On May 8, the International Monetary Fund (IMF) released its High-Level Summary Technical Assistance Report on South Africa’s Fiscal Transparency Evaluation (FTE) in response to the National Treasury’s request when an IMF team visited South Africa from July 11 to 25, 2023. The FTE, the IMF’s fiscal transparency diagnostic, assessed and benchmarked South Africa’s fiscal transparency institutions and practices against its Fiscal Transparency Code.
The IMF highlighted that South Africa has suffered the consequences of serious governance issues over the past decade, including State capture and corruption, as detailed in the Judicial Commission of Inquiry into Allegations of State Capture, 2022.
The diagnostic provides an analysis of the scale and sources of fiscal vulnerability and an estimate of the financial position of the entire public sector, as well as targeted recommendations to improve fiscal transparency. The evaluation, based on the Fiscal Transparency Code, is built around three pillars: fiscal reporting, fiscal forecasting and budgeting, and fiscal risk analysis.
The IMF concluded that South Africa has made efforts to improve the coverage, quality and timeliness of fiscal reports. Information on the operations of different levels of the public sector is available in various fiscal reports, such as budget execution documents, consolidated financial statements, and government finance statistics. Additionally, concerted efforts have been made to improve the timeliness of reporting.
Nonetheless, there is room for improvement, as inconsistencies were noted in various reports with regard to the coverage of institutions, transactions and stocks, with no clear reconciliations being available to the public, and some additional disclosures on reconciliation lacking.
Further, the quality of financial statements and the timeliness of their release could be improved, and some information that is published, such as the tax expenditure report, is not used to effectively inform policy discussions.
It was noted that the Budget Review and the Medium-Term Budget Policy Statement are well explained and detailed. However, the credibility of the fiscal framework is undermined by a lack of accountability to clear fiscal objectives. There is also a need to improve the effectiveness and transparency of the public investment management system and to address significant deficiencies in public procurement.
South Africa practises some analysis and disclosure of fiscal risks, which should be built upon to better manage the substantial risks to public finances. The National Treasury performs analysis on most risk categories covered by this assessment. However, the disclosure is not consistent over time. A significant amount of information to support a fuller disclosure of fiscal risks is available in various National Treasury documents, but such fragmented information is difficult to piece together.
State-owned corporations are identified as a major source of contingent liabilities and a major risk category, and levels of disclosure can be improved.
One of the IMF’s recommendations is that South Africa should enact and enforce fiscal rules that are precise, time-bound and stable over time, and enhance independent evaluation of official forecasts, which will strengthen budget credibility.
Moreover, the FTE highlights several priorities for improving fiscal risk management and transparency. These include strengthening analysis of macroeconomic risk, specific risks, and long-term risks in the Fiscal Risk Statement, and regularly publishing financial information on public-private partnership projects.
It is also recommended that a summary of all transfers between State-owned corporations and government be included in a single document to demonstrate the net fiscal effect on the Budget, thus strengthening the State-owned corporations’ disclosure. Introducing limits to guarantee exposure can be supported by establishing a ceiling that can apply to the total stock of guarantees or the annual issuance of new guarantees.
South Africa is also encouraged to expand and align fiscal reporting on the public sector using international guidelines, as the exclusion of large State-owned enterprises from fiscal statistics results in 40% of public-sector liabilities not being reported in fiscal statistics.
Yet another recommendation is for the strengthening of the disclosure of tax expenditure to facilitate policy discussions, given that revenue of almost 5% of GDP was forgone through tax expenditure in 2020/21.
Also recommended is improved adherence to timelines for the compilation, audit and publication of audited financial statements, as only 41% of audits performed during the 2021/22 fiscal year were conducted within the legislated timelines.