FINANCE

South Africa faces big ‘funding squeeze’

South Africa, as part of the Sub-Saharan region, is facing shrinking aid budgets and reduced inflows from partners, international and cross-border, leading to a “big funding squeeze,” says the International Monetary Fund (IMF).

Abebe Aemro Selassie, the director of the IMF’s Africa Department, during the announcement of a new report analysing the region’s current economic landscape, said that countries in the Sub-Saharan region have effectively been cut off from international markets as a result of high inflation and borrowing costs.

In its latest report, “Big Funding Squeeze”, Selassie said people in the region are feeling the effects of a funding crisis.

“Since Russia’s invasion of Ukraine, the cost of living is more expensive, borrowing costs have increased, and access to cheaper funding is dwindling,” he said.

“Coupled with a long-term decline in aid and a more recent fall in investment from partners, this means that there is less money to be spent on vital services like health, education, and infrastructure.”

The director said if measures are not taken, this funding squeeze will hamper Sub-Saharan’s efforts to build a skilled and educated population and to be the driving force of the global economy in years to come.

Across the board, public debt and inflation levels are the highest they have been in decades, eroding household purchasing power and affecting cash-strapped consumers.

Furthermore, the report outlined that the rapid tightening of global monetary policy has raised borrowing costs for Sub-Saharan Africa.

Selassie noted, however, that South Africa has been able to face the headwinds of a funding squeeze.

He said this is due to the country having deeper liquid financial markets and a government that relies almost entirely on the market to fund itself.

“In the past, global financial crisis, for example, in 2008/09, the country was subjected to a really big funding squeeze but managed it by allowing the exchange rate to move and relying on domestic markets.”

“I think that is an important funding source that will, I think, see through both the government and also private markets which can also rely on this -– private companies that can rely on this market,” the director said.

Economic growth

During a Q&A session with journalists from various publications, when queried on the current situation South Africa finds itself in, Selassie said that in terms of growth projections, challenges associated with the country’s electricity production continue to influence growth.

“I think that’s by far the most important influence in the projections that we have. Of course, the external environment being difficult is a factor also,” he said.

The IMF has revised the country’s annual growth expectations to around 0.1%. Selassie said that the country would probably scrape through with a small expansion; however, others have expressed a significant lack of confidence in this happening.

Looking broadly at Sub-Saharan Africa, the organisation expects growth to slow to 3.6% in the region – marking the second year of decline.


Read: Major red flags for investment in South Africa

By Neil Hall
For The Daily Mirror

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