Treasury might have to revisit spending priorities now that VAT is off the table — IMF

The IMF has warned that National Treasury and the Finance Minister Enoch Godongwana may have to revisit government’s spending priorities now that the VAT increase is off the table to plug the R75 billion hole in the country’s Budget 2025.

Speaking at a media briefing about the April Regional Economic Outlook for Sub-Saharan Africa on Friday, Abebe Selassie, director of the African department, at the International Monetary Fund (IMF), said if a tax rate increase for a particular tax is not possible, Treasury could try to find ways to expand the tax base or try different tax angles.

“If that are not possible, revisiting spending priorities may be one of the ways to manage this. This is typically what we see playing out in countries in the region when financing constraints are binding. These are deeply domestic political issues to be resolved as to what the best way to do the financing is.

“The issue of revenue mobilisation is a live one, but one that is extremely complex and requires quite a lot of consensus building, of discussion to be able to advance and of course broader societal support.”

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Not good news for Treasury and growth in Sub-Saharan Africa

Selassie pointed out that he highlighted the region’s sluggish growth and steep political and social hurdles governments had to overcome to push through essential reforms six months ago. “Today, that fragile recovery faces a new test: the surge of global policy uncertainty so profound it is reshaping the region’s growth trajectory.”

He said just when policy efforts began to bear fruit, with regional growth exceeding expectations in 2024, the region’s hard-won recovery was overtaken by a sudden realignment of global priorities, casting a shadow over the outlook.

This also has implications for economic growth and the IMF now expects growth in Sub-Saharan Africa to ease to 3.8% in 2025 and 4.2% in 2026, marked down from the IMF’s October projections. Selassie says these have been driven largely by difficult external conditions due to weaker demand abroad, softer commodity prices and tighter financial markets.

“Any further increase in trade tensions or tightening of financial conditions in advanced economies could further dampen regional confidence, raise borrowing costs further and delay investment. Meanwhile, official development assistance to Sub-Saharan Africa is likely to decline further, placing extra strain on the most vulnerable population.”

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New external headwinds for Sub-Saharan Africa

Selassie pointed out that these external headwinds come on top of longer-standing vulnerabilities. “High debt levels constrain the ability of many countries to finance essential services and development priorities. While inflationary pressures have moderated at the regional level, quite a few countries are still grappling with elevated inflation, necessitating a tighter monetary stance and careful fiscal policy.

“Against this challenging backdrop, our report underscores the importance of calibrating policies to balance growth, social development and macroeconomic stability. Building robust fiscal and external buffers is more important than ever, underpinned by credibility and consistency in policymaking.”

In particular, he said, there is a premium on policies to strengthen resilience by mobilising domestic revenue, improving spending efficiency and strengthening public finance management and fiscal frameworks to lower borrowing costs.

“Reforms that enhance growth, improve the business climate and foster regional trade integration are also needed to lay the groundwork for private sector-led growth. High growth is imperative to engender the millions of jobs our region needs.”

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Why the region is important for the world

Selassie emphasised that a strong, stable, and prosperous Sub-Saharan Africa is important not only for its people but also for the world. “It is the region that will be the main source of labour and incremental investment and consumption demand in the decades to come.

“External support as the region goes through its demographic transition is of tremendous strategic importance for the future of our planet. The IMF is doing its part to help, having dispersed over $65 billion since 2020 and more than $8 billion just over the last year. Our policy advice and capacity development efforts support more countries still.”