IMF calls for deep spending reforms amidst South Africa's rising debt and fiscal pressures

The International Monetary Fund (IMF) has warned that South Africa must urgently overhaul how it spends public money, from the public wage bill and State-Owned Enterprises (SOEs) to procurement systems and social transfers, if it is to stabilise debt and restore fiscal sustainability.

The IMF warning on Wednesday follows discussions with the government officials on economic developments and policies and comes ahead of the Minister of Finance tabling the 2026 National Budget later this month.  

In its 2025 Article IV Consultation, concluded this week, the IMF said though Africa’s most industrialised economy has managed to weather renewed global turbulence marked by rising protectionism, trade fragmentation and heightened policy uncertainty, longstanding structural constraints and mounting debt continue to weigh on the country’s prospects.

Although the government has reaffirmed its commitment to debt stabilisation and is targeting a 1.5% of GDP primary surplus from the 2026 fiscal year, the IMF projects that, under current policies, public debt will remain high over the medium term, leaving the country vulnerable to external shocks and rising borrowing costs.

The IMF projects that debt will continue rising over the medium term under current policies, from 77% of GDP in 2025 to around 84% of GDP by 2031 fiscal year.

"A credible, growth-friendly, and politically and socially feasible adjustment is needed to stabilize public debt and rebuild buffers, while protecting priority spending," said the IMF. "A fiscal rule, anchored in a prudent debt ceiling, could help underpin theadjustment and support policy credibility."

At the centre of the Fund’s recommendations is the need to reprioritise expenditure. One of the largest spending items is compensation of public employees.

The IMF noted that South Africa’s public wage bill is high relative to peer countries and absorbs a significant share of total expenditure. While recognising the importance of frontline services, the Fund recommended moderating wage growth and aligning increases more closely with productivity and fiscal sustainability.

"Ongoing efforts incentivizing early retirement for higher-paid employees and strengthening payroll integrity would need to be complemented with additional reforms better linking pay and grade progression to performance,"said the Fund.

"These reforms, which could yield around 0.4% of GDP in savings, should aim to preserve competitiveness for highly qualified professionals and be complemented by headcount controls in public entities."

Public procurement has long been identified as an area prone to inefficiencies and corruption risks. The IMF said that improving procurement systems could yield substantial savings and enhance fairness. Strengthening oversight, increasing transparency and leveraging digital systems would reduce waste and help ensure competitive pricing.

The IMF also called for decisive reforms to improve SOE governance, operational efficiency and financial sustainability as repeated bailouts for financially distressed entities have added to debt and diverted funds from other priorities.

This includes clarifying mandates, strengthening boards, enhancing accountability and, where appropriate, increasing private sector participation. The Fund said limiting further fiscal transfers to underperforming entities will be critical to containing contingent liabilities and restoring investor confidence.

Subsidies and other transfers form another significant portion of government spending. While some support measures are essential, the IMF emphasised the importance of ensuring that subsidies are well targeted and cost-effective.

In particular, the Fund said better targeting of social transfers could improve equity outcomes without increasing overall spending.

The IMF said South Africa’s social grant system plays a crucial role in reducing poverty and inequality, but improved data systems and beneficiary verification could help ensure that assistance reaches those most in need while minimising fraud and duplication.

Recently, the South African Social Security Agency suspended nearly 70 000 accounts of grant recipients after flagging credentials of approximately 240 000 beneficieries, resulting in substantial savings for the government amounting to about R44 million per month and nearly R500m annually.

The Fund stressed that fiscal consolidation should remain “growth-friendly and socially balanced,” meaning that savings from inefficient spending should be redirected to programmes that protect vulnerable households and promote inclusive growth.

Meanwhile, the IMF projected economic growth of 1.4% in 2026, gradually rising to 1.8% in the medium term as structural reforms begin to bear fruit.

Yet the most pressing challenge remains structural as South Africa’s unemployment rate hovers above 32%, with youth unemployment near 60%.

The IMF emphasised that entrenched rigidities in product and labour markets, inadequate infrastructure, spatial disparities and governance weaknesses continue to suppress growth and job creation.

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