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South Africa’s Economy To Contract 7.2%, Even After Loan Injection – IMF

In this photo taken Tuesday, May 19, 2020, customers queue at a mall without practicing social distancing at a mall in Khayelitsha in Cape Town South Africa. With dramatically increased community transmission, Cape Town has become the center of the COVID-19 outbreak in South Africa and the entire continent. (AP Photo/Nardus Engelbrecht).

South Africa’s economy is likely to contract by 7.2% this year due to the impact of the new coronavirus, and growing debt repayments will hamper its recovery, the International Monetary Fund (IMF) said on Tuesday.

The Washington-based lender approved $4.3 billion in emergency financing for Africa’s most advanced economy late on Monday.

The IMF loan is part of $7 billion in planned borrowing from international financial institutions. The BRICS Bank has approved a $1 billion loan, and the African Development Bank says it will lend the government 5 billion rand ($304.55 million). Talks with the World Bank are ongoing.

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In a country report complied by its executive team published on Tuesday, the IMF said the recession would limit the government’s ability to reduce debt and a bulging fiscal deficit.

“Despite the sizable relief package, the pandemic will drive the economy into a deep recession in 2020, with adverse implications for the fiscal deficit and debt,” the IMF said.

President Cyril Ramaphosa announced a 500 billion rand stimulus package in April after imposing a strict lockdown in late March to curb infections, which passed 450,000 this week, the most on the continent.

The IMF sees the consolidated budget deficit hitting 16% of gross domestic product (GDP), with public debt at 78.1% of GDP in 2020 and 82.4% in 2021.

It said forecasts were “subject to prominent downside risks”, citing increased bond issuance, social instability and bailouts to state-owned firms, especially power utility Eskom, as risks.

“Specific and well-defined fiscal consolidation and reform commitments in the October MTBPS (medium term budget) will be a critical first step to establish the credibility of the reform efforts, followed by steadfast implementation,” the IMF said.

In a letter to the IMF signed by the finance minister and the central bank governor, South Africa said it was “open to introducing a debt ceiling in addition to the nominal spending ceiling currently in place” to reduce deficits.

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Written by PH

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