Press Information Notice: IMF Concludes Article IV Consultation with South Africa

August 25, 1997

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 IMF Executive Board on July 11, 1997 concluded the 1997 Article IV consultation1 with South Africa.


Aided by the easing of political uncertainties after the national elections in early 1994 and by the cautious stance of macroeconomic policies adopted by the new administration, economic performance and investor sentiment strengthened markedly in 1994-95. However, open unemployment remained very high, officially estimated at nearly 30 percent in October 1995.

The depreciation of the rand during 1996—by some 22 percent in nominal effective terms and 16 percent in real effective terms—mainly reflected concerns about the future course of financial and structural policies and represented a stark change in investor sentiment. In response, the authorities intervened heavily in the spot and forward foreign exchange markets, taking the net open forward position of the Reserve Bank (NOFP) from US$7 billion to US$22 billion (17 percent of GDP), raised the bank rate from 15 percent to 17 percent, and began to implement their medium-term Growth Employment and Redistribution strategy (GEAR). The GEAR aims to create 400,000 jobs, largely in the private sector, and to achieve real GDP growth of 6 percent in 2000 through structural reforms—including in the labor, trade, and privatization areas—supported by accelerated fiscal consolidation and a firm anti-inflationary monetary policy.

In the context of pressures on the rand during 1996, economic growth slowed, inflation rebounded, and the fall in private non-agricultural employment continued. Real GDP grew by 3.1 percent in 1996, compared with 3.4 percent in 1995, with the strong recovery of agricultural output after the 1994/95 drought offsetting slower growth of non-agricultural output. The growth of real gross private fixed investment halved to 6½ percent in 1996, and real personal consumption decelerated from 4.7 percent in 1995 to 3.8 percent in 1996. The 12-month rate of increase in consumer prices rose from 5.5 percent in April 1996 to 9.9 percent in April 1997, before declining to 8.8 percent in June. Similarly, producer price inflation rose from 5.3 percent to 8.8 percent over the same period, before declining to 7.5 percent in June 1997. Nominal wages in the private non-agricultural sector rose by more than 10½ percent in 1996, although unit labor costs remained subdued. Formal employment is estimated to have fallen by 1.1 percent. Against this background, the 12-month growth of M3 remained at 14½-16½ percent throughout 1996 and into 1997, while the growth of bank credit to the private sector remained at 16-19 percent. Over the twelve months’ period up to June 1997, the growth of M3 declined to less than 13 percent, while the growth of bank credit to the private sector slowed to 16½ percent.

The external current account deficit declined from 2.1 percent of GDP in 1995 to 1.6 percent in 1996, reflecting the deceleration of domestic demand and the depreciation of the rand. The large short-term capital inflows registered in 1995 were sharply reversed, until the latter part of 1996. Net inflows of long-term capital, including the proceeds of new issues of Government bonds and non-financial private sector borrowing, also declined in the first half of 1996 and switched into a net outflow in the second half of the year.

Investor sentiment began to turn in favor of South Africa in early 1997, as greater confidence in the authorities’ policy stance—particularly concerning fiscal policy and privatization—and signs that the external current account deficit was falling more rapidly than expected coincided with strengthened international capital flows to emerging markets. By end-April, the rand was some 8 percent lower in real effective terms than when the depreciation began in early 1996. The improved sentiment was also reflected in some decline in the NOFP.

The budget outturn for 1996/97 was a deficit of 5.3 percent of GDP, 0.2 percent of GDP higher than targeted. The 1997/98 budget targets a deficit of 4 percent of GDP—consistent with the GEAR framework—supported by various structural fiscal reforms, including improved tax administration and cash management. The first major privatization—of a minority stake in the telecommunications utility—was completed in mid-1997, and preparations to privatize other public corporations are under way.

Executive Board Assessment

Executive Directors observed that the South African economy had weathered a difficult year in 1996, especially the persistent pressures on the rand. Directors commended the actions taken by the authorities which had helped to stabilize the rand, improve macroeconomic stability, and restore investor confidence. Nevertheless, the South African economy remained vulnerable to changes in market sentiment. Against that background, Directors strongly welcomed the authorities’ courageous Growth, Employment and Redistribution strategy (GEAR), which they viewed as providing an appropriate policy framework for macroeconomic stabilization and structural reforms. Directors particularly agreed with the GEAR’s emphasis on accelerated economic growth and reducing unemployment by facilitating private sector growth and employment. At the same time, Directors underscored that further elaboration of the GEAR framework was needed, most notably with concrete measures in regard to trade and labor market policies. The sustained implementation of this comprehensive strategy would ensure the achievement of the authorities’ medium-term goals for growth, employment, and poverty reduction.

Directors commended the authorities for the steps taken to implement the GEAR’s fiscal program. The outturn of the government’s budget deficit for 1996/97 had been close to the original target, and the 1997/98 budget target of a reduction of the deficit to 4 percent of GDP underscored the authorities’ commitment to implement the GEAR. Directors welcomed the authorities’ firm determination to achieve this target, and encouraged the early elaboration of the measures needed in this regard. However, several Directors noted that the civil service wage agreement would constrain the fiscal consolidation process, and place undue pressures on nonwage spending. They encouraged the authorities to make use of whatever flexibility that was available in implementing this agreement and to take action to streamline the civil service. Directors commended the acceleration of programs to reorient expenditure to social objectives, and the structural fiscal reform efforts, including improved cash management, greater devolution of expenditure functions to the provincial level, the development of a medium-term public expenditure framework, and the strengthening of tax administration.

Directors encouraged the authorities to further strengthen efforts in those areas. Directors welcomed the first steps toward privatization, including the recent sale of a minority stake in the telecommunications utility. They urged the authorities to accelerate the privatization program and agreed with the authorities’ intention to use the proceeds of the sales accruing to the government primarily for debt reduction.

While noting recent progress to improve industrial relations, Directors considered that much needed to be done to create a flexible labor market. As recognized in the GEAR, the scale and nature of the unemployment problem would require bold initiatives to increase the demand for unskilled labor through added flexibility in wage determination and to strengthen South African competitiveness through further training and trade liberalization. Given the existing large unemployment and wage rigidities, Directors urged that careful consideration be given to the impact on employment of proposed reforms to the basic conditions of employment. Some Directors observed that development of small and medium enterprises could help job creation. They noted that training could be encouraged by the adjustment of the wage scales for trainees as proposed in the GEAR, buttressed by funds released by the public expenditure reprioritization process under way. Several Directors cautioned against the proposed training levy on payroll as it might discourage job creation.

Directors expressed concern about the large net open forward position (NOFP) of the Reserve Bank, although noting that it had declined somewhat in recent months. They cautioned against large scale intervention in foreign exchange markets as it raised the uncertainties in the foreign exchange markets and risked heavy quasi-fiscal losses. Directors emphasized that underlying pressures in the foreign exchange markets should be addressed by adjustments to macroeconomic and structural policies rather than by intervention. Directors considered that it was important to reduce the NOFP on a sustainable basis and to provide a clear signal that intervention would no longer form a central part of the policy response to possible future pressures in foreign exchange markets. Further upward pressures should be used to reduce the NOFP, while substantial downward pressures on the rand should be resisted through a tightening of financial policies, and, in the view of a few Directors, by increasing the Bank rate. Some Directors suggested that more transparency with regard to the NOFP of the central bank would bolster credibility in monetary policy. In that context, the authorities’ regular disclosure to the Fund of the Reserve Bank’s forward foreign exchange exposure was commended.

Accelerated trade liberalization would help further integrate South Africa into the global economy. Directors recommended broad-based tariff reductions that would lower effective protection at a faster pace than currently envisaged, and further progress on the SADC and EU free trade area proposals.

Concerns were expressed about inflationary pressures evident from rates of growth of money and credit that remain well above the authorities’ guideline range, and Directors generally cautioned against an early reduction in the Bank rate. Several Directors stressed that more fiscal consolidation accompanied by decisive efforts to implement the structural elements of the GEAR, particularly trade liberalization and labor market reforms, would help to not overburden monetary policy for achieving and maintaining price stability. Directors encouraged the authorities to forcefully implement their stabilization and adjustment strategy to help create a prosperous South Africa, which would not only benefit the people of South Africa but also the regional economy.

South Africa: Selected Economic Indicators

  1993 1994 1995 1996

  In percent
Domestic Economy  
    Change in real GDP 1.3 2.7 3.4 3.1
    Unemployment rate ... ... 29.3 ...
    Change in consumer prices (end of period) 9.5 9.9 6.9 9.4

In billions of U.S. dollars1

External Economy  
    Exports, f.o.b. 24.2 25.0 28.6 29.1
    Imports, f.o.b. 18.3 21.5 27.0 27.1
    Current account balance 1.9 -0.3 2.8 -2.0
    Direct investment -0.3 0.2 -0.2 0.5
    Portfolio investment 1.0 0.3 1.8 0.5
    Financial account balance 0.2 2.3 4.5 3.4
    Gross official reserves 2.7 3.1 4.3 2.2
    Current account balance (in percent of GDP) 1.6 -0.3 -2.1 -1.6
    Change in real effective exchange
       rate (in percent)2
-4.4 -3.0 0.2 -8.1

In percent of GDP1

Financial Variables  
    General government balance3 -6.1 -5.5 -4.9 -5.3
    Change in broad money (in percent) 7.0 15.7 15.2 13.6
    Interest rate (in percent)4 12.8 12.3 14.5 15.9

1Unless otherwise noted.
2 (+) = appreciation (period average).
3Fiscal year starting on 1 April.
4Bank rate (period average).

1Under 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 prepare 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. In this PIN, the main features of the Board’s discussion are described.


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