There was a lively debate on how the government can revive the economy and create jobs. During the first decade after democracy, the ANC government created several economic initiatives that have borne fruit, as evidenced by the notable growth rates that have achieved South Africa’s sovereign investment rating .
Indeed, the South African economy has been constrained lately, thanks to the Covid-19 pandemic, among other factors.
It is high time that institutions at the local level mobilized to revive the national economy.
The global economy is showing a noticeable recovery in most developed markets, as central banks are currently containing rising consumer inflation pressures by tightening monetary policies.
Just before the advent of Covid-19, an index of developed economies including Germany, the UK and the US shows their economies grew by 1.75% in 2018, which fell to 1.59 % in 2019 and contracted by -5.94% in 2020.
Importantly, the economy rebounded with 5.26% growth in 2021 and future growth forecasts were positive.
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Over the same period, data from the International Monetary Fund (IMF) showed that South Africa grew only 1.49% in 2018, posted a meager production of 0.11% in 2019 when Covid-19 emerged and contracted significantly by -6.43% in 2020.
These data suggest that the South African economy is severely affected by Covid-19 compared to the cited sample of developed economies.
The IMF predicts South Africa will see optimistic growth of 4.4% in 2022, but South Africa’s recovery is unlikely to be as aggressive; indeed, the constant power cuts undermine the growth ideal cultivated by increasing the stock of public debt as a stimulus measure.
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In 2021, the European Central Bank and the US Federal Reserve continued their monetary policy stimulus and expanded their balance sheets by €500 billion (R10.177 trillion) and US$700 billion (R12.037 trillion). trillion rand) respectively, bolstering their economies through the provision of liquidity, portfolio rebalancing and strengthening positive sentiment.
While monetary policies accelerated recovery rates in these countries, one salient variable was actually at the heart of these recoveries, namely the role played by municipal governments in stimulating the local economy, prioritizing infrastructure investment. .
Just before Covid-19, from the second quarter of 2018, the EU invested in connectivity infrastructure in around 1,000 cities and towns. In addition, local municipalities have benefited from creative project financing initiatives to stimulate the economy of cities through infrastructure spending.
In addition to this, some local economies have actually started reducing city tax rates to maintain business investment in the local economy and to prevent capital flight and the loss of corporate citizens in their area. , which has maintained and increased employment rates and advanced local economic expansion.
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The results of this economic stimulus by local municipalities is that local populations and residents are emerging from the Covid-induced economic downturn into a consumption and investment-led recovery. Along the same lines, cities are playing their development role admirably, investing in infrastructure, and these tax breaks are paying dividends.
Before Covid-19, the German city of Mainz, with a population of just 220,000, was saddled with debt, earning just 173 million euros in revenue, but during the Covid-19 pandemic, one of its resident companies, BioNTech, paid 3.2 billion euros in taxes and the Mainz city senate announced a budget surplus of 1.09 billion euros, not to mention the availability of cash reserves for repay 634 million euros of short-term loans.
The prestigious American research group Brookings Institution surmised that an injection of infrastructure into the developed economy and local support for businesses protected their populations from the worst of Covid-19, hence the rapid economic recovery underway.
On the other hand, some of our municipalities are not at the forefront of post-pandemic economic recovery, as is the case elsewhere.
The engine of the South African economy, namely the city of Johannesburg, deserves increased attention; it is in a deplorable state and unable to kick-start infrastructure investment that could serve as a stimulus for local and national economic recovery.
Indeed, the City of Johannesburg’s latest credit rating report released by leading global ratings agency Moody’s Investors Service gave the city a Ba3 rating with a negative outlook, suggesting that a further downgrade credit to junk status is in sight in the near future. term.
Sewage fills the streets of Hillbrow. Photo: Rosetta Msimango/City Press
The logging challenges are that Johannesburg’s economy is not growing; instead it is stagnating and as a result the municipality is increasing borrowing, currently at 37% from 35%.
The City of Johannesburg’s total reserves are around R6 billion and the municipality’s sinking fund has fallen to just R2.5 billion from around R4.5 billion a few years ago.
The financial situation is serious insofar as only the Development Bank of Southern Africa could borrow the city of Johannesburg but at a significantly higher interest rate.
It is unlikely that the situation will reverse as the revised budget shows a deficit of 5%, which means that certain commitments will not be met.
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Moody’s rating report says this shortfall will likely be financed by R1.8 billion in borrowing, which will likely be covered by the sinking fund drawdown, again, as lenders are unlikely to extend lines of credit.
The growth in outstanding debt and the consumption of financial reserves to pay salaries and other recurring expenses suggests that the city is unlikely to have sufficient reserves to redeem the bonds when they fall and will likely collapse. anytime soon, notably due to bankruptcy. This will be tragic for efforts to revive and consolidate the national economic recovery.
Dependence on debt and the sinking fund is not a prudential public finance management strategy; instead, the City of Johannesburg should improve efficiency.
The city has a debt book worth more than 28 billion rand, but poor credit and revenue management is the order of the day: the credit recovery rate is 74%, below 85% required, hence the budget deficit in question.
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Failure to continue to improve revenue collection poses existential risks to the city as municipal consumer debt subscribes, debtors’ reluctance to pay will worsen, and revenue-related court cases will simply go away. collapse – and all of these variables will also disrupt local economic development.
Gauteng accounts for 35% of South Africa’s economic well-being, largely attributable to Johannesburg’s economic output, making the city of Johannesburg the economic hub of the country.
Therefore, the ultimate goal should be for the city to follow in the footsteps of peer global cities in developed economies. They are the peers who have rightly taken on the role of driving their country’s economic recovery as Covid-19 recedes.
Indeed, said peers have demonstrated a viable economic strategy to emerge from the current low: the solution lies in the demand side of the economic framework and the innovative application of local economic development initiatives to improve the national economy.
Local economic recovery strategies must be based on multi-agency and smart local partnerships everywhere.
And, as we saw in Mainz, it is the bold thinking of city-led economic investment, pro-residents, pro-small business policies and careful management of public finances that will reset and reinvigorate the economy. Johannesburg’s economy, will usher in socio-economic prosperity and eventually spur the recovery of the South African national economy as well.
* Morero is the regional president of the ANC Johannesburg