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Zawya
07-07-2025
- Business
- Zawya
Kingdom of Lesotho: Staff Concluding Statement of the 2025 Article IV Mission
Against a backdrop of low growth, high unemployment, and widespread poverty, Lesotho's government-led growth model has long struggled to deliver on the authorities' growth and development goals. Now, an additional set of external shocks has further clouded the outlook. From a modest peak of 2.6 percent in FY24/25, GDP growth is expected to almost halve to 1.4 percent in FY25/26, reflecting a much more turbulent and uncertain external environment. The peg to the Rand has continued to serve Lesotho well, helping bring inflation down from a peak of 8.2 percent in early 2024 to 4.0 percent in April 2025. Prudent government spending during FY24/25, along with buoyant South African Customs Union (SACU) transfers and water royalties have once again resulted in a sizable fiscal surplus. This has enhanced longer-term fiscal sustainability and helped strengthen foreign reserves, which supports the peg. Looking forward, increased water royalties from South Africa will further boost revenue, and help offset easing SACU transfers. The main challenge for the authorities is to transform these fiscal surpluses into sustainable and high-quality growth -- now even more urgent in light of recent shocks. Public funds should be saved wisely and spent strategically, with an emphasis on high-return investment projects. More effective use of public funds, alongside structural reforms, should support longer-term private sector-led growth. An International Monetary Fund (IMF) team led by Mr. Andrew Tiffin held meetings in Maseru with the authorities of Lesotho and other counterparts from the public and private sectors and civil society from June 4 to 17, 2025, as part of the 2025 Article IV consultation. Discussions focused on the mix of fiscal and monetary policies to ensure macroeconomic stability and debt sustainability, as well as the structural reforms needed to create jobs, reduce poverty, and facilitate the transition to private-sector-led growth. Context and Outlook IMF staff estimates suggest that real GDP growth picked up modestly in FY24/25 to 2.6 percent, up from 2.0 percent the previous year. In large part, this reflects spillovers from the Lesotho Highlands Water Project (LHWP-II), which has helped offset declining competitiveness in the apparel sector and the impact on exports of lower diamond prices. Headline inflation was 4.0 percent in April, down from a peak of 8.2 percent in January 2024. The gap between CPI inflation in Lesotho and South Africa mainly reflects the larger share of food in Lesotho's CPI basket. Lesotho's fiscal balance registered a sizable surplus in FY24/25. South African Customs Union (SACU) transfers are up by almost 14 percent of GDP compared with FY23/24, and recurrent spending has remained steady as a proportion of GDP, owing to a moratorium on public sector hiring and a reduction in the in-kind social assistance benefits. Capital spending increased but execution remained short of budgeted levels. The net impact has been a fiscal surplus of 9.0 percent of GDP in FY24/25, which helped lift gross international reserves to 6 months of imports; strengthening the peg. With less issuance of domestic debt, clearance of domestic arrears, and repayment of an IMF arrangement under the Rapid Financing Facility, public debt fell to 56.6 percent of GDP in FY24/25, down from 61.5 percent in FY23/24. However, a more uncertain global environment has undermined Lesotho's economic outlook, with growth expected to almost halve to 1.4 percent in FY25/26. In particular, the sudden shift in policies by the United States on tariffs and official development assistance (ODA) will hit the economy hard. Details of US intentions are still unclear, but as a small and vulnerable country, Lesotho is one of the most exposed countries in Africa to changing US priorities. Exports to the United States represent 10 percent of Lesotho's GDP, and foreign assistance from the United States has typically amounted to around 3½ percent of GDP, mostly concentrated on disease prevention and other critical health needs. Looking ahead, Lesotho has options. SACU transfers are expected to drop to their long-term average this year (down 6 percentage points to less than 20 percent of GDP). Filling the gap, however, renegotiated water royalty rates under the Treaty with South Africa on the LHWP-II represent a significant source of revenue—rising to almost 13 percent of GDP in FY25/26 and then settling at around 10 percent of GDP every year over the medium term. In sum, domestic revenues are expected to be around 8-10 percent of GDP higher than just a few years ago. On the monetary side, the peg to the Rand continues to serve the economy well and should remain the main focus of monetary policy. Policy rates should continue to follow South African rates closely. The central bank should take advantage of the current easing cycle to close the remaining gap with South Africa. The key challenge for the authorities is to transform Lesotho's fiscal surpluses into sustained, high-quality growth. A striking lesson from the country's recent history, however, is that greater public spending is no guarantee of higher living standards. As a proportion of GDP, for example, government spending in Lesotho is well above international norms—more than double the SACU average. But this has not been matched by improved economic performance. Indeed, real per capita incomes shrunk by 12 percent between 2016 and 2023, and unemployment and inequality remain high. Considering the possible uses of Lesotho's surpluses, therefore, the main goal of the authorities should be to ensure that this time is different, and that these funds are saved wisely and spent strategically. Saving Wisely Greater savings will require continued fiscal prudence. To this end, the authorities should maintain their efforts to control recurrent spending and enhance capacity in tax revenue analysis and administration. Contain the wage bill. Lesotho's wage bill (as a share of GDP) is the highest among SACU members and triple the sub-Saharan African average. Reducing the amount spent on wages has long been a key recommendation of past Article IV consultations. And the government's continued restraint over the past year has been a critical step in the right direction—this effort should continue, with a continued moratorium on hiring, streamlining of the establishment list, and regular reviews of the compensation system. It should be noted, however, that reducing the wage bill is not an end in itself. Ultimately the objective is a fair and performance-based public employment system that rewards productivity and ensures better delivery of public services. Improve tax policy design and strengthen tax administration. The Tax Policy Unit has been established and key staff are being hired. With help from the IMF, the unit's capacity to accurately forecast revenue and improve tax-system design should be strengthened quickly. On tax administration, a phased reform strategy is being implemented in line with the IMF's 2023 TADAT assessment. Prompt approval of the two tax policy bills and tax administration bill could help address identified deficiencies in many areas. Improve the efficiency of social spending to target the most needy. Social spending is several times that of neighboring countries as a share of GDP but the targeting of social safety schemes should be improved. For example, the tertiary loan bursary fund education scheme (2.7 percent of GDP) provides loans to many who typically do not need support and fail to repay (loan recovery is only 2 percent). A better targeted safety net would not only free resources for the most vulnerable but would also help enhance Lesotho's resilience to new shocks. In this regard, the authorities should move proactively to take stock of services likely to be disrupted by cuts in U.S. assistance and swiftly develop a coordinated plan to ensure continued delivery of essential health services. More broadly, the authorities should enhance the operation of existing cash transfer programs, reinstate the national digital system for social registry to better streamline the identification and registration of beneficiaries, and accelerate the deployment of new benefit delivery tools. The authorities should quickly establish a well-governed savings framework (stabilization fund). The details of a framework have been developed in close cooperation with Lesotho's development partners and aim to ensure a stable source of government funding going forward, which in turn would allow for uninterrupted service delivery even in the face of shocks. With sufficient savings, the fund might also help finance future development spending, such as infrastructure investment. To be effective, the fund needs to be anchored by a clear and credible fiscal rule, which would guide the conditions under which funds are deposited and withdrawn. The fund should also be set within a firm legal framework, with a clear governance structure that is independent from political influence, safeguarding Lesotho's savings until they can be used wisely. In this regard, the authorities are currently developing the policy, expected by July 2025, that will guide the stipulated legal framework for the stabilization fund. Within the framework, a key anchor would be a target for Lesotho's public debt. Until very recently, debt has trended steadily upward, rising sharply during the COVID-19 pandemic. The decline over the past year has been welcome, but the IMF's Debt Sustainability Analysis still suggests that, although the risk of debt distress is 'moderate,' there is little scope to absorb any further shocks. These might easily push debt to a level where the risk of debt distress is high. A medium-term goal of 50 percent of GDP would be appropriate, as it would allow for greater resilience and is consistent with the debt anchor proposed in the fiscal rules. The authorities should therefore scale back new borrowing but might also consider first retiring existing (high cost) debt. In addition, the authorities should clear any remaining or new domestic arrears as soon as possible. Spending Strategically Improved public investment management is needed to increase the quality of capital spending. Before Lesotho's savings are allocated for investment or infrastructure projects, sufficient controls should be in place to ensure that this investment represents value for money. Historically, high levels of public investment in Lesotho have not resulted in a capital stock of equal quality. And owing to longstanding capacity constraints, the capital budget continues to be significantly under executed. Authorities should take steps to boost the efficiency of public investment, including by creating a centralized asset registry, establishing a prioritized project pipeline and enhancing capacity for project management and monitoring. In this regard, the request for a Public Investment Management Assessment from the IMF is timely and welcome. In support of efforts to ensure value for money, the authorities should redouble their efforts to enhance Public Financial Management (PFM). Without these measures in place, there is a danger that new revenues will simply be wasted. Budget preparation and execution must be strengthened to enhance budget credibility. This requires improved expenditure control through better collaboration between departments, monitoring and identification of mis-appropriated funds, and regular and timely audits. More broadly, the authorities should implement the Medium-Term Expenditure Framework to better align policy objectives with budget allocations over a multi-year timeframe and enhance long-term planning. To build further trust in PFM, the authorities should strengthen internal controls within the integrated financial management system. The authorities should accelerate the deployment of digital signatures to strengthen payment processes and prevent the accumulation of arrears. The authorities should also continue their efforts to ensure a comprehensive analysis and management of fiscal risks. Several fiscal risks have materialized in recent years, including from collapsed public private partnerships; unquantified arrears; and transfers and contingent liabilities from state-owned enterprises (SOEs). The authorities should further strengthen the effectiveness of SOE management and reporting and continue the release of a fiscal risk statement as part of the annual budget process. As a matter of priority, therefore, pending PFM legislation should be passed as soon as possible. Currently, the most pressing items include i) the Public Financial Management and Accountability Bill; ii) the Public Debt Management Bill; and iii) secondary legislation to implement the 2023 Public Procurement Act. Together, this legislation will improve the efficiency and transparency of procurement, enhance fiscal responsibility and budget processes, strengthen financial management and fiscal reporting. The legislation will also help ensure that the government's public borrowing plan is well integrated with the budget process. With these measures and controls in place, Lesotho would be in a much better position to transform its accumulated surpluses into high-quality growth. In line with the authorities' announced shift in emphasis from recurrent spending to capital spending, a focus on the cost effectiveness of public investment would allow for increased levels of better-quality investment, and ultimately higher growth. This would naturally entail lower fiscal surpluses going forward. However, in this context, a more relaxed fiscal stance would not necessarily entail a higher debt path, but would instead result in a slower, but acceptable, pace of reserve accumulation. Supporting Private-Sector Growth Improved public investment will need to be accompanied by broad structural reforms. Better service delivery and higher-quality investment will be helpful. But the current government-led growth model has resulted in an economy with a small and undiversified private sector—contributing to low productivity, anemic private investment, declining competitiveness, and high informality. In parallel, therefore, the authorities should accelerate efforts to unlock the growth potential of the private sector. Supporting financial inclusion and literacy is imperative. Evidence suggests that access to finance remains a key challenge, particularly for small and informal firms. This in turn undermines private-sector job creation. The authorities have addressed this through various interventions, including partial credit guarantees, establishment of a moveable asset registry, and support of a credit bureau. And signs of a positive impact are emerging, particularly in financial access for small enterprises. Building on this success, the new Financial Sector Development Strategy and National Financial Inclusion Strategy are welcome and should be implemented swiftly as a matter of priority. Providing a stable, predictable, and well-regulated business environment is also essential. For larger firms, needed reforms include measures to reduce the cost of doing business, and efforts to boost private investor confidence—including through transparent and consistent regulatory frameworks, greater policy consistency, and a clear long-term strategy for infrastructure development. To reverse the long-term decline of some industries (e.g., textiles) and take full advantage of new opportunities, the authorities should focus on coordinating and streamlining the efforts of the Lesotho National Development Corporation and the Basotho Enterprise Development Corporation. The authorities should also enhance the regulatory framework for the establishment, operation, and oversight of SOEs, while developing a strategy for the gradual privatization of non-performing SOEs to enhance efficiency and attract investment. Mitigating corruption and strengthening the rule of law is essential to restoring confidence, investment, and growth. Legacy fraud cases point to underlying vulnerabilities in payment and procurement, underscoring the need for the transparency and accountability that would result from successful PFM reform. More broadly, strengthening key bodies such as the Office of the Auditor General and the Directorate on Corruption and Economic Offences (DCEO) would also send a strong signal of the government's resolve, and help incentivize private sector development. In this regard, the increased funding and expansion of the DCEO has been most welcome. The IMF team thanks the Lesotho authorities and other counterparts for their hospitality and for a candid and productive set of discussions. Distributed by APO Group on behalf of International Monetary Fund (IMF).
IOL News
29-06-2025
- Business
- IOL News
How Africa can foster sustainable diplomacy amidst global trade tensions
Ashraf Patel The abrupt exit of Donald Trump from the G7 Summit in Canada, without having side meetings with Global South leaders from South Africa, India et al, and this week's NATO Summit where core nations committed to a 5% of GDP spending on Defence amidst Trump tariffs has cemented 'nationalism as the new normal.' Meanwhile, 9 July is a key date when Trump tariffs kick in and will further erode African nations - who face high costs of capital and many face social conflicts amidst multiple cost of living crises facing the continent. In this context, South Africa should develop a smart agile and sustainable diplomacy rooted in both national interest and continental solidarity. Traditional blocks and alliances are no longer viable for middle powers. It is thus imperative that South Africa needs to craft a more nuanced trade and investment-people partnership to address its sagging economy and deep-seated structural problems such as unemployment, inequality, hunger and digital deficits. The recent announcement by China to accept duty-free access for 53 African nations is a huge boost that can promote exports and preserve jobs - but trade facilitation and meeting product standards will be crucial to leverage these opportunities. Both China and India offer a market of hundreds of millions of consumers that African exporters can tap into. Russia and the St Petersburg Economic Forum In early June Deputy President attended the 28th St. Petersburg International Economic Forum (SPIEF) in Russia's second-largest city. This year's forum, "Shared Values: The Foundation of Growth in a Multipolar World attracted nearly 20,000 representatives from 140 countries and regions and heads of several international organizations. Russia has managed GDP growth and currency reserves despite sanctions and war and is the Gateway to Eurasia. This forum is held when the global economy is facing severe challenges. It is a platform for issues ranging from accelerating digitalization to addressing climate change and formulating specific, practical solutions that can adapt the global economy to new conditions. The forum included more than 150 events, with entrepreneurs from Russia, China, the United States, Türkiye, Brazil, Vietnam, India, Iran, the United Arab Emirates and Africa. Southern Africa, SACU and AFCFTA expansion Our Southern African region comprises over 300 million citizens with huge trade and development potential. AFCFTA has been operational for five years but trade is negligible. Trade facilitation capacity and product quality support are needed as well as tech transfer. As the G20 host nation South Africa needs a new trade and investment package rooted in SADC industrialisation and energy plans. Smart tariffs would be needed with SACU nations Lesotho, Swaziland and Botswana. However, South Africa Inc.'s story in Africa has been that of a 'regional hegemon exploiting the rest of Africa', especially in mining and retail. Can a new AFCFTA be possible? One rooted in fair trade, solidarity and the SDG model with smaller nations? Here responsible diplomacy is needed beyond rhetoric. France and its commitments to Multilateralism and SDGs agenda In the current geopolitical situation, France is ensuring multilateralism and UN norms are adhered to. President Macron's stated position on advancing the two-state solution for Palestine will go a long way in ensuring a peaceful settlement. The Paris AI Safety Summit in February with France committing to a progressive vision for AI rooted in sustainability, inclusion and addressing inequality is progressive and aligned to UN and G20 commitments. The annual Paris Peace Conference is a global platform providing the world with a plethora of progressive ideas -and solutions on a range of key global issues for dialogue. At a bilateral level, a visit to France in early June saw Deputy President Paul Mashile deepen partnerships in areas of investment, development infrastructure, energy and technology. Indonesia, Malaysia and the ASEAN bloc ASEAN nations Indonesia and Malaysia nations offer enormous opportunities. With a population of 250 million, this is a major opportunity in trade especially in small business developments, exports, tourism and culture. Canada and Australia - progressive Commonwealth nations with common values Canada and Australia are fellow Commonwealth nations that currently have progressive governments in power with a deep commitment to multilateralism. Australia's Labour leader and Prime Minister Albanese is an example of smart diplomacy and managing a 'strategic autonomy' balance with major powers in the Asia Pacific region, China and the EU. His domestic agenda is rooted in progressive social policies from climate change to social cohesion. For example, the smartphone ban in Australian schools is seen as a game-changer in regulating social media and youth, a policy Africans can learn from. Canada too has a range of commitments to development aid and investments in skills development across Africa. Both nations are major investors in mining in Africa and committed to the sustainable mining agenda, although much more can be done in terms of human rights and mining. Solidarity and Sustainability in Latin America In Colombia President Gustavo Petro has showed the way of solidarity and banned coal exports to Isreal. The city of Bogota is known to be a model city in terms of urban transport and spatial transformation, something South African metros can draw upon. Chile a progressive social democracy and once a poster child of Chicago-style neoliberalism, now has a solid social democracy increasing well-being and wealth social safety nets, and higher education access. Here South Africa can learn much on how to manage the headwinds of neoliberalism and ensure our eroding social agenda is preserved. Bolivia's socialist government is maturing and learning to be in government. South Africa has cordial relations for two decades. With large reserves in lithium and being in the headwinds of large power competition for resource extractions, South Africa and African nations can better engage Bolivia and Latin American nations in the big development ideas on resource governance and the beneficiation of critical minerals for development, trade and the UN SDG sustainable agenda. While Trump 2.0 tariffs have severely disrupted African nations, neighbours Canada and Mexico, we can learn from Cuba, who for decades have endured the illegal US blockade yet managed to maintain their sovereignty and continue to advance their historical mission and revolution. By contrast, our current tariff challenges are merely a 'walk in the park'. Hence, internationalism and solidarity should still be a core feature of foreign policy while also being smart in navigating partnerships with a diverse range of nations across continents regardless of ideological blocs. However, in order to navigate the 'new nationalist normal' in this chaotic trade geopolitics nexus calls for a new generation of smart and agile diplomats. Smart and sustainable diplomacy and outreach are required by our embassies, chambers of commerce as well as academic institutes and civil society towards a more calibrated trade, investment, solidarity and people-to-people partnerships. We may do well to establish Bi-National Commissions with some of these nations. * Ashraf Patel is a Senior Research Associate at the Institute for Global Dialogue, UNISA. ** The views expressed do not necessarily reflect the views of IOL, Independent Media or The African.
Zawya
05-05-2025
- Business
- Zawya
The vital role of trade agreements in driving South Africa's economic growth
Trade agreements are one of the essential pillars supporting South Africa's economic strategy, shaping market access, investment flows, and international competitiveness. While global discourse on trade has recently focused on negotiations involving the United States, Canada, Mexico, and China, to mention a few, South Africa needs to look closer to home and examine its own trade agreements to capitalise on emerging opportunities and mitigate potential risks. With the African Continental Free Trade Area (AfCFTA), the Southern African Customs Union (SACU), and the Africa Growth and Opportunity Act (AGOA) shaping the country's trade landscape, understanding these agreements and how to leverage them are the keys to navigating an increasingly complex global economy. The importance of trade agreements Trade agreements streamline the exchange of goods and services between countries, reducing tariffs and barriers that otherwise hinder economic growth. Historically based on barter systems, modern agreements involve structured and equitable exchanges. South Africa's participation in agreements such as AGOA and SACU allows businesses to access international markets under preferential conditions, driving growth, enhancing economic development, and supporting job creation. AGOA, for example, gives South African exporters duty-free access to the US market for certain goods, particularly benefiting sectors like agriculture, automotive manufacturing and mining. However, AGOA's non-reciprocal nature means South Africa is vulnerable to US policy shifts. Recent diplomatic tensions - highlighted by the US decision to expel South Africa's ambassador - illustrate how quickly trade dynamics can change, potentially affecting market access. Losing AGOA preferences would subject exports to higher US tariffs, significantly hindering South Africa's competitiveness against countries with lower costs and more efficient supply chains. Challenges in navigating trade agreements Trade agreements also pose several other challenges, particularly regarding compliance with international regulations. For South African businesses, especially SMEs, navigating complex legal and administrative requirements can be resource-intensive. Meeting high standards for exports, for example the stringent sanitary and phytosanitary measures in agriculture, requires significant investment in quality control and documentation. Another significant issue is the infrastructural and logistical barriers hampering trade efficiency. South Africa's ports and border posts, notably Beitbridge Border Post, remain congested and inefficient, negatively impacting trade with neighbouring countries. Delays in customs processes and high transportation costs also limit the competitiveness of South African exports, disproportionately affecting smaller businesses looking to enter export markets. Expanding trade beyond traditional partners Against this backdrop, it is imperative for South Africa to actively strengthen trade relationships within Africa. The AfCFTA offers a historic opportunity to create a unified African market, reducing intra-African trade barriers and promoting economic integration. Recently, South Africa began preferential trade under AfCFTA, enabling duty-free or reduced-duty exports to 12 African countries. However, inadequate infrastructure, regulatory disparities, and non-tariff barriers still hinder growth. To leverage AfCFTA fully, South Africa – and indeed all other African countries - must invest in logistics and border efficiency. Modernising customs procedures, reducing red tape and enhancing transportation networks will facilitate smoother trade flows. Addressing regulatory bottlenecks will also help SMEs participate more fully in regional trade, promoting economic inclusivity. Beyond Africa, engagement with BRICS nations offers additional trade opportunities. While China remains a major partner, other BRICS markets hold untapped potential for South African exporters, particularly in minerals, manufacturing and agriculture. However, non-tariff barriers, such as Brazil's stringent medical equipment import regulations, must be addressed to fully realise these opportunities. Policy considerations and future trade strategies For South Africa to remain competitive globally, a strategic policy approach is essential. Recent EU investments totalling €4.7bn in green energy and vaccine production reflect growing opportunities to diversify trade and attract foreign investment. But it is imperative that we build on this positive momentum. There are some areas where government is doing that – for instance its recent decision to invest R1 billion into local electric vehicle (EV) production, thereby demonstrating alignment with global sustainability trends and hopefully enhancing South Africa's competitive position over time. However, there is still much work to be done and, unfortunately, the recent budget demonstrated that there is not much money to fund that work. In fact, little has been said or done of late to signal serious government intent of any sort to boost economic growth through trade facilitation. Still hope for a future built on strategic trade growth Despite the challenges, though, South Africa still has a unique opportunity to reposition itself as a leader in African trade and beyond. By embracing digital customs processes, strengthening regional trade networks and leveraging public-private partnerships alongside private sector investment, the country can create a more agile and resilient trade environment – one that evolves from merely reacting to global trade shifts to proactively leveraging the power of trade agreements to help shape its own economic destiny and that of the African continent.
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Business Standard
24-04-2025
- Business
- Business Standard
India, South Africa discuss preferential trade pact through SACU bloc
India and South Africa have held talks on a preferential trade agreement (PTA) or a limited trade deal via the five-member South African Customs Union (SACU) to expand trade ties, the commerce department said on Thursday. SACU nations include South Africa, Namibia, Botswana, Lesotho and Eswatini and is the world's oldest customs union -- over a century old. Of the five nations, as much as 95 per cent of trade is with South Africa. A nine-member delegation held the Joint Working Group on Trade and Investment meeting with the South African side in Pretoria, South Africa on 22nd-23rd April, the commerce department said in a statement. Both sides also explored potential areas of collaboration such as pharmaceuticals, healthcare, agriculture, MSMEs. They also discussed revival of the CEO Forum, investment cooperation, market access issues with regard to agricultural products, local currency settlement system, among others. South Africa is the largest trading partner of India in the Africa region. Bilateral trade between India and South Africa stood at $19.25 billion in the financial year 2023-24 (FY24). In the past India and SACU nations were in talks for finalising a preferential trade agreement. The 1st round of technical discussions for India-SACU PTA took place in Pretoria in October, 2007, which was followed by four more rounds till 2010.
Zawya
08-04-2025
- Business
- Zawya
Is South Africa ready for strategic tax reforms and infrastructure overhaul?
South Africans have had time to scrutinise the Budget Speech 2025 and its related documents, with diverse responses to key proposals and major decisions. As activities around the speech wind down and the budget documents make their way through Parliamentary processes, it is important to take a step back and consider some of the key macro factors surrounding the budget and how these interplay with the economy, says PwC: Now, more than ever, we need to focus on creating a more prosperous South Africa. Through our Ubuntu Bethu (Our Humanity) strategy, PwC leverages our community of solvers to build trust and deliver sustained outcomes towards creating a more prosperous country. To this end, we have asked some of our brightest minds to consider how we, as a society, can improve upon some of the pertinent factors influencing the state of the fiscus. In our new report Responsible growth for a sustainable future, we emphasise the importance of making the right fiscal choices today in the interest of South Africa's tomorrow. Specifically, we look firstly at the broader context of South Africa's tax increase choices, secondly, the levers to improve economic growth and thirdly, the need for climate-resilient infrastructure. Making the right tax choices South Africa has seen large fiscal deficits over the past decade, resulting in substantial increases in the public debt burden and the amount of money spent on debt servicing. As such, the National Treasury is in search of ways to shore up its revenues towards reducing the fiscal deficit today and, over time, reduce its debt burden. In the Budget Speech 2025, the finance minister proposed that value-added tax (VAT) increase by 0.5 percentage points to 15.5% on 1 May 2025 and another 0.5 percentage points in April 2026. It is estimated by the National Treasury that this could generate R43bn in additional fiscal revenues over the next two financial years. We believe that there are other options available for the National Treasury to also consider as it looks for additional tax revenues. One option would be to invest in narrowing the tax gap (the difference between taxes owed and taxes collected), currently estimated at between R400bn and R450bn. Kyle Mandy, PwC Africa Technical and Tax Policy Leader, says: 'While it is unrealistic to expect that there would be no tax gap in South Africa, a gap of around 20% of theoretical revenues is high. If the country's tax gap could be narrowed by only 10% in 2025/2026, that would give rise to an additional R40bn to R45bn in revenue and would remove the need for VAT increases.' Another option is revising the Southern African Customs Union (SACU) revenue sharing formula, which in 2025/2026 will see R73.5bn paid over to some of our neighbouring countries. The SACU agreement provides for duty-free trade between Botswana, Eswatini, Lesotho, Namibia and South Africa. In 2025/2026, the cost to South Africa of this deal—in the form of revenues foregone relating to domestic consumption of dutiable goods—is estimated by the National Treasury at R73.5bn. This foregone revenue must be weighed up against the benefits to South Africa of having duty-free access to its neighbouring markets; exports by South Africa to the SACU economies amounts to around R200bn annually. Accelerating economic growth to create more tax revenues Plans around VAT increases, the size of the tax gap and adjusting the SACU revenue sharing formula might be less of a focal point if South Africa's economy was growing at a healthier pace. Real GDP growth measured only 0.6% in 2024, down from an already meagre 0.7% in the preceding year. Meanwhile, population growth exceeds 1.0% per annum. As a result, the country's real GDP per capita has now been declining for the better part of a decade. There is a close relationship between nominal economic growth and tax revenue growth, with a long-term average of 1:1. So, if we can get the economic levers right, we can help improve the course of the fiscal ship. One of the ways that South Africa's economy can grow faster is through productivity gains. We know what the levers are that need to be pulled to accelerate South Africa's productivity and economic growth, with energy, logistics and infrastructure being some of the main ones. Lullu Krugel, PwC South Africa Chief Economist, says: 'South Africa's private sector has in recent years forged strong co-operative relationships with the government in support of enabling key reforms in critical bottlenecks for economic growth. Work in energy, transport and logistics, and crime and corruption have had some positive results, though as the meagre economic growth numbers for 2023–2024 shows, more work still needs to be done.' Investing in climate-resilient infrastructure Budget Review 2025 announced that, over the next three years, R1tn will be spent on public infrastructure. This is a massive investment in physical capital—a key contributor to economic productivity. However, frequent references in Budget Review 2025 to infrastructure spending are not accompanied by discussions about the impact of climate and weather on infrastructure. This is because, while South Africa wants to increase funding for climate-resilient infrastructure, the fiscus cannot afford to financially support the amount of investment that is required. Chantal van der Watt, PwC South Africa Director for Sustainability, adds: 'Climate-resilient infrastructure includes the design, construction and maintenance of infrastructure systems that can withstand and adapt to the impacts of climate change. "With extreme weather events becoming more frequent and more severe, South Africa needs roads that can handle heavier rains, bridges that can withstand the torrent of more severe flooding in rivers, and power grids that do not buckle under increasingly stronger winds.' There are, however, some considerations that could improve traditional infrastructure delivery processes to increase the climate resilience of fixed capital, while keeping in mind that financing falls short. These include: • Incorporate climate risk assessments into project planning: South Africa's Environmental Impact Assessment (EIA) already has stringent requirements for infrastructure projects to include climate-change assessments. Adding climate-risk assessments during the planning phase helps identify how risks may evolve over time, guiding the design to account for material risks. • Nature-based solutions: Human-made infrastructure interacts with natural processes, and nature can protect against extreme weather events. Wetlands and mangroves, for example, can absorb floodwaters and provide natural barriers, benefiting infrastructure and local communities. • Community engagement: South Africa's public participation process in EIAs often focuses on impacts rather than gathering insights for resilient infrastructure design. Local knowledge of extreme weather events can be invaluable, and involving communities can enhance volunteer efforts in maintaining natural defences. • Updating building codes and standards: Building codes need adjustments to address climate-change realities, with more frequent and severe weather conditions. Engineers must design buildings to withstand increased heat, moisture and wind, balancing climate and financial challenges within funding constraints. • Attracting private-sector investment: The Budget Review 2025 emphasises the need for higher capital investment and private-sector participation in public infrastructure. Private investment is crucial for communities needing infrastructure but lacking government funds, helping manage risks like supply-chain disruptions. All rights reserved. © 2022. Provided by SyndiGate Media Inc. (
