We can’t wipe out debt, says government

The government responds to pressure to wipe out the ‘apartheid debt’ by arguing that it’s not technically feasible. Critics say it is.

ACH year the South African government spends as much money paying interest on its R338-billion debt as it does on education, but the Department of Finance insists there is no easy way out.

Jubilee 2000 is an international umbrella body calling for the cancellation of debts owed by poor countries. It is launching its South African campaign next week with calls for the scrapping of apartheid debt owed by Southern African countries to foreign states and companies that bankrolled the region’s destabilisation.

The campaign argues that reducing the R40-billion South Africa pays in interest each year could free up money for the social services sectors where spending has been restricted by the tight budget deficit targets set by the growth, employment and redistribution strategy (Gear).

But Department of Finance chief director of liability management Lesetja Kganyago said there is little room for cancellation of South Africa’s debt. “South Africa supports debt cancellation for highly indebted poor countries. But South Africa is not one of those countries … Foreign debt is only 5% of our total debt and most of this was borrowed after 1994,” he said.

Kganyago says foreign debt accumulated by the apartheid government amounts to “at most 1% of government debt”. Sanctions during the 1980s forced the previous government to borrow money from local banks, insurance companies and the public service fund. The government sold bonds to these companies which essentially invested in the apartheid government.

“There was a prescribed asset requirement that all private insurance companies and banks had to invest in government bonds. This is still the case in part for banks, and if you cancel those bonds, you are cancelling the investment of ordinary people who hold insurance policies. By 1998, 21% of all government debt was held by private insurers,” said Kganyago.

Other government bond holders included trade union provident funds which invested in the government following provident fund reforms in the 1980s, added Kganyago.

But anti-debt campaigners argue that as much as 40% of South Africa’s debt could be restructured by changing the public service pension fund. Civil servants pay money into this fund, but the bulk is paid by their employer — the government. Prior to 1990 this fund worked on a pay-as-you-go system through which state employees would help finance the pensions of retired civil servants.

In 1990, the government shifted to an interest-based system. This meant that the pension fund invested its income and paid pensions largely from the interest on those investments. The pension fund handed its money to the Public Investment Commission, which invested much of the money in the government, through the purchase of government bonds.

Since this change in 1990, government debt has more than tripled, from R90-billion in 1990 to nearly R340-billion today. This has led to higher interest, resulting in further belt-tightening in other sectors of government spending.

Fair Share’s Sally Timmel says this belt-tightening is unnecessary, because a large part of this debt is essentially “owed to ourselves”. In other words, the South African taxpayer has a responsibility — through the government — to pay the pensions of retired civil servants. But since 1990, we have been doing this as well as funding a reserve pool of cash for future pension requirements. It is this reserve pool, which stood at R114-billion in 1996, which campaigners say has distorted our national budget. The higher interest payments lead to higher annual government expenditure, which forces the government to borrow more money to meet the excess spending requirements after tax income. This increases the annual budget deficit and forces real budget cuts in development budgets.

The government wants to keep the deficit under 3% of gross domestic product. Timmel says that if we returned to a pay-as-you-go system, our budget deficit would already be in line with Gear deficit targets. The reduced deficit figures could free up R8-billion to R10-billion.

The Congress of South African Trade Unions told a parliamentary finance committee debate on the issue last week that it thought this money should be used to boost employment in the construction sector, which has been shedding jobs in spite of the huge demand for housing. But the Federated Unions of South Africa (Fedusa), which represents many of the civil servants the former government sought to protect, has rejected the call to restructure the fund. Fedusa says a return to a pay-as-you-go scheme will endanger the long-term security of civil service pensions, especially as the population ages and more pensions are demanded at the same time.

Kganyago says the Department of Finance is also concerned about these long-term implications. “The government pension fund has a 30% actuarial deficit. In other words, if all civil servants retired now the fund would be 30% short.”

While Kganyago agreed that this scenario was unlikely, he argued that these liabilities could not be overlooked. He added that the government could not write off the debt owed to the pension fund because this money belonged to the state employees who pay into it. While they had chosen to invest in government bonds, they could also invest in the market. “It does not mean that the government owes itself money,” he said.

Those in favour of the pay-as-you-go scheme say civil service pensioners are entitled to their benefits at retirement, but it is unnecessary to pay for the next generation of pensioners now.

Kganyago said the department preferred to look at ways of reducing the size of the government’s contribution to the fund to free up development money. “The government was contributing 17% of an employee’s salary to the pension fund. In the private sector employers only contribute 10%. But when we tried to reduce this amount in the public service bargaining chamber to 15%, the unions demanded that we pay the 2% difference to them in wage increases,” he added.

The department agreed last week to look at ways of restructuring the fund, but anti-debt campaigners are poised to push for a broader approach to restructuring South Africa’s debt as the campaign to free the continent from its debt burden gathers pace.

Ann Eveleth, Mail & Guardian (Johannesburg), November 4, 1998

Categories: Africa, Odious Debts, South Africa

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