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SA at economic crossroads

13th November 2003


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South Africa stands at the crossroads of major economic possibilities, but decisive action will be needed to prevent it heading in a direction where the negatives will overwhelm the positives.

This is according to the 2003 Medium Term Budget Policy Statement (MTBPS), unveiled by Finance Minister Trevor Manuel in Parliament yesterday.

The document warns that failure to address the issue of economic inclusion and exclusion could "precipitate a vicious cycle of decline in all spheres".

Citing the conclusions of a preliminary report, "Towards a Ten Year Review", which aims to identify government's progress towards meeting its objectives, it says both focus and decisiveness will be required to avoid such a cycle.

"Required are both focus and decisiveness on the part of government, the will to weigh trade-offs and make choices, as well as strategies to inspire all of society along a new trail.

"If decisive action is taken on a number of focused areas, the confluence of possibilities is such that the country could enter a road of faster economic growth and job creation".

Such decisive action would also result in faster and more efficient provision of services, and a "reduction of the paradigm of exclusion prevalent among sections of the society".

The MTBPS also highlights major demographic and social challenges facing the country. These include: - Rising unemployment: Since the mid-1990s, the economically active population has grown faster than job creation, causing the unemployment rate to hit 29,5% by 2001.

The document says employment creation is a critical challenge.

It warns that both investment and output growth "still lag behind the rates required to reduce unemployment and achieve greater equity in the distribution of incomes".

-Migration to urban areas: This has gathered momentum, resulting in a "significant shift" of population between provinces.

-Figures show that between 1996 and 2001, almost 600 000 migrants streamed into Gauteng and the Western Cape from South Africa's seven other provinces.

- Living conditions: Although steady progress has been made over the past decade, "many communities remain marginalised from the mainstream of economic opportunity, and lack commercial, cultural or recreational cohesion".

- Education: The MTBPS says progress here has been slow "in advancing the quality of educational attainment and the range of further education opportunities".

- Health care: Although a network of facilities has been created, health system management remains uneven.

- Social grants: The number of social grant recipients has risen to just under seven million over the past five years.

However, "significant numbers of poor households remain vulnerable to income or food security, particularly where drought conditions affect rural livelihoods, or crime and unemployment impact on communities".

- Aids: An estimated overall rate of HIV infection of 11,7%, and a rising death toll from Aids, sees health and welfare services facing "difficult and fast-changing demands and institutional pressures".

- Crime and justice: Despite progress, and stabilisation in the incidence of some serious crimes, "levels remain unacceptably high, and the efficiency of the justice system has to be improved".

- The MTBPS says addressing these challenges "is the point of departure of government's policy framework for the 2004 Budget, and for the years ahead".

- "South Africa is at the confluence of major possibilities arising out of progress that has been made (over the past decade)," it says.

Trevor Manuel has scaled back the February 2003 Budget economic growth forecast of 3,3% to 2,2% for the year, but says growth will rise to 4% in 2006, as the world economy improves.

In his Medium Term Budget Policy Statement (MTBPS), he says inflation – 5,4% in September - is expected to remain within the target range of three to six percent over the next three years.

The MTBPS, tabled in Parliament yesterday, states that while risks remain - particularly in respect of food price inflation, oil prices and the exchange rate -- CPIX inflation is expected to average 4,9%, 5,4%, and 5,1% in 2004, 2005 and 2006 respectively.

The strengthening of the rand has contributed significantly towards lowering both producer and consumer prices, especially for imported and tradable commodities.

Given the economic slowdown, the revised revenue estimate for 2003/04 is R4,6-billion lower than the 2003 Budget projection.

Interest expenditure is likely to be R3,8-billion less than budgeted, and non-interest expenditure has been adjusted upwards by R1,3-billion.

Thus, the resulting budget deficit is slightly higher than initially budgeted.

The medium term expenditure framework (MTEF) provides for spending to increase in real terms by an average of 4,4% over the next three years.

This growth in non-interest spending is supported by the savings on debt service costs.

The current MTEF provides for an additional R37-billion over the 2003 budget estimates.

This is broken down into R8-billion in 2004/05, R12-billion in 2005/06, and R17-billion in 2006/07.

According to the MTBPS, these allocations will continue to be used to address social and economic needs, particularly through social grant transfers, infrastructure development, and human capital development.

In line with previous years, a contingency reserve has been set aside for all three years in the MTEF.

A budget deficit of 2,6% of gross domestic product (GDP) is anticipated for this year, rising to 3,2% next year, before declining to 2,8% by 2006/07.

These main budget deficits will be offset by significant surpluses in the social security funds, thereby reducing the consolidated national government deficit to 2,9% in 2004/05, declining to 2,6% in 2006/07.

Savings on interest payments mean that debt service costs will continue to moderate over the 2004 MTEF period, reaching 3,7% of GDP in 2006/07 from 4,2% in 2002/03.

The overall public sector borrowing requirement is expected to average about 3,5% of GDP over the next three years, and should not put undue pressure on domestic capital markets.

GDE will be driven by steady growth in consumption expenditure, investment spending, and government's "expansionary fiscal stance".

The foreign exchange reserve position continued to strengthen this year, and as at the end of September, gross gold and other foreign reserves stood at $20,2-billion - up from $14,9-billion at the end of March.

The South African Reserve Bank's oversold net open forward position (NOFP), which was $1,5-billion in January, was completely eliminated in May this year.

Since then, the continued reduction in forward foreign exchange contracts has contributed to a strengthening of the NOFP to a positive $1,8-billion at the end of September this year.

The last three years has seen South Africa's Gross Domestic Product become "more resilient" and less likely to be affected by the world market in relation to the G7 group of industrialized countries.

The document says that after a protracted downturn in the world economy, the global recovery is beginning to gather momentum, particularly in the US, Japan and emerging Asia.

"World GDP growth is forecast to hold above two per cent in 2003 and to accelerate to around 3 percent in 2004".

The MTBPS says the US will remain the primary driver of world growth over the medium term, supporting recovery in Europe and elsewhere.

Further, the European economy will continue to be adversely affected by the global slowdown, the effects of which have been exacerbated by the strengthening of the Euro.

Growth in Europe remains hampered by both long-term structural constraints and short-term restrictions on monetary and fiscal policy.

China continues to grow strongly, supported by growing domestic markets and the "extremely" competitive real level of the Yuan.

Sustained growth in China has supported commodity prices, despite faltering G7 performance.

Expectations are that recovery in the G7 will further contribute to strengthening commodity prices. – Sapa.


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