27-05-2025
Now more than ever South Africa needs to practise fiscal prudence
To paraphrase Ronald Reagan, 'this time is different' are the four most dangerous words in economics. And yet, in a recent op-ed for Business Day, Ziyanda Stuurman invokes precisely this logic. She argues that while 'budget cuts have become conventional wisdom in South Africa in the past decade… we are no longer living in conventional times.'
Surely however, it is exactly during turbulent and unpredictable economic conditions such as those we are living through that — particularly for emerging markets like South Africa — fiscal discipline becomes more critical, not less?
Stuurman makes an impassioned plea to the National Treasury to break from economic orthodoxy and embrace the principles of Modern Monetary Theory (MMT) — essentially, spend freely in the hope that growth and welfare dividends will follow. However, her central claim — that countries across Africa like Kenya are successfully applying this approach — is not only misleading, but is also just wrong.
Across the continent, governments are conversely tightening their belts in response to severe economic pressure. In the past week alone, Kenya, Mozambique and Botswana have all announced plans to reduce spending. Ghana made similar announcements in March.
The reason for these draconian cuts to expenditures is the darkening economic outlook. Kenya, for example, has announced austerity programmes to drastically shrink its budget deficit by June 2026 as it negotiates a new bailout programme with the International Monetary Fund. The government intends to make 'substantial revisions' to its previously expansionary budget of 4.3-trillion shillings ($33-billion), in an effort to drastically cut its deficit. Clouding it all is a gloomy growth outlook, with the economy expanding in 2024 by 4.7%, its slowest since the pandemic.
'The cabinet has resolved to implement significant budget realignments in line with the government's policy of fiscal consolidation and commitment to living within its means,' read a statement from the Kenyan presidency.
Post-election unrest
In Mozambique, post-election unrest and a slump in the price of coal, the nation's biggest export, have led to job losses and a financing crunch. The government slashed its 2025 budget by 9%, approving a 512.75-billion meticais ($8bn) spending plan, down from 567.86-billion in 2024. Yet, the budget deficit is still expected to reach 8.2% of GDP. With debt servicing and a ballooning state wage bill consuming state resources, Mozambique faces mounting fiscal strain amid political instability and falling growth projections. The worst election-related protests the country has yet seen — after opposition presidential candidate Venâncio Mondlane disputed the October election outcome that placed him second — have also hit growth and revenues, exacerbating the situation.
Meanwhile Botswana — the world's leading diamond exporter by value — is suffering from a prolonged drop in global demand for the gems. It previously relied on precious stones for most of its exports and about a third of its fiscal revenue. Collapsing diamond demand has led to dwindling government revenue streams and reserves, with its budget deficit projected to widen to 9% of GDP. The country is also forecasting a 3% economic contraction this year.
Compounding Africa's challenges is a shifting global environment. The abrupt end of billions in dollars in aid and a major reordering of global trade under US President Donald Trump are already having ripple effects. Reduced demand for key commodities and diminished preferential access to the US market will worsen the economic downturn for many of Africa's poorest countries, precisely when they need it least.
It is with this backdrop that South Africa's Finance Minister Enoch Godongwana last week calmed a months-long political crisis that had threatened the stability of its governing coalition, presenting a fiscally cautious Budget that won praise from lawmakers and investors alike.
In his third stab at getting the Budget signed off by Parliament, Godongwana announced cuts to spending, lowered growth forecasts, and acknowledged a slightly higher debt peak than before.
Markets cheered the Budget. Despite the fraught meeting between presidents Cyril Ramaphosa and Donald Trump in the White House that happened to be on the same day, the rand surged toward its sixth consecutive weekly advance, hitting a five-month high against the dollar on Friday. It is now trading at well under R18 to the greenback, which has seen general weakness against major currencies. South African bonds have also barely moved this year, shrugging off the volatility incurred by the debates over the Budget. The 10-year yield is under 10.5%, its lowest since February (bond yields move inversely to prices).
Instead of using this moment to supposedly question economic orthodoxy, we should commend the National Treasury and coalition government for their firm stance on either raising taxes or cutting expenditure.
As previously argued in this column, any worsening of the outlook for the US economy will have major repercussions on emerging markets such as South Africa. Aid cuts and higher tariffs will hurt, regardless of whatever kind of slightly improved deal may be forthcoming from the meetings in the White House.
The National Treasury and indeed the South African Reserve Bank are right that this is a time for maximum prudence and caution. Sadly, beset with State Capture and energy crises, South Africa did not make the most of the amenable conditions for emerging markets over the past few years. Yet, that is not an argument to jettison the sensible economic policy that has been the one thing keeping South Africa from going the way of Venezuela and Zimbabwe over the past few decades.
