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SA's fiscal picture has 'deteriorated sharply', Reserve Bank says

Economists have warned that the government's budget deficit could reach 6% of GDP. This is significantly higher than the 4.7% forecast for 2019/2020 in February’s budget.

Similarly, the debt-to-GDP ratio is also expected to worsen to about 58%, up from February’s forecast of 56.2%

The country’s potential growth rate had slumped to below 1% in the context of supply constraints – particularly electricity shortages – and depressed business confidence. Demand had also weakened, thanks to higher taxes and slowing growth among other factors, the Bank said.

“But the economy has also been buffeted by supply-side shocks and sentiment is suffering from ongoing policy uncertainty,” the Bank said. “Where monetary policy enjoys margin for maneuver, weak demand is a problem that can be addressed with interest rates. Supply shocks and policy uncertainty, however, are beyond the reach of the SA Reserve Bank. ”

There are risks that a change in the environment could force an “outright-tight” policy stance, the Bank warned. “To control these risks, SA needs reforms,” it said, which are likely to entail, “short-term pain … The cost of postponing reforms further, however, is rising at an accelerated rate.”

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