Why South Africa is raising public wages amid cash crunch
Public servants in South Africa’s ailing economy have secured a new three-year deal that will raise their combined wages to 466.8 billion rand, from 412.7 billion rand over the 2015 medium-term economic framework. This will cost the country 61 billion rand ($4.8 billion) this year.
The wage increase is coming at a time South Africa’s public finances are under severe pressure. The country, which is Africa’s most advanced and second largest economy, is predicted to post one of the highest current account and fiscal deficits (4.6 percent and 4.2 percent of GDP, respectively). Ironically, the economy of South Africa is forecast to grow at just 2 percent, one of the lowest amongst emerging markets.
South Africa’s current financial status actually makes a stronger argument for slashing its public wage bill, but the continuous threat of strike from workers’ unions has placed it in a dicey situation.
The country has faced several economy-crippling strike actions over the past three years, particularly within the mining sector. Strike actions have cost the country and companies like AngloGold over $6 billion in lost output during this period. It has also repelled lucrative investment deals and forced telecom giant MTN to shut down a number of its customer centres last week after a strike over wage increment took a violent turn.
Any strike action that results from wage cut would further dampen investor confidence, and crash key economic sectors such as mining and telecom.
Several issues persist in the country which just finished hosting the World Economic Forum (WEF) on Africa—from inflation to incessant power cuts. This has resulted in a downgrade in growth forecasts by rating agency Fitch. Although South Africa’s credit rating was held steady at BBB (lower medium grade), weak GDP growth and failure to stabilise the government’s Debt-to-GDP ratio may result in an eventual downgrade.
Despite its new commitment, South Africa’s treasury department said it would stick to a spending ceiling of 3.9 percent of GDP for the 2015/2016 fiscal year.
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