IMF Says South Africa Making Strides on Budget, Failing on Eskom

South Africa has taken appropriate steps to curb its budget deficit, yet is falling short in resolving an energy crisis that threatens the economy, the International Monetary Fund’s Deputy Managing Director David Lipton said.

The budget balances the “need for there to be continued fiscal consolidation to protect the macroeconomic stability of the country with the need to be supportive of growth,” Lipton said in an interview in Cape Town on Thursday. In an earlier speech, he said there hasn’t been an adequate response to the electricity shortages.

Finance Minister Nhlanhla Nene raised personal taxes for the first time in two decades in his Feb. 25 budget and curtailed spending growth in a bid to avoid a debt spiral and ward off further credit-rating downgrades. He projected the fiscal deficit will narrow to 2.5 percent of gross domestic product in two years from an estimated 3.9 percent this year.

“Some fiscal consolidation is appropriate,” Lipton said in the interview. “They have picked a reasonable amount, a reasonable path. It should be augmented with policies aimed to overcome the structural rigidities in the economy, including dealing with the electricity sector problems.”

Nene’s goals are at risk as Eskom Holdings SOC Ltd., the state-owned utility that produces 95 percent of South Africa’s electricity, is forced to implement rolling blackouts as it struggles to meet demand.

In a speech at the University of Cape Town, Lipton said the power shortages were “a very expensive and painful wake-up call.” While the problem could be solved, “I don’t think there is yet a sufficient response,” he said.

The IMF estimates South Africa’s economy has a potential growth rate of 2.5 percent to 3 percent, Lipton said. The government is targeting growth of 5 percent by 2019 as its seeks to reduce a 24 percent unemployment rate.

Authorities should take advantage of lower international oil prices to bolster the economy and encourage greater competition in labor and product markets, Lipton said.

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