IMF Executive Board Concludes 2019 Article IV Consultation with South Africa

January 30, 2020

On January 24, 2020, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with South Africa.

Given structural impediments to growth, South Africa’s economic performance remains subdued, and risks are materializing. Weak private investment and productivity growth have dampened economic activity to levels insufficient to raise per-capita income and foster greater social inclusion. While the sophisticated services sector has been growing, most other sectors have been stagnant or contracting. South Africa thus remains an extremely unequal society, with high and rising unemployment (29 percent), particularly among the youth. Inflation is estimated to have moderated in 2019 to below the midpoint of the inflation target range, aided by one-off factors. The current account deficit is relatively wide and largely financed by non-FDI inflows. Banks are sound, albeit with pockets of vulnerabilities.

Fiscal deficits have been persistently large due to continued high expenditure despite weakening revenue performance and state-owned enterprise (SOE) bailouts. The government deficit is projected to reach 6½ percent of GDP in FY19/20, resulting in significant debt accumulation—projected to exceed 60 percent of GDP in FY19/20—and leaving South Africa with no fiscal space. Weaknesses in public enterprises are resulting in poor service delivery and weighing on the fiscus through bailouts or administrative interventions. An earlier monetary policy tightening was unwound in mid-2019 following inflation moderation, and the policy rate has remained unchanged since.

Policymakers have taken initial steps to advance reforms and streamline regulations with the purpose of reigniting growth and fostering greater social inclusion. The Medium-Term Budget Policy Statement (MTBPS) released in October proposed savings from a rationalization of spending in goods and services to partially offset large bailouts to the electricity company Eskom, but projects increasing government debt that does not stabilize.

On current policies, staff projects a lackluster growth recovery from an estimated 0.4 percent in 2019 to 0.8 percent in 2020 and 1.5 percent in the outer years. Inflation is projected to rebound in 2020 (from an estimated 4.2 percent in 2019) before easing to slightly below 5 percent in the medium term. The current account deficit is expected to widen to around 4 percent of GDP over the medium term. The outlook is subject to risks derived from further delays in adjustment and reform or changes in investors’ appetite for emerging markets.

Executive Board Assessment [2]

Directors commended South Africa’s monetary framework, anchored on a credible inflation targeting regime, flexible exchange rate system, and highly developed financial system. Notwithstanding these buffers, Directors noted that South Africa is in a difficult situation, given subdued growth, rising debt, and high poverty and unemployment rates. In that context, they encouraged the authorities to implement strong fiscal consolidation and SOE reforms to ensure debt sustainability, accompanied by decisive structural reform measures to boost private-sector led, inclusive growth.

With public debt on the rise, Directors encouraged the authorities to focus on maintaining medium term debt sustainability, through a growth friendly and expenditure based fiscal consolidation. Noting that the upcoming budget discussion provides an opportunity for the authorities to undertake necessary reforms, Directors suggested reductions in the public wage bill and fiscal contingencies from SOEs, coupled with improved tax administration and compliance. Directors also highlighted the importance of protecting priority pro poor social spending and making education and health spending more efficient given high poverty and unemployment rates. They also supported introducing a debt anchor to the fiscal framework and institutionalizing periodic spending reviews.

Directors were concerned with the risks emanating from SOEs, especially from the electricity company Eskom, and emphasized that budget support to SOEs needs to be conditioned on well- defined governance and operational and financial performance targets. They noted that tackling Eskom’s challenges would not only reduce fiscal deficits and debt but would also boost business confidence, encourage private investment, including in green energy, improve macroeconomic policy credibility, and convey a genuine ambition by the authorities to address state capture legacies.

Directors also encouraged the steadfast implementation of structural reforms to fully harness South Africa’s economic potential and foster greater social inclusion. Beyond the initial steps undertaken, Directors called for particular focus on product and labor market reforms, including greater competition and private participation in network industries, and efforts to improve the business climate and human capital, and to promote an environment conducive to job creation, particularly for the youth. Directors also encouraged the authorities to accelerate reforms to strengthen governance and fight corruption, including enhancing the AML/CFT framework.

Directors commended South African Reserve Bank’s (SARB) credibility and strong performance. Amid rising fiscal risks and volatile global conditions, Directors stressed the importance of continuing to durably anchor inflation expectations at the targeted level by closely monitoring upside and downside risks in the context of the flexible exchange rate regime. They noted that monetary policy has limited potency to boost growth at this juncture given structural impediments to growth and called for close coordination between monetary and fiscal policies. In the context of ongoing SARB reform discussions, Directors indicated that the SARB’s independence and inflation mandate should be preserved.

Directors welcomed the resilience of the financial sector and called for continued vigilance, given the recent pick up in unsecured lending. They also encouraged the SARB to use the forthcoming FSAP as an opportunity to further strengthen its supervisory and regulatory framework. Directors welcomed the entry of new players and technological innovations to promote financial inclusion.



South Africa: Selected Economic Indicators, 2014–2021

Social Indicators

GDP

Poverty (percent of population)

Nominal GDP (2018, billions of US dollars)

368

Lower national poverty line (2015)

40

GDP per capita (2018, in US dollars)

6,354

Undernourishment (2016)

6

Population characteristics

Inequality (income shares unless otherwise specified)

Total (2018, million)

58

Highest 10 percent of population

51

Urban population (2017, percent of total)

66

Lowest 20 percent of population

3

Life expectancy at birth (2017, number of years)

63

Gini coefficient (2015)

63

Economic Indicators

2014

2015

2016

2017

2018

2019

2020

2021

Proj.

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

Real GDP

1.8

1.2

0.4

1.4

0.8

0.4

0.8

1.0

Real GDP per capita

0.3

-0.3

-1.1

-0.1

-0.7

-1.1

-0.7

-0.5

Real domestic demand

0.5

2.0

-0.9

1.9

0.9

0.7

0.8

1.1

GDP deflator

5.5

5.2

7.2

5.3

3.9

4.2

5.2

5.0

CPI (annual average)

6.1

4.6

6.3

5.3

4.6

4.2

5.2

5.0

CPI (end of period)

5.3

5.3

6.7

4.7

4.9

4.0

5.2

5.0

Labor market (annual percentage change unless otherwise indicated)

Unemployment rate (percent of labor force, annual average)

25.1

25.4

26.7

27.5

27.1

28.6

29.8

30.7

Unit labor costs (formal nonagricultural)

5.2

5.4

5.5

5.1

4.6

4.2

5.2

5.0

Savings and Investment (percent of GDP)

Gross national saving

15.4

16.3

16.3

16.3

14.4

14.2

13.8

13.8

Public (incl. public enterprises)

1.2

1.9

1.9

1.3

1.1

0.4

0.0

-0.1

Private

14.3

14.4

14.4

14.9

13.3

13.9

13.9

13.9

Investment (including inventories)

20.5

20.9

19.2

18.8

17.9

17.6

17.5

17.5

Public (incl. public enterprises)

6.9

7.3

6.9

6.3

5.7

5.9

5.9

6.1

Private

13.5

13.0

12.5

12.5

12.5

12.0

11.9

11.7

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

Revenue, including grants 2/

27.6

28.2

28.6

28.3

29.1

29.1

29.1

29.1

Expenditure and net lending

31.9

32.9

32.7

32.6

33.4

35.2

35.9

36.0

Overall balance

-4.3

-4.8

-4.1

-4.4

-4.3

-6.1

-6.7

-6.8

Primary balance

-1.2

-1.5

-0.6

-0.8

-0.5

-2.1

-2.4

-2.2

Structural balance (percent of potential GDP)

-4.1

-4.2

-3.8

-3.8

-3.6

-4.6

-4.9

-5.2

Gross government debt 3/

47.0

49.3

51.5

53.0

56.7

60.8

65.3

69.6

Government bond yield (10-year and over, percent)

8.0

9.7

8.9

9.2

9.4

9.0

...

...

Money and credit (annual percentage change unless otherwise indicated)

Broad money

7.2

10.5

6.1

6.4

5.6

4.6

5.4

5.5

Credit to the private sector

7.2

8.0

4.7

4.3

5.5

3.1

3.7

3.7

Repo rate (percent, end-period)

5.8

6.3

7.0

6.8

6.8

6.5

...

...

3-month Treasury bill interest rate (percent)

5.8

6.1

7.2

7.3

7.2

7.1

...

...

Balance of payments (annual percentage change unless otherwise indicated)

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

-17.8

-14.7

-8.5

-8.9

-13.1

-11.9

-13.4

-14.1

percent of GDP

-5.1

-4.6

-2.9

-2.5

-3.5

-3.3

-3.7

-3.7

Exports growth (volume)

3.6

2.9

0.4

-0.7

2.6

0.5

3.4

3.2

Imports growth (volume)

-0.6

5.4

-3.9

1.0

3.3

1.5

3.2

3.2

Terms of trade

-1.5

2.8

1.7

4.5

-2.6

1.4

-0.5

0.0

Overall balance (percent of GDP)

0.4

-0.3

0.9

0.5

0.2

0.6

-0.6

0.0

Gross reserves (billions of U.S. dollars)

49.1

45.8

47.4

50.7

51.6

53.8

51.5

51.7

Total external debt (percent of GDP)

41.3

39.1

48.2

49.6

46.8

51.1

51.0

51.2

Nominal effective exchange rate (period average)

-9.6

-5.2

-10.4

9.8

0.0

-5.2

...

...

Real effective exchange rate (period average) 4/

-6.1

-2.5

-6.3

12.7

1.8

-1.8

...

...

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

11.6

15.6

13.7

12.3

14.4

14.0

...

...

Sources: South African Reserve Bank, National Treasury, Haver, Bloomberg, World Bank, and Fund staff estimates and projections.

1/ Consolidated government as defined in the budget unless otherwise indicated.

2/ Revenue excludes "transactions in assets and liabilities" classified as part of revenue in budget documents. This item represents proceeds from the sales of assets, realized valuation gains from holding of foreign currency deposits, and other conceptually similar items, which are not classified as revenue by the IMF's Government Finance Statistics Manual 2010.

3/ Central government.

4/ January-October 2019 average.


[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 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: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

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