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

September 2, 1998

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.

On July 17, 1998, the Executive Board concluded the Article IV consultation with South Africa1.


In the context of cautious financial policies during 1997 and through early 1998, the underlying inflation rate fell to 7.4 percent in May 1998 (12-month rate) compared with 9.3 percent in December 1996. Real GDP growth decelerated from 3.2 percent in 1996 to 1.7 percent in 1997, with a marked slowdown occurring in the second half of 1997 and continuing into 1998. This slowdown was accompanied by a fall of 2.4 percent in formal nonfarm employment during 1997, while the average increase in remuneration per worker in the formal nonfarm sector declined by just half a percentage point to 10.6 percent in 1997. The rates of increase in real personal consumption and real private fixed investment slowed to half their 1996 rates and inventories were reduced sharply. The 12-month growth rate of broad money (M3) rose from 13.6 percent in December 1996 to 16.4 percent in May 1998, following a temporary deceleration to 12.7 percent by June 1997, while the expansion of credit to the private sector remained around 16 percent.

The deficit of the national government is estimated to have fallen from 5.2 percent of GDP in 1996/97 to 4.1 percent in 1997/98, in line with the budget target. However, the overall deficit for the consolidated general government is estimated to have fallen by somewhat less—from 5.7 percent of GDP to 5.1 percent, respectively—reflecting a deterioration in the finances of the provinces and, to a lesser extent, the local authorities. The 1998/99 budget targets a national government deficit of 3.5 percent of GDP, consistent with the authorities’ Growth, Employment and Redistribution (GEAR) strategy.

The external current account deficit deteriorated slightly from 1.3 percent of GDP in 1996 to 1.5 percent of GDP in 1997. Following two years of strong growth, nongold export volumes have risen modestly since the second half of 1996; the value of gold exports declined in 1997, owing to the 18 percent fall in international gold prices. Capital inflows rose markedly in 1997 and early 1998, reflecting mainly nonresident purchases of bonds and equities, and contributed to an increase in net international reserves from US$1.3 billion at end-1996 to US$3.4 billion at end-1997 and to US$4.4 billion at end-April 1998. In this context, the net open forward position (NOFP) of the Reserve Bank was reduced from US$22.2 billion at end-1996 to US$12.8 billion at end-April 1998.

Strong pressures emerged in South Africa’s foreign exchange and financial markets in May 1998, reflecting renewed turbulence in emerging markets, and the rand depreciated from R 5.05 per U.S. dollar at end-April to a peak of R 6.62 per U.S. dollar on July 6. Since then, pressures have eased somewhat and the rand stood at R 6.28 per U.S. dollar on July 17. The authorities responded initially to the pressures by intervening heavily in the spot and forward exchange markets, and the NOFP increased to US$22.5 billion by end-June 1998; in this context, net international reserves fell by nearly US$2 billion to US$2.6 billion. However, the authorities have considerably reduced their intervention in the exchange markets since mid-June, and monetary policy has been tightened in July, with the average cost of borrowing from the Reserve Bank remaining around 21–22 percent.

Significant improvements in the institutional framework and transparency in the conduct of monetary and fiscal policies were introduced within the past year. These include the formulation of the Medium-Term Expenditure Framework (MTEF); the reforms implemented in the South African Revenue Service (SARS), including its administrative autonomy; the new monetary arrangements based on repurchase agreements; the establishment of a primary dealers system for government bond placements; and the timely (monthly) publication of the NOFP. There were also several initiatives in labor policy, including the passage of the Basic Conditions of Employment Act, the drafting of the Employment Equity and Skills Development Bills, and the announcement of the Employment Strategy Framework.

Executive Board Assessment

Executive Directors commended the authorities for their prudent monetary and fiscal policies during 1997 and early 1998, which had helped South Africa emerge from the foreign exchange market pressures in 1996 and weather the contagion from the emerging markets crisis in October 1997. However, these efforts at establishing financial stability had been significantly affected by severe pressures in the currency market since early May 1998. Directors expressed concern that, following an initial increase in interest rates, the authorities’ intervention in the spot and forward exchange markets and the pursuit of an uneven monetary policy had exacerbated the pressures, and may have risked converting a contagion problem into one that was more specific to South Africa.

In these circumstances, Directors stressed the urgent need for a comprehensive policy response to restore market confidence. This response would include maintaining a consistently tight monetary policy to dampen pressures on the rand, avoiding further intervention in the foreign exchange markets, reaffirming the commitment to achieving the budget target for 1998/99, as well as accelerating implementation of the structural reforms announced in the GEAR strategy. Directors underscored the critical importance of the latter for strengthening the economy’s medium-term outlook, as markets have identified the current slow economic growth and high unemployment as major sources of vulnerability over the medium term.

Directors observed that, once the exchange market pressures had abated, an easing of monetary policy would need to proceed cautiously to avoid the resurgence of external pressures and contain the inflationary impetus associated with the large depreciation of the rand. However, it was also noted that if renewed pressures were to develop, the Reserve Bank would need to tighten monetary policy again. In this regard, several Directors pointed out that further intervention would not be advisable, given the low reserve position, and would, in any event, not be successful without appropriately stronger macroeconomic policies and structural reforms. Directors noted with concern that the commendable reduction of the NOFP of the Reserve Bank achieved until April 1998 had been reversed recently. The resulting large NOFP entailed high risks and costs because it had increased the potential for large quasi-fiscal losses, raised the risk premium on South Africa, and made the rand more vulnerable to speculative pressures. They urged the authorities to revert to the strategy of reducing the NOFP, which they had been successfully pursuing until recently, with the goal of exiting from forward market operations altogether. Directors welcomed the increased transparency stemming from the monthly publication of the NOFP, but considered that more frequent dissemination would be helpful. They commended the authorities for the gradual liberalization of exchange controls on residents, and recommended continuing a cautious approach to liberalization in order to avoid increased pressures on the rand, given the need to considerably lower the NOFP.

Directors commended the authorities for the fiscal outturn in 1997/98 and the budget for 1998/99, which demonstrated the government’s commitment to fiscal discipline. The budget was tight and required careful monitoring, but Directors stressed that adhering to the targeted deficit reduction would be important in restoring confidence. Directors underscored that reducing the government wage bill, as appropriately intended by the authorities, held the key to achieving the medium-term objectives of eliminating general government dissaving and reorienting expenditure toward social services and capital spending. Directors also saw an important role for improved tax administration in underpinning the envisaged strengthening of the fiscal position. Fiscal consolidation at the provincial and local government levels was necessary to support efforts at the national government level if higher private investment was not to widen unsustainably the current account deficit. In this regard, they welcomed the initiatives to improve monitoring and control over provincial expenditures.

Directors emphasized that, in addition to restoring financial stability, the urgent challenge facing the authorities was to durably raise South Africa’s supply potential to facilitate job creation and improve living standards. As recognized in the GEAR framework, high and sustainable realGDP and employment growth required the implementation of key structural reforms in the labor market and trade areas, supplemented by faster privatization, improved provision of education, skills enhancement, improved access to health care, and land reform. Directors therefore stressed the need to expeditiously implement these reforms to help fulfill the high expectations created by South Africa’s successful political transition and to realize the economy’s vast potential.

Directors welcomed the continuing progress in improving industrial relations and the government’s underlying objectives in recent labor-market-related initiatives. However, they noted that measures aimed at enhancing labor market flexibility, including increasing the attractiveness of hiring unskilled labor, providing training, and relaxing the automatic extension of collective wage agreements to nonparticipants, as envisaged in the government’s proposals for the forthcoming jobs summit, needed to be implemented soon. The importance of addressing the problems of youth unemployment was emphasized by a number of Directors. In this context, they pointed to lower minimum wages and apprentice schemes as possible incentives for the hiring of youth.

Although significant progress had been made in the area of trade liberalization, Directors encouraged the authorities to consider a bolder approach to boost efficiency, reduce the existing anti-export bias, accelerate investment decisions, and increase the employment of unskilled labor. Such an approach would include reducing the current large number of tariffs to a few rates and preannouncing a new schedule of tariff reform that would result in a structure of tariffs comparable with international best practices. On privatization, Directors were encouraged that a genuine start had been made, but saw significant room for a bolder approach.

Directors noted that the banking system appeared sound and commended the authorities for their robust regulatory framework for banks. At the same time, they encouraged the authorities to remain vigilant and continue to improve banking supervision—in line with international best practices—to ensure that the banking system could successfully address the challenges ahead. Directors welcomed the significant improvements in the institutional framework and transparency in the conduct of fiscal and monetary policies, including the Medium-Term Expenditure Framework, and the administrative autonomy granted to the South African Revenue Service. Directors also commended the authorities’ commitment to fully meet the requirements of the IMF’s Special Data Dissemination Standard by the end of the transition period. While data reported by the authorities was generally of high quality and comprehensive, they noted the need for improvements in the timeliness of certain data on external debt. Looking ahead, the authorities were encouraged to intensify their relationship with the Bretton Woods institutions, which would help bolster public confidence in South Africa’s reform efforts.

South Africa: Selected Economic Indicators

  1994 1995 1996 1997

  (In percent)
Domestic Economy  
Change in real GDP 2.7 3.4 3.2 1.7
Unemployment rate ... 29.3 ... ...
Change in consumer prices (end of period) 9.9 6.9 9.4 6.1
  (In billions of U.S. dollars)1
External Economy  
Exports, f.o.b. 25.0 28.9 29.7 30.4
Imports, f.o.b. 21.5 27.1 27.4 28.4
Current account balance (deficit -) -0.3 -2.7 -1.7 -1.9
Direct investment 0.2 0.7 0.7 2.0
Portfolio investment 0.3 1.3 -0.3 2.7
Financial account balance (deficit -) 2.3 4.2 5.4 1.9
Gross official reserves 3.1 4.3 2.2 5.9
Current account balance (in percent of GDP, deficit -) -0.3 -2.0 -1.3 -1.5
Change in real effective exchange rate (in percent)2 -4.5 -3.0 -7.7 7.0
Net open forward position of the Reserve Bank3 25.2 14.0 22.2 16.3
External debt (in percent of GDP)4 23.0 24.7 26.1 ...
Exchange rate, rand per U.S. dollar (end-period) 3.56 3.66 4.68 4.87
  (In percent of GDP)1
Financial Variables  
National government balance (deficit -)5 -5.6 -5.8 -5.2 -4.1
Change in broad money (in percent) 15.7 15.2 13.6 17.2
Interest rate (in percent)6 12.3 14.5 15.9 16.7

Sources: Data provided by South African authorities and IMF staff estimates.

1/Unless otherwise noted.
2/(+)=appreciation (period average).
3/Defined as net forward foreign exchange liabilities less net spot reserves.
4/Includes rand denominated external debt. For 1997, data are available only for foreign currency denominated debt, which amounted to 17.8 percent of GDP at end-June.
5/Fiscal year starting on April 1.
6/Bank rate (period

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 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 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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