Public Information Notice: IMF Concludes 2002 Article IV Consultation with South Africa

July 19, 2002

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On July 1, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with South Africa.1


In 2001, the South African economy felt the impact of a slowdown in global economic activity, which interrupted the modest upturn that started late in 1998. Driven mainly by a contraction in overseas demand that lowered export prices and volumes, real GDP growth fell to 2.2 percent in 2001 from 3.4 percent in 2000. Activity reached a trough in the third quarter of the year, with GDP growth slowing to around 1 percent at an annualized rate and unemployment rising further from already very high levels. A modest recovery now appears to be under way, fueled in large part by a sharp depreciation of the exchange rate in late 2001 and a more recent firming in world commodity prices.

The slowdown in South Africa during 2001 was milder than in previous cycles. The greater resilience of the economy to external shocks reflected in part the extensive trade liberalization undertaken in the 1990s, which together with a depreciated currency has helped to increase competitiveness and diversify the export base, contributing to a relatively strong trade performance and a narrowing of the current account deficit to 0.1 percent of GDP in 2001. In addition, industrial profitability has been boosted by lower borrowing and input costs. In particular, real interest rates fell during 2001, and wage moderation and substantial productivity gains led to a decline in real unit labor costs. As a result, domestic demand held up well, with both fixed investment and private consumption remaining relatively strong.

Economic performance has been underpinned by sound fiscal policy. The national budget deficit was reduced from 2.0 percent of GDP in 2000/01 (April-March) to 1.5 percent in 2001/02 (well under the original target of 2.5 percent) as a result of strong tax revenue growth and steps taken to improve expenditure monitoring and control. Provincial governments' budgets also overperformed, contributing to a narrowing in the consolidated government deficit from 1.7 percent of GDP in 2000/01 to an estimated 1.3 percent in 2001/02. The budget for 2002/03 that was presented in February 2002 targets an increase in the national deficit to 2.1 percent of GDP, in part reflecting some tax relief for lower- and middle-income people and higher spending on priority areas such as poverty reduction, social and economic infrastructure, and HIV/AIDS and crime. The provincial budgets are expected to be broadly in balance.

Monetary policy was eased during 2001 in the context of the inflation-targeting strategy that South Africa adopted in 2000. With inflation expectations falling through the third quarter of 2001—to within the official target range of 3-6 percent—and overseas interest rates coming down, short-term policy interest rates were lowered by 150 basis points between June and September. The monetary easing was reflected in an increase in broad money growth from 7.5 percent at end-2000 to 17 percent at end-2001.

The effort to lower inflation suffered a setback during the final quarter of 2001 when the value of the rand dropped sharply. The currency had depreciated steadily during January-August, but the pace of depreciation picked up sharply toward end-September. By mid-December, the rand was weaker by 40 percent in nominal effective terms than at end-August. With inflation rising during the first quarter of 2002, policy interest rates were raised by 100 basis points each in January, March, and June 2002. The tightening provided support for the rand, which at end-June 2002 was around 23 percent more depreciated than at end-August 2001.

The Reserve Bank continued to make steady progress in reducing its short-term foreign currency exposure—a key source of external vulnerability in the past—by retaining some of the proceeds of foreign direct investment, privatization, and external official borrowing. By end-April 2002, its net open forward position (NOFP) had been lowered to less than US$2 billion from nearly US$10 billion at end-2000 and a peak of US$23 billion in October 1998.

After some delays, structural reforms appear to be picking up pace. Implementation of the program for restructuring public enterprises that was launched in 2000 has been slow, but Telkom, the state telecommunications company, is now expected to be divested by March 2003 and the restructuring of Denel, the state defense corporation, is well ahead of schedule. An integrated human resource development strategy is being implemented to address skill deficiencies after a lengthy process of consultation with stakeholders. Amendments to South Africa's labor legislation are about to come into law and include more flexible work practices, steps to protect the interests of retrenched workers, and streamlined arbitration and conciliation procedures.

Executive Board Assessment

Executive Directors welcomed the increased resilience of the economy to external shocks, which has helped South Africa weather the impact of the recent global economic downturn. This resilience reflects an improved macroeconomic policy environment, gains in international competitiveness and export diversification, and a further reduction in the central bank's short-term foreign currency exposure.

Directors agreed that the central policy challenge for South Africa is to achieve higher, broad-based and job-creating economic growth. This will require a continued sound and stable financial environment, including a sufficiently tight monetary policy in the context of the inflation-targeting strategy, maintaining fiscal discipline, and rebuilding international reserves. Structural reforms aimed at promoting private sector activity and attracting foreign investment will remain critical, and should focus on further progress with privatization and trade liberalization, continued labor market reforms, and a sustained effort to address the HIV/AIDS pandemic.

Directors noted that the value of the rand has undergone large swings over the past year, resulting in what has appeared to be a significant overshooting of the exchange rate, which at present appears to be undervalued. While a confluence of factors, including an easing of monetary policy, delays in the privatization program, and contagion from developments in Zimbabwe, appear to have contributed to the weakness of the rand in late 2001, the rapidity and magnitude of the depreciation were difficult to reconcile with the otherwise sound macroeconomic environment.

Directors commended the authorities for their skillful handling of currency developments. They observed, however, that the sharp depreciation of the rand had undermined the effort to lower inflation, making it unlikely that the inflation target of the South African Reserve Bank for 2002 will be met. In light of this, firm commitment to the targets for 2003 and beyond will reinforce the credibility of the inflation-targeting strategy. Directors supported, in this respect, the increases in short-term policy interest rates so far this year to dampen inflationary expectations and contain wage increases, and they welcomed the authorities' determination to take all necessary steps to achieve the 2003 inflation target.

Directors commended the government for maintaining strict fiscal discipline in the face of budgetary pressures. Following a tighter than intended fiscal stance last year, they considered the modest relaxation in fiscal policy announced in the budget for 2002/03 to be appropriate. This will provide welcome room for income tax cuts and higher spending on key social services, HIV/AIDS, and efforts to address the high rate of crime. Directors highlighted the importance of continued improvements in tax administration to ensure that the ambitious revenue projections are met. They commented favorably on the comprehensive framework for improved fiscal management embedded in the Public Finance Management Act.

Directors welcomed the good progress made by the central bank in reducing its net open forward position (NOFP), which had been a major source of external vulnerability, and they supported the goal of eliminating the NOFP by March 2003. However, South Africa's international reserve position would still remain relatively weak, and Directors encouraged the central bank to continue to build up its net reserves with the proceeds from privatization and from prudent external borrowing. Directors commended the authorities' sound debt management policies, and supported the government's gradual approach to removing capital controls.

South Africa's financial system is sound and well regulated, and Directors noted that it had proven itself capable of withstanding the impact of a substantial currency depreciation. The difficulties relating to microfinancing operations, experienced by a few small banks, have been satisfactorily resolved.

Directors encouraged the authorities to persevere with structural reform efforts that are essential for higher sustained growth and employment. They welcomed the authorities' efforts to pick up the pace of privatization, including in the telecommunications sector, which will help increase productive efficiency, attract foreign investment and technology, and reduce government indebtedness. Directors also welcomed the steps taken to communicate the privatization strategy more clearly to the public.

Directors strongly supported the government's efforts to address South Africa's acute unemployment problem through programs to raise educational standards and provide job training. Noting, however, that the use of a payroll tax to finance the skills development program might have a counterproductive impact on job creation, they suggested identifying alternative sources of financing for the program. Directors welcomed recent legislation which will reduce the "statutory" costs of doing business, while protecting workers' basic rights, but they urged the authorities to continue reviewing labor laws at frequent intervals. This should include consideration of a more decentralized collective bargaining system by granting small and medium-sized enterprises greater latitude in setting wages. Directors also encouraged the authorities to continue with their land reform program, which they saw as key to improving rural employment prospects.

South Africa is facing a serious HIV/AIDS pandemic, which could significantly reduce average life expectancy and dampen future economic growth. Directors welcomed the importance that the government is attaching to combating HIV/AIDS by implementing a multisectoral approach and treating the disease as a fiscal priority, while ensuring that budgetary funds are properly targeted and well spent.

Directors encouraged the authorities to push further ahead with trade liberalization, which has been a major source of economic growth in recent years. They hoped that the new institutional arrangements for setting tariffs within the Southern African Customs Union would not slow down the process of trade reform.

Directors welcomed the recent Report on the Observance of Standards and Codes (ROSC) on Fiscal Transparency, which concluded that the quality of fiscal management and transparency in South Africa are high by international standards. They encouraged the authorities to tackle the few areas where further improvements are needed. Similarly, they welcomed the conclusion of a recent Data ROSC, which considered South Africa's economic data to be generally of high quality and adequate for surveillance purposes, although there is scope to improve the reliability and timeliness of labor market data.

Directors commended South Africa's leadership role in contributing to conflict resolution and poverty reduction in Africa, including through continued grant support for the PRGF-HIPC Trust.

South Africa: Selected Economic Indicators







(In percent)

Domestic economy


Change in real GDP





Unemployment rate 1/





Change in consumer prices (end of period)






(In billions of U.S. dollars, unless otherwise noted)

External economy


Exports, f.o.b.





Imports, f.o.b.





Current account balance (deficit -)





Direct investment





Portfolio investment





Financial account balance (deficit -)





Gross official reserves





Current account balance (in percent of GDP, deficit -)





Change in real effective exchange rate (in percent ) 2/





Net open forward position of the Reserve Bank 3/





External debt (in percent of GDP) 4/





Exchange rate, rand per U.S. dollar (end of period)






(In percent, unless otherwise noted)

Financial variables


National government balance (in percent of GDP, deficit -) 5/





Change in broad money





Interest rate 6/





Sources: South African Reserve Bank; and IMF staff estimates.

1/ Official definition.

2/ (+)=appreciation (period average).

3/ Defined as net forward foreign exchange liabilities less net spot reserves.

4/ Includes rand denominated external debt.

5/ Fiscal year starting on April 1.

6/ Bank/repo rate (end of period).

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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