South Africa, once considered the economic jewel of Africa has had a rough go of late. In 2014, it lost its long-held status as Africa’s biggest economy to Nigeria and things have only gotten worse.
Growth has stalled, unemployment hovers at 24.5 per cent according to the World Bank, the highest rate amongst emerging markets and investor and business confidence are at their lowest levels in two decades.
South Africa’s Finance Minister Pravin Gordhan has made an admirable effort to reverse this economic decline. Canada has lessons for him on how to reign in a fiscal mess and get a country back on the path to growth.
In the 1990s, Canada, much like South Africa today faced a stalled economy, high unemployment and a credit downgrade. Canada made an incredible turnaround and South Africa can too.
Canada’s then Finance Minister Paul Martin has been credited with engineering this turnaround by implementing fiscal measures that led to one of the best periods of growth and prosperity in the country’s history.
The turnaround began in 1995 when Martin tabled a budget aimed at slashing Canada’s $42 billion chronic deficit. For a country facing a fiscal crisis Martin’s budget was tough medicine, the very kind South Africa needs today.
Martin reduced government spending by $25 billion over three years. The civil service was cut by 25 per cent, programme spending was reduced, pensions were overhauled, and corporate subsidies, an anathema to business innovation and competitiveness were slashed by 60 per cent.
Canada’s finances were put in order. The economy grew, generating more tax revenue and a surplus. Tax cuts followed that mostly benefited low and middle income earners, as well as increases in spending on social programmes.
In February 2016, Gordhan tabled a budget deemed credible enough to stem a credit downgrade, despite lukewarm response from investors looking for more decisive action. Gordhan has pledged to cut South Africa’s perennially bloated civil service — a welcome measure.
But what South Africa truly needs is bold reform of the country’s 700 state-owned firms. These firms are a mess, gobbling up government finances and dragging down the economy in the process.
In 2015, The Economist reported that the biggest of these firms, power producer Eskom, the railway and ports business Transnet, defence firm Denel and South African Airways accounted for 5 per cent of the country’s’ economy. Yet as The Economist noted, these firms, along with many others are mostly characterised by financial losses and subsidy squandering. This is quite a feat as some of these firms are monopolies yet they still bleed money.
Canada’s fiscal restoration came with the slaying of the sacred cows of government programmes.
If Gordhan wants to engineer a similar turnaround he will have to slash South Africa’s sacred cows, state enterprises.
Junk status looms so the time to be bold is now.
Letlotlo (Coco) Lefoka is an MBA Candidate at the Rotman School of Management at the University of Toronto