A debate is raging between the National Treasury and a number of economists over the treatment of the R254bn Eskom debt relief package in the 2023 budget and whether it masks South Africa’s true fiscal position.
The Treasury’s detractors say the new approach of classifying cash payments to Eskom not as an above-the-line expenditure item but as a below-the-line debt redemption departs from good accounting practice, renders the bailout invisible in terms of the deficit, and consequently flatters the fiscal consolidation apparent in the budget.
“It looks like expenditure, and I wish it had been recognised as such. Then we would know that in effect there is no fiscal consolidation and no primary surplus — at least not yet,” says Absa Capital macro strategist Mamokete Lijane.
The Treasury’s defenders say there is absolutely nothing wrong with the accounting treatment of the bailout, that the budget is fully transparent, and that the impact is visible in the rise in debt service costs and the gross borrowing requirement. Anyway, they say, what really matters is that Eskom’s debt is finally being dealt with in a meaningful way.
The controversy comes down to the fact that, until now, bailouts for state-owned companies have been reported as part of noninterest expenditure.
The 2023 budget changes this practice by classifying the new R254bn in cash payments to Eskom as a debt redemption, not an expenditure item. The effect of this is to keep R254bn out of the deficit numbers; the bailout shows up in debt service costs and the gross borrowing requirement instead.
The Treasury says the government’s debt service costs and redemptions are always reported below the line and do not form part of the main budget deficit. Taking over Eskom’s debt service costs and redemptions should, therefore, be reflected exactly the same way, making them part of the government’s gross borrowing requirement but not noninterest expenditure.
It looks like expenditure, and I wish it had been recognised as such. Then we would know that in effect there is no fiscal consolidation and no primary surplus — at least not yet
— Mamokete Lijane
The counterargument is that debt redemptions against the National Revenue Fund (NRF) are typically funded by issuing new debt, leaving the overall stock of government liabilities unchanged. However, cash payments to Eskom will reduce Eskom’s liabilities while the NRF will be increasingly encumbered by debt.
And because the R66bn three-year bailout previously awarded to Eskom now falls away, and the new R254bn package is not reflected in the deficit, the upshot has been an inflated or misleading improvement in the primary surplus (revenue minus noninterest expenditure).
This may just sound like a technical quibble, but, given that the budget deficit arguably no longer represents the full extent of the government’s fiscal health, it should also matter to the public.
It is particularly problematic, given that the Treasury has been explicitly targeting a primary surplus for years as a prerequisite for getting debt to stabilise. The last time South Africa achieved a primary surplus was just before the global financial crisis, at the end of a protracted commodity boom — the debt ratio has been rising ever since.
So, the achievement of a primary surplus in 2022/2023, and the budgeted forecast that the country will run ever-larger primary surpluses over the medium term, would normally have been an important signal that the country was finally getting on top of its fiscal challenges.
Instead, the Treasury is now trying to downplay the importance of this achievement. In defending its handling of the Eskom bailout, acting director-general Ismail Momoniat says in a recent article in FM sister publication Business Day: “One should always look at all the fiscal ratios in the Budget Review to get an accurate sense of the fiscal picture over time. Focusing on some, like the primary balance, and not others, like the gross borrowing requirement, creates misunderstandings.”
But this is exactly the problem: it shouldn’t. The situation has created the oddity whereby the country now appears to be showing greater spending restraint, resulting in consecutive primary surpluses, while the stock of debt is rising faster than before because of the enormous Eskom bailout.
The accounting treatment of Eskom’s R254bn debt relief package has set the cat among the pigeons
— What it means
In short, the 2023 budget is not strictly comparable with previous years. This is a major red flag for watchdogs that scrutinise South Africa’s public finances, such as Wits University’s Public Economy Project (PEP).
The PEP has been one of the most outspoken critics on this issue. Its comments are being taken seriously, given that it is headed by Wits adjunct professor Michael Sachs, the former head of the Treasury’s budget office. He is also the deputy chair of the Finance & Fiscal Commission, which is mandated by the constitution to provide impartial advice to parliament on the country’s public finances.
The PEP’s assessment of the 2023 budget is not flattering. It regards the decision to keep Eskom’s cash support out of the expenditure line as a “departure from good government accounting practices”, and it warns that “the reliability and authoritativeness of the official budget documentation has been opened to question”.
“Those trying to gauge economic and fiscal developments will need to have two sets of numbers in mind — those provided by the authorities, and those adjusted to reflect a more consistent view of macro-fiscal intervention,” it says in a presentation on the budget.
But Eskom is not all the PEP has a problem with.
It notes that Eskom’s R254bn is just one of several expenditure items that have been excluded from the medium-term budget. Once all of these likely (if not inevitable) items are added back on top of Eskom’s allocation — including the repeated extension of the Covid social relief of distress grant, the continuation of the president’s public employment programmes, and the likely awarding of inflation-related increases for public servants — then the country’s fiscal position shows a worsening trend.
So, whereas the 2023 budget shows noninterest spending falling dramatically from 25.5% of GDP in 2022/2023 to 24.1% in 2023/2024, the main budget deficit falling from 4.5% to 3.3% over the medium term, and the achievement of a growing primary surplus, the way the PEP looks at it creates a completely different, and much more worrying, picture.
It expects the main budget deficit to remain sticky at about 5% and for the country to run consecutive primary deficits. And instead of the debt ratio stabilising at 73.6% in 2025/2026 as the Treasury expects, it will likely exceed 75% by then and keep climbing.
So, who is right?
Rand Merchant Bank head of research Isaah Mhlanga has come out in defence of the Treasury. Though he has “some sympathy” for the PEP argument, what really matters, he believes, is that the Treasury has come up with a solution to the big fiscal, economic, social and national security risks posed by Eskom’s debt.
“The treatment of Eskom’s debt was always going to be complex,” he writes in Business Day. “The Treasury found a clean way to solve the problem, explained its rationale, and published all the detail in publicly available documents. I understand what the Treasury did, and as far as I’m concerned, nothing was hidden.”
The Treasury found a clean way to solve the problem, explained its rationale, and published all the detail in publicly available documents
— Isaah Mhlanga
He adds that those watching from the sidelines should avoid “throwing mud at those in the hot seat finding solutions to the complex problems facing the economy, especially if we cannot come up with better solutions that advance South Africa’s economic development”.
Lijane, however, considers the accounting treatment of Eskom’s debt relief package farcical. She also fears a material deterioration in the risk of the country’s debt portfolio as the Treasury tries to meet the increased funding requirement created by its R254bn gift to Eskom.
She notes that additional funding for Eskom will be raised by issuing floating-rate bonds and running down the government’s cash reserves. But while floating-rate debt may be cheaper, it is riskier for the issuer, she explains, and though cash may be expensive to hold, it acts as a buffer in the event of stress.
“Less cash and more nonfixed debt mean more fragility,” she says. “There is a point beyond which the debt portfolio of the state becomes a problem in and of itself. We are not there yet, but that is the road we have taken.”
In short, the 2023 budget has confirmed her fears that a “negative doom loop” is emerging.
“If these trends do not reverse,” she warns, “South Africa will end up with no fiscal space, unpredictable, reactive macroeconomic policymaking, and the boom-bust cycles characteristic of many emerging-market economies.”
The debate appears to have reached a stalemate. Everyone is hoping the International Monetary Fund (IMF), which is currently in South Africa conducting interviews for its annual Article 4 report on the state of the economy, will chime in.
But that really isn’t the lender’s style. It prefers to stay behind the scenes, offering guidance and perhaps a bit of gentle prodding.
Though the IMF declined to comment for this story, it is far more likely to defend the Treasury than castigate it, given the Treasury’s transparency and commitment to fiscal discipline. What the fund says on this matter in the Article 4 report, due out in late May or early June, will be telling.
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