This Selected Issues paper highlights that cautious monetary and fiscal polices of South Africa during 1997 resulted in a return of financial investor confidence and capital inflows during 1997 and through April 1998. These policies helped the South African economy emerge successfully from the exchange market pressures of 1996 and weather the contagion from the East Asian crisis in the second half of 1997. Throughout 1997 and up until May 1998, inflation and market interest rates fell considerably, net international reserves increased, and the net open forward position of the Reserve Bank was reduced sharply.

Abstract

This Selected Issues paper highlights that cautious monetary and fiscal polices of South Africa during 1997 resulted in a return of financial investor confidence and capital inflows during 1997 and through April 1998. These policies helped the South African economy emerge successfully from the exchange market pressures of 1996 and weather the contagion from the East Asian crisis in the second half of 1997. Throughout 1997 and up until May 1998, inflation and market interest rates fell considerably, net international reserves increased, and the net open forward position of the Reserve Bank was reduced sharply.

VI. The Nonfinancial Public Sector

217. The nonfinancial public sector of South Africa is composed of the general government and the nonfinancial public enterprises. The general government comprises the national government, social security funds,72 and the extrabudgetary institutions73 (which together make up the central government), the provincial governments (which, prior to 1994, were the former provincial authorities, TBVC states, and self-governing territories), and the local authorities (i.e., municipalities). In 1997/98, the public sector borrowing requirement, PSBR (excluding extraordinary receipts and spending), was 5.1 percent of GDP, down from a recent peak of 8.8 percent of GDP in 1992/93 (Table 10 and Figure 13).74 Including this extraordinary spending, the recent peak of the PSBR was 10.9 percent of GDP in 1993/94.

Table 10.

South Africa: Public Sector Borrowing Requirement (PSBR) of the Nonfinancial Public Sector

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Sources: Department of Finance; South African Reserve Bank; and Fund staff estimates
Figure 13.
Figure 13.

South Africa: Public Sector Borrowing Requirement

(percent of GDP)

Citation: IMF Staff Country Reports 1998, 096; 10.5089/9781451840940.002.A006

Sources: Department of Finance; South African Reserve Bank; and Fund staff estimates

218. It has been customary when analyzing fiscal issues in South Africa to focus exclusively on the national government. For example, the staffs assessment that fiscal policy is appropriate and on the right track stems mainly from the fact that the national government (i) met its 1997/98 fiscal deficit target of 4 percent of GDP (down from 5.2 percent the previous year) and (ii) presented a 1998/99 budget that seeks to reduce the deficit to 3½ percent of GDP, on the way to deficits of 3 percent of GDP in subsequent years.

219. While the national government remains the most important level of government from a macroeconomic perspective, an increase in the budgets of other levels of government during the 1990s as well as the fiscal federalism arrangements defined in the 1994 constitution imply that an assessment of fiscal policy that looks only at the national government would be incomplete. Indeed, the national government is directly responsible for only 39 percent of total general government spending; 37 percent of capital expenditures; and 77 percent of the deficit (Figures 14 and 15). As explained in Section I, the improvement in the fiscal situation of the general government in 1997/98 was due entirely to the national government because the financial performance of both the provinces and the local authorities deteriorated.

Figure 14.
Figure 14.

South Africa: General Government Overall Deficit, 1991/92 - 1997/98

(Contribution of individual levels of government in total general government, in percent)

Citation: IMF Staff Country Reports 1998, 096; 10.5089/9781451840940.002.A006

Sources: Department of Finance; South African Reserve Bank; and Fund staff estimates
Figure 15.
Figure 15.

South Africa: General Government Expenditure, 1991/92 - 1997/98

(Contribution of individual levels of government in total general government, in percent)

Citation: IMF Staff Country Reports 1998, 096; 10.5089/9781451840940.002.A006

Sources: Department of Finance; South African Reserve Bank; and Fund staff estimates.

220. This section, through a number of charts and tables, presents a picture of the consolidated nonfinancial public sector of South Africa, with the objective of facilitating a more complete analysis of the public sector’s finances and its performance. Because detailed discussion of the fiscal developments in the national government has been standard in all staff reports and Selected Issues papers, this section concentrates on the other constituents of the public sector, most notably the provinces and the local authorities.

221. While data for the national government are of a high quality,75 the data on the provinces and local authorities are not as good and therefore the estimates presented here are preliminary. Moreover, provinces and local authorities do not utilize a single standardized financial accounting system, which hinders the aggregation and consolidation exercise.76 Thus, in addition to published above-the-line data on the provinces and local authorities, this study utilizes “below-the-line” data (i.e., financing data) on banking system credits and deposits, and issues and redemptions of bonds and other securities.

A. South Africa’s Federalist System

222. The 1994 constitution established national, provincial, and local governments as autonomous spheres and prescribed to each level of government functions for which it has concurrent or exclusive responsibility. To allow each sphere of government to carry out the functions prescribed for it, and taking into consideration each sphere’s sources of own revenue, the constitution requires that nationally raised revenue be divided equitably between the three spheres of government. Thus, while most of the general government revenue is raised by the national government, a significant portion is transferred to the provinces because of their substantial expenditure responsibilities and their own limited revenue sources. Local authorities, because they have more sources of own revenue, receive substantially less in the form of constitutionally mandated transfers from the national government.

223. These constitutional provisions became a reality on January 1, 1998 with the passage of the Intergovernmental Fiscal Relations Act, which established a formal process for considering intergovernmental budgetary issues, including setting out the process to arrive at the equitable sharing of nationally raised revenue among the three spheres of government (and the allocation of the overall provincial share among the nine provinces). Thus, 1998/99 is the first year in which the formula-based system of revenue sharing among the different levels of government has been in place.

224. The new intergovernmental fiscal system is radically different from the previous system.77 Then, transfers were determined and administered through functional committees, in which national government ministries controlled allocations to the provincial counterpart departments. In the new system, provinces now budget for themselves, with provincial executive councils and legislatures allocating and voting funds according to their priorities, although they must still follow national norms and standards where they are applicable.

B. General Government

225. The overall deficit of the general government, reflecting the pattern of the deficit of the national government, reached a peak in 1992/93 and has declined since then, returning in 1997/98 to the level of 1991/92 (Table 11). The combined deficit of the other levels of general government remained very small, only beginning to rise in the past two years, mainly on account of the provinces, and even then only reaching a little above 1 percent of GDP in 1997/98. General government revenue has remained roughly constant at around 31 percent of GDP during the 1990s, although it has shown a slight upward trend in the last two years, in part because of improved tax administration procedures. The decline in the deficit since 1992/93 has come from almost similar reductions in current and capital spending; given that interest payments have increased by one percentage point of GDP over this period, noninterest current expenditure has declined more markedly.

Table 11.

South Africa: General Government Finances

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Sources: Department of Finance; South African Reserve Bank; and Fund staff estimates

226. The national government has two important instruments of control to regulate the size of the budget deficits of the provinces and the local authorities. First, consistent with the provision in the constitution that allows provinces and municipalities to borrow for bridge financing (which must be repaid within 12 months) and to finance capital spending, the government enacted the Borrowing Powers of Provincial Governments Act (1996) to regulate provincial borrowing and the Local Government Transition Act (LGTA, 1996), to regulate borrowing by local authorities. In the case of the provinces, it had been agreed that they would not borrow at all in the 1997/98 and 1998/99 fiscal years, but as mentioned in Section I, a number of provinces utilized bank overdraft facilities in 1997/98.78 In the case of the local authorities, borrowing equal to about 55 percent of capital expenditure was budgeted for in both 1996/97 and 1997/98. The second instrument of control for the national government arises from its responsibility for fiscal coordination. The LGTA gives it the authority to annually determine aggregate guidelines for both current and capital expenditure for the local authorities. For 1996/97 a growth rate of 10 percent was set for both current and capital spending, followed by 8 percent for 1997/98 and 6 percent for 1998/99.

C. National Government

227. The deficit of the national government has been reduced substantially since 1992/93, reflecting the authorities’ serious commitment to macroeconomic stability and sound public finances (Table 12). The deficit reached a peak of R40.2 billion (10.2 percent of GDP) in 1993/94, but more than a third of this amount was attributable to extraordinary spending.79 Excluding extraordinary expenditure, the overall deficit peaked in 1992/93 at 8.2 percent of GDP. Since that time the burden in reducing the deficit has been shared almost equally by revenue and expenditure, with revenue rising from 23.8 percent of GDP in 1992/93 to 26.6 percent of GDP in 1997/98 and expenditure falling from 33.1 percent of GDP to 30.6 percent over the same period.

Table 12.

South Africa: National Government Finances

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Sources: Department of Finance; South African Reserve Bank; and Fund staff estimates

Excluding extraordinary revenues

In 1993/94, transfer to the Government Services Pension Fund

Transfers to the Gold and Foreign Exchange Contingency Reserve Account

D. Provinces

228. The provinces moved from a balanced budget in 1995/96 to a deficit of 0.8 percent of GDP in 1997/98, mainly because of substantial increases in social spending (Table 13). As shown in Figures 14 and 15, the relative size of provincial budgets has grown substantially during the 1990s, with provincial outlays accounting for 41 percent of general government spending in 1997/98 compared with 28 percent in 1991/92. This increase in relative importance reflects the provinces assuming the role prescribed for them in the constitution as having primary responsibility for the social welfare functions of government, namely education, health, and social assistance. As a result, the growth in the provincial share of noninterest expenditure of the general government categories is even more marked: provinces now account for 51 percent of general government spending on goods and services (including personnel costs), up from 32 percent in 1991/92; almost 57 percent of other current outlays (mostly welfare payments and subsidies to the private sector), up from 45 percent; and 28 percent of capital spending, up from 21 percent in 1991/92.

Table 13.

South Africa: Finances of the Provinces

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Sources: Department of Finance; South African Reserve Bank; and Fund staff estimates

Difference between the deficit as calculated from “below-the-line”, i.e. net financing, and as calculated from “above-the-line”, i.e. revenue minus expenditure

South Africa: Provincial Expenditure

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Source: Department of Finance

229. Education is typically the largest item in provincial budgets, accounting for about 40 percent of total expenditure (see above). Provincial responsibility covers primary and secondary education, special education, teacher training and technical colleges. Salaries for education personnel account for 90 percent of total education spending. The size of provincial health budgets tends to vary between 15 percent and 35 percent of total expenditure depending largely on whether the province supports an academic hospital.80

230. As Figures 14 and 15 and Table 13 indicate, the overwhelming proportion of provincial funds come in the form of transfers from the national government; own revenue of the provinces accounts for only about 2 percent of general government revenue and finances only 4 percent of provincial expenditure. The major components of own revenue are licenses and fees, including motor vehicle licenses and hospital fees. For 1998/99, the national government rejected a recommendation by the Financial and Fiscal Commission that the provinces be granted additional taxation authority in the form of a surtax on the personal income tax.81

E. Local Authorities

231. The local authorities comprise six metropolitan councils (which account for about half of total expenditure); transitional councils, which are responsible for municipal functions in other areas; and district or services councils, which are responsible for infrastructure and regional services. Apart from normal municipal functions, the main functions of the local authorities include administering public housing and providing water, electricity and sewerage services. In 1997/98 municipal budgets totaled R52.3 billion, including bulk purchases of electricity and water.82

232. The budget deficit of the local authorities has remained low throughout the 1990s (Table 14). Revenue and spending by the local authorities have remained roughly constant at around 4 percent of GDP, resulting in deficits that have remained below R1 billion. These numbers, however, do not measure the serious cashflow problems being experienced by local governments. These problems have resulted in the drying up of private sector demand for local government securities and intervention by the national government in the administration of some municipalities. The cashflow problem reflects widespread non-payment of utility bills, which has threatened the financial viability of a number of municipalities. As of September 1997, outstanding debt owed to the local authorities in the form of unpaid utility bills amounted to R9.3 billion, or approximately 25 percent of annual revenues from these sources.

Table 14.

South Africa: Finances of the Local Authorities

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Sources: Department of Finance; South African Reserve Bank; and Fund staff estimates

Discrepancy is the difference between the deficit as calculated from “below-the-line”, i.e. net credit from the banking system plus net issues of securities, and as calculated from “above-the-line”, i.e. revenue minus expenditure

233. In contrast to the provinces, local authorities’ reliance on transfers from other levels of government is relatively small Own revenue of the local authorities accounts for about 75 percent of their total revenue and comprises about 10 percent of general government revenue. With the exception of grants for rural water infrastructure, capital transfers from the national government are made under the consolidated municipal infrastructures program (administered by the Department of Constitutional Development). The main sources for operational (current) transfers are intergovernmental grants from provincial budgets and implicit subsidies from national and provincial departments. However, this system was found to be unsatisfactory as it was not based on any objective criteria and resulted in inequitable and unpredictable allocation. As a result, a transparent, formula-based system will be introduced during 1998/99, consistent with the provisions of the Intergovernmental Fiscal Relations Act.

234. In response to the financial problems of the local authorities, owing mainly to poor credit control procedure and the fact that only 70 percent of municipal residents are regular payers, the government launched “Project Liquidity” to monitor the state of local government finances and intervene where necessary. Under this program, whose legal basis was established in an amendment to the Local Government Transition Act, teams of financial experts in each province visit all the municipalities, report on the problems encountered and make recommendations for action. As a result of this program, Johannesburg is now being run by a ten-person task team that was appointed to restructure the municipal budget and to restore health to the public finances.

F. Extrabudgetary Institutions and the Social Security Funds

235. The extrabudgetary institutions rely on transfers from the national government for about half of their overall revenue, with fees charges and other nontax receipts comprising the other half (Table 15). Transfers, however, have been declining as a percent of GDP during the 1990s, and deficits, though very small, have begun to rise in recent years. The declining transfers reflect lower allocations in the national government budget to the Special Defense Account, universities and technikons.

Table 15.

South Africa: Finances of the Extrabudgetary Institutions

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Sources: Department of Finance; South African Reserve Bank; and Fund staff estimates

236. The social security funds obtain most of their revenue from payroll taxes (Table 16). For the Unemployment Insurance Fund the employee and employer contribute one percent of the employee’s earnings. The contributions to the compensation funds vary depending on the riskiness of the insured’s occupation.

Table 16.

South Africa: Finances of the Social Security Funds

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Sources: Department of Finance; South African Reserve Bank; and Fund staff estimates

G. The Nonfinancial Public Enterprises83

237. The nonfinancial enterprises command an important presence in the South African economy. Total assets are equal to about 30 percent of GDP, while total liabilities equal about 17 percent of GDP. In 1995, these enterprises had a turnover equal to 11 percent of GDP and they employed almost 320,000 persons.

238. As discussed in Section II, the nonfinancial public enterprises, for the most part, do not represent a drain on government finances. In fact, in the past year, the government has been able to sell unprofitable enterprises like Sun Air (airline). The restructuring (including sale of minority interest to a strategic private sector partner) of South African Airways is now the government’s priority in the area of public enterprise policy. The aggregate deficits of the early 1990s have turned into small surpluses in recent years, even as investment spending has increased substantially (Table 17).

Table 17.

South Africa: Operations of the Nonfinancial Public Enterprises

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Sources: Department of Finance; South African Reserve Bank; and Fund staff estimates
72

Including the Unemployment Insurance Fund, the Mines and Works Compensation Fund, and the Workmen’s Compensation Fund.

73

Including universities, technikons, museums, parks boards, libraries, research councils, the National Road Fund, the Legal Aid Board, the Special Defense Account, and the Atomic Energy Corporation. Independent accounting arrangements outside the State Revenue Account exist for these institutions.

74

Extraordinary receipts include sales of oil stocks and privatization receipts by the national government, and extraordinary expenditure includes transfers to the Reserve Bank Gold and Foreign Exchange Contingency Reserve Account or transfers to government pension funds (see below, in the section on National Government).

75

National government data for 1996/97 and 1997/98 are still preliminary and subject to change.

76

As mentioned in Section I, however, all nine provinces and the national government moved to the same centralized personnel management system, PERSAL in 1997/98.

77

See 1997 Selected Issues (SM/97/162) for a description of the new intergovernmental structure.

78

Some provinces made provisions in their 1998/99 budgets to repay the full amount of the overdrafts—for example, Gauteng’s overdraft was scheduled to be repaid in the first month of the new fiscal year—while others are only likely to be able to eliminate their overdraft balances over a number of years, given the size of their overdrafts and the need to reform structurally unsound finances.

79

This consisted of R7.3 billion in transfers to the Government Service Pension Fund in order to raise its actuarial funding level and to help finance early retirements under a package offered to public workers; and R7.5 billion in transfers to the Gold and Foreign Exchange Contingency Reserve Account of the Reserve Bank in order to cover Reserve Bank losses incurred on forward exchange market operations over a number of years. Similar transfers to the Contingency Reserve Account of R3.8 billion and R3.1 billion were made in 1992/93 and 1995/96, respectively.

80

In the 1998/99 budget, the national government provided for a special conditional transfer of R3 billion to four provinces that have large central hospitals in order to cover the cost of the services these hospitals provide to the region and the nation as a whole.

81

The constitution (section 228) provides for taxing authority on the part of the provinces. The national government is awaiting a report from the Katz Commission (see Section V) on provincial taxation issues, after which it will prepare draft legislation on the subject.

82

Revenue and expenditure pertaining to the actual purchase and sale of utility services are not included in the fiscal tables since these do not represent government functions under the GFS framework.

83

See Table 3 in Section II for a list of the most important enterprises.

South Africa: Selected Issues
Author: International Monetary Fund