Public Information Notice: IMF Concludes 2003 Article IV Consultation with South Africa

July 1, 2004

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2003 Article IV consultation with South Africa is also available.

On August 20, 2003 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with South Africa.1


In 2002, the South African economy performed well, notwithstanding difficult global economic conditions. Supported by sound macroeconomic management and a highly competitive exchange rate, real GDP growth rose to 3.0 percent in 2002 from 2.8 percent in 2001. However, growth slowed to 1.5 percent (on an annualized basis) in the first quarter of 2003, largely in response to a strong currency appreciation and tight financial conditions. While the currency appreciation resulted in lower export growth and a deterioration of the trade balance, a recent pick-up in private consumption and continuing strong investment growth suggest that the slowdown should be of limited duration and magnitude.

Growth performance has mirrored movements in the exchange rate. The sharp currency depreciation that occurred in the second half of 2001 provided a major boost to activity during much of 2002. The rand has subsequently recovered in value, appreciating by around 40 percent on a trade-weighted basis since the end of 2001; in real terms, the exchange rate is presently around the level prevailing in the second half of 2000. Much of the appreciation reflects a reversion to long-term equilibrium following the overshooting that took place in 2001, but fundamentals have also contributed to a strengthening of the exchange rate. These include firmer export commodity prices; widening interest rate differentials with overseas capital markets when domestic credit conditions were tight; increasing appetite by global investors for emerging market assets; and a strong external current account position. At the same time, the Net Open Forward Position (NOFP) of the South African Reserve Bank, which represented a major source of external vulnerability in the past, has been reduced to below zero; this is a major achievement.

Following a buildup in inflationary pressures, monetary conditions were tightened during 2002. Average CPIX inflation (CPIX is the CPI less interest on mortgages) jumped from 6.6 percent in 2001 to 9.3 percent in 2002, which was well above the South African Reserve Bank's (SARB) target range of 3-6 percent under the inflation-targeting strategy. In response, the SARB raised short-term interest rates by 400 basis points in 2002. Subsequently, as CPIX inflation declined steadily and the inflation outlook brightened, the SARB opted for a cautious easing of monetary policy by lowering interest rates by 150 basis points in June 2003 and by a further 100 basis points in August. CPIX inflation fell to 8¼ percent in January-July (average annual rate).

Economic performance continues to be underpinned by sound fiscal policy. The budget performed well in 2002/03 (April-March), registering a deficit of 1.2 percent of GDP, compared with an original target of 2.1 percent. The 2003/04 budget targets an increase in the deficit to 2.4 percent of GDP, mainly reflecting higher spending on economic infrastructure and social services. The moderate expansion in the fiscal stance envisaged for 2003/04 is appropriate in light of South Africa's social and developmental needs and the countercyclical support that it provides to economic activity. The government has further increased budgetary allocations to social sectors.

Important structural challenges remain, despite progress with reforms in many areas. Labor market conditions—including skill shortages, rigidities, centralized collective bargaining, and the stalling decline in real unit labor costs—continue to impede job creation, despite efforts to address the unemployment problem. Notwithstanding the first increase in formal employment in many years in 2002, the unemployment rate has risen to over 30 percent. The successful sale of a majority stake in Telkom in March 2003 has revived the privatization process, but foreign investors still appear deterred by the prevalence of HIV/AIDS, labor market rigidities, and high rates of unemployment and crime. While the black economic empowerment strategy can make an important contribution to social stability, uncertainties remain about the financing of asset transfers and safeguards against the concentration of assets in just a few hands.

Executive Board Assessment

Executive Directors commended the authorities for their sound macroeconomic management and the implementation of structural policies, which had helped increase the economy's efficiency and resilience to shocks.

Directors agreed that the main policy challenge for South Africa continued to be the achievement of higher, broad-based, and employment-generating economic growth. This will be critical to realizing the country's full growth potential and its goals of reducing poverty and unemployment, addressing the prevalence of HIV/AIDS, and ensuring a more equitable society.

Directors pointed out that weak demand conditions overseas were contributing to the current slowdown in activity. They considered the mildly expansionary policies adopted by the authorities as appropriate in helping bring about a modest rebound in 2004. However, Directors noted that there were downside risks to the outlook. In particular, global economic conditions remained uncertain and the anticipated rise in real wages during 2003 could dampen activity and reverse recent employment gains.

Directors commended the authorities for their skillful conduct of monetary policy, which had been appropriately tightened in 2002 in response to an increase in inflation. They noted that the recent dissipation of inflationary pressures had allowed the South African Reserve Bank to cautiously lower interest rates, and prospects were good that the 3-6 percent inflation target for 2004 would be met. Directors welcomed the more frequent meetings of the Monetary Policy Committee, which would facilitate smoother policy adjustments. In order to further strengthen the credibility of the inflation-targeting framework, many Directors encouraged the authorities to consider eliminating the escape clauses that could be invoked if the targets were missed.

Directors considered that the flexible exchange rate regime had served South Africa well. While noting the significant volatility of the level of the rand over the past few years, they viewed its present strength as consistent with macroeconomic fundamentals.

Directors welcomed the elimination in May 2003 of the SARB's positive net open forward position in foreign exchange, which had long been a source of external vulnerability. Nonetheless, many Directors encouraged the SARB to strengthen its reserve position in order to help reduce currency volatility, although some questioned the need for this at present. Directors commended the authorities on their cautious debt-management strategy and supported the gradual approach adopted in removing capital controls. They welcomed the inclusion of collective action clauses in the latest bond issue.

Directors commended the government for its strong record of fiscal discipline in the face of budgetary pressures, which had helped keep long-term interest rates low, maintain a competitive exchange rate, and revive confidence in the economy. They felt that the cautiously expansionary stance of the budget envisaged for 2003/04-2005/06 was appropriate. Such a stance would permit additional spending on critical social needs and infrastructure, while maintaining competitive tax rates and allowing public debt to decline as a share of GDP. However, Directors noted that the 2003/04 fiscal revenue projections appeared somewhat ambitious, and cautioned that there was a need for continued efforts to strengthen tax administration.

Directors noted that South Africa's financial and corporate sector indicators were healthy, and that these sectors appeared to be resilient to major exchange and interest rate shocks. The staff was encouraged to continue to assess the resilience of sectoral balance sheets in assessing the vulnerability of the South African economy.

Directors considered that actions to enhance job skills and remove legal and institutional barriers to job creation were critical for raising living standards across the board and lowering unemployment. In this context, they welcomed the government's efforts to raise education standards, including through a skills development strategy. Directors believed, however, that the strategy should place greater emphasis on training the unemployed. They also felt that less reliance on payroll taxes for funding the strategy would help raise labor demand. Directors welcomed the significant amendments made to the labor laws in 2002, but reiterated that the government should undertake further reviews as experience unfolded. They also favored allowing small and medium-sized enterprises more autonomy in setting wages, as this could have a substantial impact on job creation and competitiveness.

Directors noted that completion of a tariff review would provide an opportunity to accelerate trade liberalization, and that there was scope to further simplify the tariff regime and reduce tariff rates, particularly in a few heavily protected sectors. To maximize the potential employment benefits, trade liberalization should be accompanied by labor market reforms.

Directors stressed the importance of improving the investment climate, which would help boost growth and employment. They felt that moving ahead with privatization and parastatal restructuring would help realize efficiency gains and benefits from the transfer of technology. Directors welcomed the government's efforts to strengthen social safety nets to mitigate any potentially adverse short-run employment consequences of restructuring.

Directors expressed concern over South Africa's severe social problems, many of which related to the HIV/AIDS pandemic. They noted that the disease was causing grave human suffering, lowering life expectancy, and undermining economic performance. Directors felt that the government was appropriately treating the disease as a fiscal, as well as a social priority, while ensuring that budgetary resources were well spent.

Wealth disparities were seen as posing a potential threat to social harmony. Directors therefore welcomed the black economic empowerment and land reform strategies, which were aimed at ensuring a more equitable and sustainable distribution of productive assets. They urged, however, that uncertainties over the funding of the empowerment program be resolved quickly. Directors noted the slow progress of the land redistribution program, and urged the authorities to speed up its implementation. While moving ahead with social reforms, appropriate attention should be given to maintaining economic incentives.

South Africa's economic data were viewed as being of generally high quality and fully adequate for surveillance purposes. Directors urged the authorities to address the weaknesses that remained in the quality and frequency of labor market data and commended their recent efforts in this area. Directors also welcomed the authorities' ongoing efforts to improve data quality in other areas, notably the consumer price index statistics.

Directors welcomed the passage of anti-money laundering legislation in 2002.

Directors praised South Africa's leadership role in contributing to conflict resolution and poverty reduction in Africa, including through 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) 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 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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