By Mfuneko Toyana and Wendell Roelf
CAPE TOWN (Reuters) - The South African government pledged to freeze public sector wages for the next three years to contain a yawning budget deficit but forecast that debt would peak at a higher level in a mid-term budget unveiled on Wednesday.
Africa's most industrialised economy was already in recession before the COVID-19 pandemic struck, and one of the world's strictest lockdowns has exacerbated its woes.
The wage-freeze plan raises the risk of strikes by the country's 1.3 million civil servants and follows a pledge in February by Finance Minister Tito Mboweni to curb a rising wage bill.
Addressing parliament on Wednesday, Mboweni said the country had to take action to avoid a sovereign debt crisis. "Our compass points towards fiscal sustainability and we must all face the same way," he said.
The consolidated budget deficit is now forecast at 15.7% of gross domestic product (GDP) for the fiscal year ending in March 2021, more than twice last fiscal year's 6.4% shortfall and the widest gap in the post-apartheid era.
The economy is seen contracting 7.8% in 2020, while gross debt will peak at more than 95% of GDP in 2025/26, a higher level than aimed for in an emergency coronavirus budget in June.
To narrow the deficit, the Treasury is seeking nearly 311 billion rand ($19 billion) in wage bill reductions by 2023/24. It is pinning its economic recovery hopes on more spending on infrastructure investment, the cornerstone of President Cyril Ramaphosa's growth plan.
Freezing civil servants' salaries will put the governing African National Congress on a collision course with its labour union allies.
Public sector unions have already taken the government to court, challenging its failure to pay wage increases in April as agreed in a 2018 wage deal.
Mugwena Maluleke, general secretary of teachers' union SADTU, told Reuters that freezing civil servants' pay was "not implementable". "This is a neo-liberal onslaught on the workers ... who are basically on a daily basis dealing with this virus in order to serve our people."
Razia Khan, chief Africa economist at Standard Chartered, said the key takeaway for financial markets was that South Africa's growing public debt was still a problem.
"There is little certainty – just yet – that positive outcomes for fiscal consolidation plans can be achieved," she added.
The mid-term budget allocated 10.5 billion rand to ailing national airline South African Airways to implement a restructuring plan approved by creditors in July.
The government also said it would make it easier for companies that are tax resident in South Africa to invest in the country via foreign entities.
(Additional reporting and writing by Olivia Kumwenda-Mtambo in Cape Town and Alexander Winning in Johannesburg; Editing by Tim Cocks, Hugh Lawson and Giles Elgood)