South Africa pledges to freeze wages but sees debt spike higher

CAPE TOWN (Reuters) – The South African government has pledged to freeze public sector wages for the next three years to contain a gaping budget deficit, but forecast debt to peak at a higher level in a budget to medium term unveiled on Wednesday.

Africa’s most industrialized economy was already in recession before the COVID-19 pandemic hit, and one of the world’s strictest lockdowns has exacerbated its woes.

The wage freeze plan increases the risk of strikes for the country’s 1.3 million civil servants and follows a pledge made in February by Finance Minister Tito Mboweni to curb the rise in the wage bill.

Addressing parliament on Wednesday, Mboweni said the country needed to take steps to avoid a sovereign debt crisis. “Our compass points to fiscal sustainability and we all have to deal with it the same way,” he said.

The consolidated fiscal deficit is now projected at 15.7% of gross domestic product (GDP) for the fiscal year ending March 2021, more than double the 6.4% deficit in the previous fiscal year and the difference the most important of the post-apartheid era.

The economy is expected to contract by 7.8% in 2020, while gross debt will peak at more than 95% of GDP in 2025/26, a level higher than that targeted in an emergency coronavirus budget in June .

To reduce the deficit, the Treasury is asking for nearly 311 billion rand ($19 billion) in payroll cuts by 2023/24. He is pinning his hopes for an economic recovery on more infrastructure investment spending, a cornerstone of President Cyril Ramaphosa’s growth plan.

The wage freeze for civil servants will put the ruling African National Congress on a collision course with its union allies.

Public sector unions have already taken the government to court, challenging its non-payment of pay rises in April, as agreed in a 2018 pay deal.

Mugwena Maluleke, general secretary of the teachers’ union SADTU, told Reuters the wage freeze for civil servants was “not applicable”. “This is a neoliberal assault on working people…who essentially face this virus on a daily basis in order to serve our people.”

Razia Khan, chief economist for Africa at Standard Chartered, said the main takeaway for financial markets was that South Africa’s growing public debt was still a problem.

“There is little certainty – for now – that positive results for fiscal consolidation plans can be achieved,” she added.

The medium-term budget allocated 10.5 billion rand to struggling flag carrier South African Airways to implement a restructuring plan approved by creditors in July.

The government has also said it will be easier for tax resident companies in South Africa to invest in the country through foreign entities.