Economic reforms in focus as David Masondo weighs in on cabinet negotiations

As political parties jockey for positions in President Cyril Ramaphosa’s cabinet, former deputy finance minister David Masondo has said he is hopeful the new government will advance the sixth administration’s economic reforms.

Masondo was speaking during the first day of the Operation Vulindlela conference on Tuesday, where panellists emphasised the need for political will to keep reforms on track.

Uncertainty over South Africa’s political transition hung over Tuesday’s event, which will help shape the next phase of Operation Vulindlela — an joint initiative of the presidency and treasury established during Ramaphosa’s first term.

Masondo’s job is up for grabs in the ongoing negotiations for ministerial positions. The Democratic Alliance — the second-biggest member in the government of national unity after the ANC — has demanded that it be given the deputy finance minister post as part of the agreement.

For the time being, it appears Ramaphosa’s structural reform programme won’t be derailed by competing political interests in the new government. 

The government of national unity’s statement of intent indicates that structural reforms will be a priority of the seventh administration. The document also lists fiscal sustainability among the coalition’s priorities.

In his weekly letter, Ramaphosa said on Monday that it will be critical that the unity government stays the course on structural reforms.

“These reforms are necessary to resolve long-standing challenges in key industries and create more jobs and opportunities. We will need to build on the progress that has already been made, while accelerating the pace of reform,” he wrote in a letter which urged unity amid wrangling over power sharing.

In his opening remarks on Tuesday, Masondo said the reforms envisioned in Operation Vulindlela would be painful in the short term, but beneficial over a longer period. Thus far, the programme — aimed at lifting supply-side constraints on the economy — has focused on energy, digital infrastructure, transport and water to boost investment and growth.

Echoing sentiments expressed by Masondo, Saul Musker, director of strategy and delivery support in the presidency, suggested the government was intent on following through with the initiative.

“Although a lot remains uncertain at the moment — we are living through particularly uncertain times — I think one thing that has been absolutely clear is that government remains committed to this journey of reforming the economy,” Musker said.

He added that South Africa has a unique opportunity to lift growth over the next five years. “[It is] an opportunity that we may not have again. So there is an absolute commitment from government to continue this journey,” Musker said.

Among the early achievements of Operation Vulindlela was the raising of the licensing threshold for new grid-connected generation projects to 100 megawatts, announced by Ramaphosa in June 2021. The reform was aimed at boosting private investment in embedded generation and reducing the burden on Eskom. The suspension of load-shedding since March has been attributed to Ramaphosa-era energy reforms.

Earlier this month, the Bureau for Economic Research (BER) released a report modelling the effects of the sustained implementation of structural reforms, using Operation Vulindlela as a starting point.

The BER’s model found that implementing structural reforms in the four network industries — energy, railways, ports and infrastructure — can boost real GDP growth by 1.5 percentage points by 2029.

According to the research, in this scenario the largest boost to growth will come from improved fixed investment, which is 4 percentage points higher by 2029 compared to the BER’s baseline scenario.

Importantly, this scenario assumes that the government is able to continue to pursue fiscal discipline.

The BER’s research notes that any form of government spending can be positive for economic growth over the short term. “However, spending on infrastructure and current line items do not have the same long-term impact on potential growth. The markets will also view them differently, with ill-advised spending resulting in higher bond yields and debt [repayments] over time.”

The slow pace of structural reforms — compared to the more immediate effect of spending injections — has made Ramaphosa’s economic programme unpopular in some circles. This is as spending cuts continue to have a deleterious effect on public services and the people and businesses relying on them. 

Analysis by Asghar Adelzadeh, the director and chief economic modeller at Applied Development Research Solutions, suggests that structural reforms in the absence of higher public spending will yield disappointing results.

According to a 2019 report weighing various economic policy scenarios, a programme that focuses on lifting supply-side constraint alone would add only 0.3% to the average annual growth rate. 

This finding suggests structural reforms may need to be implemented alongside macroeconomic measures, such as increased public investment, to induce significant economic and employment growth.