IMF Executive Board Concludes 2016 Article IV Consultation with South Africa

July 7, 2016

On July 1, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation 1 with South Africa.

South Africa has made impressive economic and social progress in the past two decades. Yet, deep-rooted structural problems—infrastructure bottlenecks, skill mismatches, and harmful insider-outsider dynamics—are holding back growth and exacerbating unemployment and inequality.

South Africa’s vulnerabilities are elevated. Despite a large currency depreciation and notwithstanding some correction, South Africa’s current account deficit remains among the highest in emerging markets. A combination of rising government debt, albeit at a slower rate, low growth, financially-weak state-owned enterprises, and spending pressures has increased vulnerabilities in the real and fiscal sectors. Most private corporations’ balance sheets remain strong, but financial indicators signal some deterioration ahead. Headline inflation at 6.1 percent in May 2016 was above the South African Reserve Bank’s (SARB) 3–6 percent band, mostly due to base effects of fuel prices and rising food prices caused by drought.

Monetary and fiscal policy are on a tightening course. The SARB raised the policy rate by 50bps in 2015 and 75bps in 2016 to 7 percent, citing rising inflation and elevated risks. The 2016 budget envisaged significant deficit reduction for the years 2016 to 2017.

The outlook is sobering with considerable downside risks. Growth is projected to slow to 0.1 percent in 2016, with a weak recovery envisaged from 2017 (1.1 percent), approaching 2–2½ percent in the outer years, as shocks dissipate and new power plants are completed. The unemployment rate could rise further over the medium term. The current account deficit is forecast to narrow slightly in 2016, but rise to 4¾ percent of GDP in 2017–18 on weaker terms of trade. Inflation is projected at 6.7 percent in 2016 before easing to 5.6 percent by end-2017.

Downside risks dominate and stem mainly from linkages with China, heightened global financial volatility, and domestic politics and policies that are perceived to harm confidence. Shocks could be amplified by linkages between capital flows, the sovereign, and the financial sector, especially if combined with sovereign credit rating downgrades to speculative grade. On the upside, the recent dialogue between social partners could catalyze reform implementation and invigorate growth.

Executive Board Assessment2

Executive Directors recognized the remarkable progress that South Africa has achieved in improving living standards, and the country’s strong institutions and policy frameworks that have delivered macroeconomic stability in the past two decades. Directors welcomed the recent dialogue among social partners, but underlined the weak growth outlook, and the need to manage significant downside risks. In this context, Directors noted the likely impact of the recent U.K. referendum to leave the EU, China’s transitions, tighter global financial conditions, and the effects of heightened policy uncertainty on growth. Directors also noted vulnerabilities and risks from linkages among capital flows, sovereign debt, and the financial sector, which could amplify the impact of shocks. Directors cautioned that unemployment and inequality remain high, while structural impediments continue to constrain growth and job creation.

Directors emphasized the need for wide ranging structural reforms as a sustainable way to boost growth, create jobs, lower inequality and reduce vulnerabilities. They recommended a comprehensive package of reforms, including greater product market competition, more labor market inclusiveness, better education and improved governance. Directors saw merits in an initial, focused set of tangible measures that can help generate reform momentum, and noted that such reforms could also provide near term benefits by increasing confidence, reducing uncertainty and signalling policy consistency. They welcomed progress in easing infrastructure bottlenecks.

Directors considered the 2016 Budget as appropriately ambitious but cautioned that additional measures might be required to stabilize debt over the medium term. They recommended measures to boost spending efficiency, including containing the public wage bill, and increasing private sector participation in state owned enterprises (SOEs). Should these measures not materialize, and if growth underperforms, Directors recommended implementing a package of growth-friendly fiscal consolidation measures, while protecting social spending. Directors also underscored the need to improve SOE performance and strengthen their governance.

Directors commended the South African Reserve Bank (SARB) for a balanced monetary policy stance. They suggested that the SARB consider holding interest rates steady unless core inflation or inflation expectations rise substantially, as the impact of past policy hikes is still filtering through, and the weak economy should keep inflation contained. Directors encouraged the SARB to consider ways to enhance its inflation targeting regime to guide expectations within the target band.

Directors viewed exchange rate flexibility, the favorable currency composition of external debt, and South Africa’s net external creditor position as strengths. However, external competitiveness remains a concern, notwithstanding some adjustment in the current account deficit. Directors encouraged the authorities to seize opportunities to increase reserves.

Directors recognized the soundness of the financial sector, as noted in the SARB’s recent stress tests. With rising pressures from the weak economy, tightening financial conditions and regulatory changes, Directors encouraged stepped up monitoring of financial sector risks and contingency planning.

South Africa: Selected Economic and Social Indicators, 2012–17
Social Indicators



Nominal GDP (2015, billions of U.S. dollars)


Headcount ratio at $1.90 a day (2011, percent of population)


GDP per capita (2015, U.S. dollars)


Undernourishment (2012, percent of population)


Population characteristics

Income distribution (2011)

Total, 2015


Income share held by highest 10 percent of population


Urban population (percent of total), 2014


Income share held by lowest 20 percent of population


Life expectancy at birth (years), 2014


Gini index

Economic Indicators
2012 2013 2014 2015 2016 2017
Proj. Proj.

National income and prices (annual percentage change unless otherwise indicated)

Real GDP

2.2 2.3 1.6 1.3 0.1 1.1

Real GDP per capita

0.6 0.7 0.0 -0.4 -1.6 -0.6

Real domestic demand

3.5 3.3 0.6 1.6 -0.4 0.6

GDP deflator

5.3 6.6 5.7 4.0 6.5 6.1

CPI (annual average)

5.7 5.8 6.1 4.6 6.7 6.2

CPI (end of period)

5.7 5.4 5.3 5.2 7.0 5.6

Labor market (annual percentage change unless otherwise indicated)

Unemployment rate (percent of labor force, annual average)

24.9 24.7 25.1 25.4 26.1 26.7

Average remuneration (formal nonagricultural, nominal)

7.6 10.4 7.5 7.8 8.5 8.0

Labor productivity (formal nonagricultural)

1.1 -2.6 -0.3 2.3 2.8 2.8

Unit labor costs (formal nonagricultural)

6.4 13.5 7.7 4.9 5.5 5.1

Savings and Investment (percent of GDP unless otherwise indicated)

Gross national saving

15.0 15.3 15.3 16.4 15.8 14.9

Public (including public enterprises)

-0.9 -0.9 1.1 1.0 1.2 1.5


15.9 16.2 14.2 15.4 14.6 13.4

Investment (including inventories)

20.0 21.0 20.7 20.7 19.9 19.7

Public (including public enterprises)

6.8 7.0 7.3 7.6 7.6 7.6


12.5 13.3 13.2 13.0 12.3 12.2

Fiscal position (percent of GDP unless otherwise indicated) 1/

Revenue, including grants

27.3 27.6 28.2 29.6 30.1 30.2

Expenditure and net lending

31.4 31.5 31.9 33.5 33.8 33.8

Overall balance

-4.0 -3.9 -3.7 -3.9 -3.7 -3.6

Primary balance

-1.3 -0.9 -0.6 -0.6 -0.2 0.1

Structural balance (percent of potential GDP)

-3.8 -3.8 -3.4 -3.2 -2.8 -2.7

Gross government debt 2/

41.0 44.0 46.9 49.8 51.5 52.6

Government bond yield (10-year, percent) 3/

7.6 7.3 8.2 8.2 9.3

Money and credit (annual percentage change unless otherwise indicated)

Broad money

5.2 5.9 7.3 10.3 6.5 6.9

Credit to the private sector

9.3 6.6 7.2 8.3 6.5 6.9

Repo rate (percent, end-period) 3/

5.0 5.0 5.75 6.25 7.0

3-month Treasury bill interest rate (percent) 3/

5.3 5.1 5.8 6.1 7.0

Balance of payments (percent of GDP unless otherwise indicated)

Current account balance (billions of U.S. dollars)

-19.7 -21.1 -19.1 -13.7 -11.0 -13.2

percent of GDP

-5.0 -5.7 -5.4 -4.3 -4.1 -4.8

Exports growth (volume)

0.7 3.6 3.3 3.6 2.4 2.9

Imports growth (volume)

4.2 5.0 -0.5 2.9 0.7 1.2

Terms of trade (percentage change)

-1.4 -5.4 -1.8 -0.5 -2.0 -3.3

Overall balance

0.3 0.1 0.4 -0.2 0.0 0.0

Gross reserves (billions of U.S. dollars)

50.7 49.6 49.1 45.8 45.8 45.8

percent of short-term debt (residual maturity)

133.2 130.2 123.8 134.8 122.8 118.0

Total external debt

35.7 37.3 41.3 39.4 50.6 51.4

of which short-term (residual maturity)

9.6 10.4 11.3 10.8 13.9 14.1

Nominal effective exchange rate (percentage change, end-period) 4/

-5.2 -15.4 -2.7 -16.6 -18.2

Real effective exchange rate (percentage change, end-period) 4/

-2.0 -12.5 1.4 -13.1 -14.0

Exchange rate (Rand/U.S. dollar, end-period) 3/

8.5 10.5 11.6 15.6 15.8

Sources: South African Reserve Bank and National Treasury, Haver, Bloomberg, World Bank, IMF, INS database; and IMF staff estimates and projections.

1/ General government unless otherwise indicated.

2/ National government.

3/ For 2016, May data.

4/ For 2016, April data.

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.

2 At the conclusion of the discussion, the First Deputy Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:

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