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

September 7, 2006

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.

Public Information Notice (PIN) No. 06/102
September 7, 2006

On August 2, 2006 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with South Africa.1


Real GDP grew by 4.9 percent in 2005 and continued to grow strongly in 2006. High growth was driven by strong domestic demand, with private consumption and investment spending supported by low interest rates and improved sentiment. Household consumption was also boosted by rising incomes and wealth effects from buoyant housing and stock prices. After a slowdown in late 2005, partly reflecting temporary supply shocks, real GDP grew by 4.2 percent in the first quarter of 2006.

The strong pace of economic activity led to higher employment. Total employment grew by 5.7 percent in the year to September 2005. However, the unemployment rate remained broadly unchanged at 26.7 percent, as labor force participation rose significantly.

Inflation and inflation expectations remain well within the 3-6 percent target band. Twelve-month CPIX inflation was 3.7 percent in April 2006, though administered fuel price increases are likely to push it up in the near future.2 Core inflation (CPIX excluding food and energy prices) remains subdued at about 3 percent. Expected average CPIX inflation for 2006 and 2007, measured on the basis of surveys conducted in April, were slightly above the mid-point of the target band. Credit to the private sector has continued to grow rapidly. Supported by low interest rates, credit to the private sector expanded by 23 percent in the year to April 2006. While household sector debt rose markedly (to 68 percent of disposable income by the first quarter of 2006, from 58 percent at end-2004), household debt service remained moderate, at about 7 percent of disposable income.

The South African Reserve Bank has maintained a flexible exchange rate system, while continuing to build up international reserves. The SARB has a publicly-announced policy of intervening in the foreign exchange market only to strengthen its external position at times of rand strength. Consistent with this policy, gross reserves have continued to grow, and by May 2006 reached US$24.1 billion, equivalent to over 200 percent of short term external debt.

After appreciating for a few years, the rand showed no clear trend in 2005 and depreciated in the first half of 2006. Like other emerging market currencies, the rand came under pressure and depreciated in May/June 2006 following turbulence in global financial markets.

The current account deficit widened markedly in 2005 and early 2006, largely driven by strong domestic demand. After reaching 4.2 percent of GDP in 2005, the current account deficit increased to 6.4 percent of GDP in the first quarter of 2006. With broadly unchanged terms of trade, the widening of the current account reflected volume growth in imports above that of exports, and large dividend payments to foreign shareholders. The deficit was more than covered by portfolio and FDI inflows. External debt declined to 19.3 percent of GDP by end-2005 from 20.2 percent a year earlier.

The fiscal deficit fell to 0.3 percent of GDP in FY2005/06, bringing government debt down to 34.1 percent of GDP by March 2006. The narrowing of the deficit mainly reflected a large increase in tax revenue, owing to strong economic activity and firm enforcement.

Asset prices continued to rise rapidly in 2005 and early 2006, but retreated somewhat in May and June. Strong commodity prices, investor interest in emerging markets, and favorable growth prospects drove the Johannesburg Stock Exchange all-share index up by 43 percent in 2005 and a further 16 percent through April 2006, before sliding back during the emerging market sell-off that started in May. Residential property prices rose strongly in recent years, favored by low interest rates and a growing demand by an emerging black middle class. The rate of increase, however, slowed to 16 percent in 2005, from 33 percent the previous year, and slowed further in the first few months of 2006.

Executive Board Assessment

Supported by well designed macroeconomic policies and structural reforms, growth in recent years has been strong, inflation has remained within the target band, and employment has increased. The public finances are sound, and international reserves have been rebuilt. Directors noted also that South Africa continues to face important challenges over the medium term, including reducing high unemployment, inequality and poverty, and staunching the HIV/AIDS epidemic.

Directors considered that the economic outlook for South Africa is broadly positive. Continued solid policy implementation and favorable external conditions should establish the foundations for sustained growth.

Directors viewed uncertainties in the external environment as the main source of risk to the outlook. A deceleration in global activity would affect South Africa owing to the structure of the country's exports. A more immediate risk would be a weakening sentiment for emerging market economies and a continuation of the recent slowdown in capital flows. Directors also noted that, in light of these factors, the external current account deficit could represent a point of vulnerability. Nonetheless, they considered that, based on its strong fundamentals, South Africa is well placed to face these risks.

Directors welcomed the tightening of monetary policy in June, noting that risks to the inflation outlook justified the decision. They also observed that interest rates may need to be raised further, especially if the depreciation of the rand threatened to pass through to general prices. Directors encouraged the authorities to continue to increase the transparency of the inflation targeting regime, which they noted had worked successfully so far. Relatedly, they noted that the flexible exchange rate regime had served the country well, providing a cushion against external shocks.

Directors welcomed the focus of public expenditure on investment and selected social programs within a framework that remains consistent with a gradual decline in public debt.

Directors noted the strength of the key indicators of financial soundness, and encouraged the authorities to continue enhancing regulation and oversight. Directors also welcomed the authorities' interest in participating in an update of the FSAP (Financial Sector Assessment Program) for South Africa and later in a regional FSAP.

Directors supported the government's goal of raising growth and reducing unemployment under the Accelerated and Shared Growth Initiative for South Africa. They agreed that attempting to influence the level of the real exchange rate through monetary policy to promote growth would be counterproductive and undermine the inflation-targeting regime. Directors considered that efforts to boost growth and employment could be complemented by further liberalization of labor markets and the trade regime. Directors expressed support for the main initiatives to reduce wealth disparities that were the legacy of the apartheid era, including land reform and Black Economic Empowerment.

South Africa: Selected Economic Indicators, 2002-06
(Annual change in percent, unless otherwise indicated)


2002 2003 2004 2005 2006



Real GDP

3.7 3.0 4.5 4.9 4.2

CPI (metropolitan areas, annual average)

9.2 5.8 1.4 3.4 4.7


10.8 4.0 4.3 4.0 5.9

Broad money 2

18.1 12.9 13.1 19.9 16.7

Unemployment rate (in percent)

30.4 28.0 26.3 26.7 26.4

National government budget balance (in percent of GDP) 3

-1.2 -2.0 -1.7 -0.6 -1.2

National government debt (in percent of GDP)

37.0 35.6 35.4 34.4 32.8

External current account balance (in percent of GDP)

0.6 -1.3 -3.4 -4.2 -4.9

External debt (in percent of GDP)

29.7 23.0 20.2 19.3 18.8

Gross reserves (SARB, in months of total imports)

2.8 2.2 3.0 3.6 3.8

International liquidity position of SARB (in billions of U.S. dollars) 2

-1.6 4.8 11.4 17.2 21.5

U.S. dollar exchange rate (rand per U.S. dollar) 2

8.64 6.64 5.63 6.33 ...

Sources: South African Reserve Bank; IMF, International Financial Statistics; and staff estimates and projections.

1 The CPIX is equal to the CPI excluding interest payments on mortgage bonds.

2 End of period.

3 Calendar year.

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.

2 The CPIX—the measure targeted by the South African Rreserve Bank-excludes interest payments on mortgage loans.


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