Public Information Notice: IMF Concludes 2004 Article IV Consultation with South Africa

December 2, 2004

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2004 Article IV consultation with South Africa is also available.

On September, 3, 2004 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with South Africa.1


Growth slowed in 2003 to 1.9 percent, from 3.6 percent in 2002, despite strong domestic demand. Fuelled by low interest rates, a more expansionary fiscal stance, and the wealth effects from strong commodity and property price increases, domestic expenditures rose strongly in 2003. But the increase in aggregate demand did not translate into higher growth, largely because of a strong currency appreciation, weak overseas demand, and poor weather-related performance in agriculture.

Developments so far in 2004, point to a rebound in growth. Real GDP grew by 3.9 percent in the second quarter (quarter-on-quarter, annualized) and a range of indicators, such as retail sales and consumer and business confidence measures, point to an acceleration in activity. The strength of the rand has contributed to a marked dissipation of inflationary pressures and has also enabled the South African Reserve Bank to reconstitute its net international reserve position. Inflation fell from a peak of over 10 percent in October 2002 to 4.4 percent in May 2004, which is well within the SARB target range of 3-6 percent.2 The SARB has been purchasing modest amounts of foreign exchange in the market and in February 2004 closed its open position in the forward market; in the past, this exposure had been a major source of external vulnerability and macroeconomic instability. The increase in net international reserves, together with sound financial policies more generally, has contributed to a substantial decline in sovereign risk spreads.

Prudent fiscal policy has been the cornerstone of South Africa's stabilization effort in the first ten years after apartheid. To help address South Africa's pressing social problems and provide a mild countercyclical boost to the economy, fiscal policy was eased somewhat in 2003/04. The budget deficit increased to 2.4 percent of GDP from 1.1 percent in 2002/03, reflecting an increase in social spending of 1.3 percent of GDP. The budget for 2004/05 provides for a further relaxation of the fiscal stance. The envisaged moderate expansion in the fiscal stance seems appropriate to help address South Africa's pressing social problems. However, a deficit in the region of 3 percent should be considered the upper limit of what is desirable to maintain macroeconomic stability and keep indebtedness low.

While the stabilization effort is now largely complete, South Africa faces formidable challenges in the form of high unemployment and widespread poverty. The official rate of unemployment fell to 28.2 percent in September 2003 from 31.2 percent in March 2003, but this mainly reflected a sharp drop in the number of people looking for work. The government is implementing a multi-faceted strategy to increase employment that includes skills development, improvements in education standards, a public works program, and amendments to labor legislation. These elements represent important steps in the right direction. Ongoing reviews of the tariff regime and the strategy for parastatal restructuring also provide an excellent opportunity to move ahead forcefully with reforms that enhance industrial efficiency and competitiveness. Black economic empowerment and land reform will be vital in helping to reduce social disparities. The HIV/AIDS epidemic is having a devastating social impact with costly macroeconomic repercussions. The government has put in place a comprehensive plan for the universal roll-out of ARV drugs and parallel steps are being taken to strengthen the public health system and provide social safety nets in the form of child support grants.

Executive Board Assessment

They commended the South African authorities for the success in stabilizing the economy through skillful macroeconomic management, and for the considerable progress in structural reforms. Inflation has been brought under control, public finances have been strengthened, and the international reserve position has improved. Directors considered that these achievements have laid the strong foundation for higher sustained growth, greater competition, increased efficiency, and reduced external vulnerability.

Directors agreed that the economy appears poised for a recovery in activity, supported by monetary easing over the past year, a moderately expansionary fiscal policy, and a pick up in overseas demand. They noted, however, that the main risks to the outlook relate to a continuation of the high pace of wage settlements, higher oil prices, and renewed currency appreciation, which could put a break on the recovery. Directors emphasized that the policy challenge facing South Africa is to achieve, over the longer run, higher sustainable economic growth and substantive reductions in unemployment, poverty, and the prevalence of HIV/AIDS. The authorities' approach to tackling HIV/AIDS is exemplary, but a more concerted effort will be needed in this regard to improve the public health system and mitigate the social and economic effects of HIV/AIDS. Directors stressed the importance of removing structural impediments to growth, particularly in the areas of the labor market, trade, and public enterprises. The government also needs to implement initiatives aimed at reducing income and wealth disparities, which will help maintain social cohesion.

Directors noted that prudent fiscal policy, in conjunction with budgetary reforms, has been the cornerstone of the stabilization effort. They supported the budget for 2004/05, which provides for a modest expansion of the fiscal stance, in light of the slowdown in economic activity in 2003 and social and infrastructure needs. Directors cautioned, however, that fiscal deficits should be contained within levels that will not exert undue pressure on long-term interest rates and the exchange rate, or lead to an undesirable accumulation of public debt. They considered that additional resources, if needed to support social programs, should be raised through new tax initiatives, cuts in non-priority spending, and strengthening of tax administration and expenditure management. It was suggested also that more resources be made available for HIV/AIDS prevention and treatment programs.

Directors commended the authorities for the progress made in bringing inflation down to within the central bank's target range, which had enabled a significant reduction in short-term interest rates. They noted, however, that several indicators—including continued high oil prices and exchange rate developments—point to a mild buildup in inflationary pressures over the next year. Directors therefore urged the authorities to remain vigilant and stand ready to raise interest rates in a timely manner, but cautioned that any such adjustment should lag, rather than lead, interest rate changes abroad. They also considered that enhancing the credibility of the inflation-targeting framework will help anchor inflation expectations, and that bringing projected inflation targets to a rate closer to the midpoint of the band would help in this regard.

Directors noted that the closure of the South African Reserve Bank (SARB)'s open position in the forward market has helped remove a potential source of external vulnerability and strengthen investor confidence. They agreed that the exchange rate remains broadly consistent with macroeconomic fundamentals, and welcomed the authorities' commitment to a free floating exchange rate regime, with intervention limited to strengthening international reserves as needed to cushion against currency volatility and speculation. Directors welcomed the authorities' prudent debt management strategy, and supported the approach to gradually relaxing capital controls. The current strength of the rand presents an opportune time to ease controls further.

Directors welcomed that South Africa's financial and corporate sectors are healthy and appear resilient to major exchange and interest rate shocks. While agreeing that the banks seem reasonably well protected in the event of adverse developments in the real estate market, Directors cautioned that vulnerability could potentially rise if a fall in property prices were to be accompanied by increases in interest rates. They therefore encouraged the authorities to monitor closely bank lending to the real estate sector, and welcomed the efforts underway to address gaps in the regulatory framework and to strengthen bank supervision in line with the Financial Sector Assessment Program recommendations. Directors praised the authorities for including collective action clauses in their recent international bond issue. They also welcomed the progress made in implementing the AML/CFT regime, and urged increased emphasis on identifying beneficial owners of accounts. Directors looked forward to parliamentary passage of legislation that criminalizes the financing of terrorism, terrorist acts, and terrorist organizations.

Directors welcomed the authorities' strategy to address the acute unemployment problem, but urged them to take more determined action in labor market reforms aimed at enhancing job skills, removing barriers to job creation, and increasing labor mobility. In this context, they agreed that the collective bargaining system should be made more decentralized to allow small- and medium-sized enterprises greater autonomy in setting wages. The government's Skills Development Program should be Directors stressed that improved by placing greater emphasis on training the unemployed and reducing labor should be exercised in implementing the labor-intensive public works program to ensure its accountability, and that procedures for dismissing and retrenching workers be streamlined.

Directors urged stronger efforts to raise productivity, enhance international competitiveness, and promote private-sector-led growth, particularly through further trade liberalization, privatization, and wage restraint. The completion of an import tariff review would provide a good occasion to move ahead vigorously with lowering and harmonizing effective rates of protection and simplifying the tariff regime. To realize the potential employment benefits, trade liberalization should be accompanied by labor market reforms. Directors underscored the importance of accelerating the privatization program to improve efficiency in the operations of major parastatals, and looked forward to the completion of the review of the reform strategy for these enterprises. They considered that the restructuring process should be supported by social safety net programs and job training, together with a clear, effective communication strategy. In addition, a transparent mechanism should be put in place to monitor the risk sharing between the government and the private sector to ensure the success of the public-private partnership programs. It would also be important that these programs are not used to bail out financially troubled private firms. Imposing hard budget constraints and improving corporate governance were also considered priorities.

Directors welcomed the black economic empowerment and land reform programs as key components of the initiatives to reduce income and wealth disparities. Funding issues relating to black empowerment, however, still need to be resolved and safeguards against an undue concentration of assets strengthened. Directors emphasized that it would be essential to make good progress in meeting the targets for land redistribution and in achieving the Millennium Development Goals.

Directors encouraged the authorities to address remaining weaknesses in employment and other labor market data. They welcomed the authorities' ongoing efforts to identify the origins of the large net errors and omissions in the balance of payments.

Directors commended the South African authorities for their leadership role in conflict resolution and poverty reduction in Africa, particularly through contributions to the PRGF-HIPC Trust and in the context of NEPAD and the African Union.

South Africa: Selected Economic Indicators






(In percent)

Domestic Economy


Change in real GDP





Change in consumer prices (metrop. areas, end of period)





Unemployment rate 1/






(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 (in percent of GDP,
  deficit -)





Gross official reserves (in billions of U.S. dollars)





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





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





International liquidity position 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 (SARB); and IMF Staff estimates.

1/ Official definition.
2/ (+) = appreciation (period average)
3/ Up to end of February 2004 referred to as net open position in foreign currency of SARB (NOFP), defined as net international reserves (gross reserves minus foreign loans) less net forward foreign exchange liabilities of SARB.
4/ Includes rand denominated debt.
5/ Main budget. 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 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.
2 These are CPIX inflation rates. CPIX is the CPI less interest payments on mortgage bonds and is the measure targeted by the SARB under its inflation-targeting framework.


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