoke about the issue of cadre deployment. He does not know where this issue comes from into this discussion. There is a difference between a performance agreement and cadre deployment. They should not be conflated here. A performance agreement is a contract entered between an employer and an employee and what follows this is done through performance management. Cadre deployment does not come in the public service act or regulations.
 

Mr E Marais (DA) said that it was conveyed to Members that there has been a slight increase to the nine provinces. In the media, it was shared that the income of the CEO of SARS was increased dramatically. If this is the case, then the allocation to the nine provinces should increase as well.

Mr Aucamp said that he brought up cadre deployment because the majority of people who are not meeting their key performance indicators are people that are cadre deployed and are unskilled for their positions. It is time that competent people are employed to do the job.

Mr Z Mlenzana (ANC) said that the issue of cadre deployment needs to be discussed thoroughly at another time. They should not drag the FFC into party politics. There is a need to clarify these terminologies.

The Chairperson agreed. The issue of cadre deployment is a political debate and should be discussed another time.

The debt service costs have increased compared to the budget. Does this suggest a lack of coordination between monetary and fiscal policy? The PBO and FFC never touched on trade policy, which has a direct impact on the budget of the country. Are the trade policies consistent with both monetary and fiscal policies? Are they consistent with what the government is trying to do with the country? What has Eskom cost the economy through loadshedding, both in terms of GDP and revenue? The Special Appropriation Bill includes Transnet. This is the first time that Transnet has come to Parliament about recapitalisation. What is happening and what is the problem here? Would they be able to get the maximum benefit from the high international commodity prices? Is the allocation of funds to local government through CoGTA the most effective method? The PBO said that the increase in the repo rate has less to do with inflation and more to do with trying to attract capital. The impact on fixed investments is negative. What is the right monetary response to this? Tongaat-Hulet in KZN has gone into business rescue. The impact of this on unemployment and farmers is going to be huge. Foreclosure does not only happen to SOEs. This big company, which has existed for decades, is also struggling with this. Looking at the impacts of this, what should be the right government response? Is it the right macroeconomic strategy to rush for primary balance with all of the challenges that the country is having?

Dr Mbava explained that the Social Development Department declared unspent funds of R1.8 billion due to lower-than-anticipated take up of the social grant. The Department claimed that there were fewer applications and that they had stringent criteria. They need to make sure that the government is reaching the people who need the grant. If they are sending back R1.8 billion, they need to be comfortable that there are people out there who do not need this money. If there are, then it is unfortunate that many have been left out who deserve these funds. A recommendation to the Department would be to review its criteria to make sure that it does not exercise gatekeeping and does not exclude those who really need the money. Members should appreciate that over 7.4 million people benefit from the SRD Grant. The SRD Grant has really supported households and has saved many people from destitution. The most vulnerable need to be protected. The government is still grappling with the question of whether to make the SRD permanent. The issue is complex and demands a lot of thought. For the next three years, the government foresees a primary budget surplus. However, this is contingent on maintaining a fiscal path that is stable. A possible basic income grant will erode this surplus. They need to be aware of the impact of that. Whilst they support the government to maintain its fiscal consolidation, they do believe that the poor should also be protected. There needs to be policy certainty so that the vulnerable and the poor can be certain that they will have some sort of income. The reality is that many South Africans will never have a job or some sort of stable income. An SRD grant will go a long way to put food on the table. This is the view of the FFC.

Mr Tseng said that with regard to debt service costs in respect to monetary and fiscal coordination, there is not much to coordinate when one is a small, open economy in the global economy like South Africa.  However, if one is able to install confidence and credibility in one, then it means the other one, one would have an easier time to manage. For example, if fiscal policy is very strong, everything is funded and sustainability is convincing, then there isn’t much pressure on the monetary side to hike interest rates or returns to ensure the fiscal envelope is well funded. It is a balancing act between the two that is most important. These are the only two policy instruments that the public sector can manipulate.

On trade policy, the FFC has constantly pushed for localised product value chain growth into inclusive growth. It talks about what is our niche product and the process to push these products forward to the market and outward to the global market. The trade policy is invisible in considering the economic recovery and economic policies in general. The FFC “did make a measure” to the Portfolio Committee on Enterprises on the days of economic activity lost due to loadshedding. It is debilitating. What was presented in terms of the days lost was the direct cost. The indirect costs are the damages to the infrastructure when the power is suddenly turned off and the resulting impact on equipment throughout the country. This is much more difficult to measure. With regard to the micropolicy balance, the measure is more lenient because it has not yet considered all of the government guarantees and added costs after the financial year. From a current cost perspective, it is a measure to push the country in the right direction. However, it is not good enough to look at one measure. South Africa has not maximised the benefit of these commodity cycles because of all these infrastructure and instrument breakdowns and expired equipment. South Africa’s production function to do with commodities production, such as mining and so forth, are not pareto efficient. There is a lot more in the long term that can be improved.

The question of the LGES allocation through CoGTA is not easy to answer. It seems that whether it is direct or indirect, if a municipality lacks capability, then resources are wasted and become redundant. The measures that they calculated in terms of provincial allocation are in real terms. This means that if there is a negative number, it is inflation adjusted. In nominal terms, there are still increases. However, this is not the main point. Just because SARS has collected more revenue it does not mean that everyone else must also have more revenue. There is a reprioritisation within the spheres of government to make sure that money is not wasted on a function that is dysfunctional.

The FFC’s next briefing to the Committee will focus specifically on the issue of economic growth and what it actually is. So far, they have only been looking at numbers during their briefings. The ultimate engines of growth are human (labour) and capital. These two factors are not evenly distributed across the landmass. They are concentrated in particular pockets and there is a meaning behind this. For example, certain industrial areas are situated close to cities where there is a concentrated labour pool. The Commission is incorporating city development planning with economic growth planning. This will ensure that people are included in the economic growth process.

There are two aspects that are important to the Eskom debt situation and financial mismanagement. On the operational side, there are three components that SOEs need to pay attention to. One is procurement management. The other is contract management. So many contracts are sitting on the balance sheets and continuously haemorrhage money. This needs to be dealt with, whether they are cancelled or fought out in court. Some contracts are inefficient, ineffective and waste money. This is why the operational deficiency is continuing. The last issue is payment management. The trouble with general public sector administration and accounting officers is that they don’t see payment as an important vehicle to managing finances. This is baffling. Payment is where one see’s money flowing in or out of the fund. It is incredibly important that these three components are managed. In the balance sheets and financial statements, they see that there is a lack of control in these areas. The FFC is recommending that these three areas could possibly become a part of the criteria for these conditional transfers or special appropriations. These debts will become bigger and a larger burden on the fiscus. However, the Eskom debts are also high risk and therefore high reward. By taking funds from somewhere else to fund this SOE, the government is making the overall financial portfolio of this entity and the fund bigger. This may ultimately result in the ‘too big to fail’ phenomenon. This was seen in the financial sector in the US during the financial crisis. In this context, one has to be careful. Taking on this debt will increase the debt burden on the fiscus. There is also the long term implication that there will be less incentive to invest.

Looking at the macroeconomic policy outcomes that we have had over the years, Dr Jantjies said there hasn’t been much growth or the realisation of socio-economic aspirations. There is a need for macroeconomic policy reform, especially that which is supported by social policy.

There are also issues around the trade and industrial policy. The last time the country had economic growth and created employment in the economy was when the public corporation and government investment were way above the rates we have now.

The question about monetary policy is an important one. If one looks at the data from 1995 until 2020 on the long term interest rate in South Africa compared to OECD countries, South Africa has had a higher long term interest rate. This was compared to more than 90% of OECD countries. At the same time, we have not advanced the socio-economic development and realise the economic development that many of those countries have.

There is a close relationship between the credit extension to the private sector and real investment in the economy. This shows that the movement of interest rate does affect the investment in the economy from the private sector. Between 1996 and 2008, there was a lot of credit extension to the private sector. During this time, there was also a lot of investment from the private sector as a result of the access to credit. After the financial crisis, there was a limit in credit extension and hence there was less investment in the economy. This demonstrates that there is a need for reform in monetary policy. Social policy enhances stability and builds up households. The issue of public procurement and increased localisation is very important. Public procurement has to be seen within the policy of economic development. There has been a lot of public debate about how much preferential procurement structures and policy. Such debates lack context and substance. It does not take into account the structure of the economy.  Diversifying the economy and making it more inclusive will go a long way in providing much-needed stability in the economy.

It was important to understand the role of public procurement within the context of supporting industrial policy and localisation.

Dr Orlandi said that the reduction of the division of revenue is addressed on slide 42. It indicates that it seems like a reduction in the equitable share to provinces but in 2022/23, there were additional funds allocated to provinces. It seems like a reduction but if you do the calculations from 2021/22, it actually increases. In the new budget, the equitable share to provinces increases in the medium term to 2.4%. In the budget, the allocation was only 1%. The allocation in 2023/24 is also higher than the previous financial year. The equitable share was R543 billion and it is now increased to R556 billion for 2023. Additional funds were allocated in 2022 so it might look like a reduction but those funds were allocated for Covid-19. With regard to the Jagersfontein disaster, a lot of allocation has been provided for in the adjustments budget for disasters that occurred during the year. This includes allocations for Jagersfontein. The includes an increase to the Department of Cooperative Governance. The budget for unseen and unavoidable events is R3.6 billion. During their analysis of the medium term strategic framework, they realised that these issues have already been addressed in the framework. It is there and it is indicated as priorities. Unfortunately, this does not translate into outputs in APPs. It is so important to make sure that those priorities are actually translated into outputs.

Dr Mohamed said that there is a need to understand how South Africa is integrated into global financial markets and what this means. South Africa attracts short term interest rates and a lot of the outflows are not related to the trade deficit. For many years, exports were more than imports and there was a positive trade balance, but the country has had a negative current account balance. This has been because of financial outflows. People assume that anything that happens in the current account is trade related. This does not mean that the country shouldn’t have the right kinds of trade policies and support, and also increase localisation.

The future prospects for growth, whether what happens in global financial markets now with higher interest rates for instance, means South Africa is going to have to increase interest rates if there is a financial crisis because of increased interest rates and lots of corporate debt or sovereign debt in other countries that will have an impact on South Africa.

Following warnings that things can be worse than the global financial crisis and the shock of COVID on economies, we need to look at what can be done domestically and build resilience.

When you have a situation where the private sector and households are going to limit their expenditure into the economy, the only space for growth and the only way to build resilience and the only way to protect yourself from what’s happening is to through a stimulative government policy. In addition, there also needs to be more coordination between fiscal and monetary policy. The Reserve Bank needs to realise that even though it is independent, it can’t allow the South African economy to suffer through this high interest rate regime. This may mean looking at how it manages debt and interest rates in a different and better way to build the stimulative impact of the government’s spending on the economy and to keep sovereign debt low. This is something that the PBO has said during the COVID crisis and it seems like examining these issues is going to become more important.

South Africa has, compared to other countries, a high real interest rate. Other countries have increased their interest rates but it’s only in the last few months that the European Union has had a positive real interest rate. The US got to that point earlier this year. South Africa has had positive real interest rates for a much longer time, through COVID and post the global financial crisis. Structural transformation does not allow the country to react to that. It reinforces businesses by reducing red tape. It is meant to increase competition. This is supposed to happen automatically, but it doesn’t say how. There needs to be a shift in how transformation is thought about in sectors of the economy. The involvement in global and regional value chains needs to be increased.

What is the relationship between social grants, social welfare and security and structural transformation? The money that is supported and gets sent into poor households can be part of a sustained process of having inclusive growth and shifting the country out of its low-growth rut into a new transformation growth path that is based on what people need: housing, school, healthcare. A lot of this can be produced locally and be part of a local strategy that is supported by an industrial policy, supported by trade and we can also work with the regional value chains and export more.

They have not done any modelling for the Eskom debt swap. Based on the numbers that they have seen from National Treasury, they are expecting around 1.8% of GDP to be added to the government debt. This happens in a time where inflation has caused nominal GDP to increase. The debt to GDP has actually come down because of inflation. Inflation has actually had some positive effects for some countries, like South Africa. They can be less worried now that the debt swap will have a massive impact. Many countries are facing much more serious sovereign debt problems, as well as large private corporations having a huge amount of debt. Relatively speaking, South Africa is in a fairly good position.

Dr Jantjies said that with regard to the extension of social grants, they have shown that there are areas where additional sources of revenue could be sourced to support such initiatives. Some of these measures could be temporary but others could be permanent. They have provided this analysis in the current presentation, as well as in the past.

The Chairperson requested a response on the Tongaat-Hulet matter.

Dr Mohamed said that government is going to have to step in to try to reduce the impact. In July 2021, they saw the impact of instability, unemployment and poverty. The government should support and bolster the community in this really hard time. In terms of saving the company, there needs to be a thorough look at the financials, business rescue process and what the company will add to the economy. And how it fits into regional and global value chains as well. As far as he is aware, the sugar industry is a capital intensive and scale industry. The price structure is based on how large production is. If other countries have larger production facilities, local companies become much less productive and can’t compete against imports.

Dr Jantjies said that lessons that can be learned from what happened post the 2008 crisis. Any support should take equity into account. Government support should not focus on one company only. It should focus on specific sectors. If support is provided, it needs to have an equity portion to it.

Mr Tseng said that people come before money. Companies will always try to take the money and run. People should be put first. He agreed with the PBO on this issue. Deeper analysis needs to be done.

On Sanral, Dr Orlandi said that in previous years, in the adjustments budget, there was a transfer from non-toll roads to toll roads. This is how they funded their debt in terms of toll road

On the equitable share to local government and whether it should be in the cooperative government department, that needs to be discussed further. Basically, the entire budget of cooperative government department is the equitable share transfer to local governments, so this matter needs to be discussed further. The Minister indicated that they don’t really do monitoring of the expenditure of the equitable share in local government. This function is allocated to the National Treasury. There is a bigger debate to be had here.

Mr Qayiso indicated that he missed the responses on the Land Bank and the conditions for Eskom.

Mr Tseng said that having looked at the Land bank’s balance sheet over the past few years, it comes down to raising issues about the financial flow. When it comes to these economic instruments and associated with particular economic growth inputs, the most important one is the land. The returns on them and the way the financial assistance is provided is where the problem lies. The FFC can provide a more detailed report on the matter.

Dr Jantjies said that the issue of the SOE links broadly to the economic development issue. There is a clear comparison between the commercial and developmental mandate. The SOEs play a very important role in investing in the economy. One of the conditions is the support being directly related to investments. The entities will need to show that they are investing in the economy. The purpose of SOEs is to deal with market failures. The conditions should be centred on this in particular. What is the purpose of this entity, and how is the support going to aid this? These are the type of questions that need to be asked.

The Chairperson said that he deliberately raised the question of Tongaat-Hulet because they are an important player in the economy. He agreed that the government needs to do something. This addresses the myth that everything that is done by the private sector is perfect. Here, there is a private company and the government is needed to help it recover. The closing of this company would have dire consequences. He thanked the PBO, FFC and the Members.

The meeting was adjourned.