Press Release No. 21/24

IMF Staff Completes Virtual Staff Visit to South Africa

January 27, 2021

• COVID-19 has exacerbated South Africa’s growth and fiscal vulnerabilities. Alleviating the impact of the ongoing pandemic’s resurgence is the government’s top priority.
• Reining in large fiscal deficits and debt will require containing the wage bill and avoiding ill-targeted subsidies and transfers to inefficient state-owned enterprises (SOEs).
• To reignite growth and job creation, there is a need to advance reforms that address Eskom and other SOEs’ difficulties, strengthen competition and governance, and increase labor market flexibility.

Washington, DC: A team from the International Monetary Fund (IMF), led by Ana Lucía Coronel, held virtual meetings with the South African authorities during January 15–26, 2021 to discuss recent economic developments and the outlook in the context of its regular surveillance activities. At the end of the visit, Ms. Coronel issued the following statement:

“South Africa has been hit very hard by the COVID-19 pandemic. In 2020, output contracted sharply, and employment losses were significant, despite the authorities’ timely actions to support the most vulnerable groups and affected businesses. Public finances also suffered severely, with the budget deficit and public debt increasing significantly amid the recession and pandemic-related expenses. The resurgence of infections and the protracted vaccination procurement and distribution processes, as elsewhere, will likely weigh on the economic recovery this year, notwithstanding improved external conditions.

“The government is rightly prioritizing the response to the pandemic. Plans to provide adequate public funding to ensure a successful vaccination process are welcome. Fiscally responsible measures to support vulnerable households and businesses would mitigate the impact of tighter mobility restrictions. We welcome the authorities’ commitment to transparently disseminate the roll out of support.  At the same time, and considering the challenging fiscal situation, reducing the pressure on the budget from inefficient outlays is crucial.

“The pandemic has further exposed vulnerabilities of the South African economy. Thus, tackling long-standing fiscal and structural challenges is more critical than ever to set the stage for a robust recovery and pursue strong, durable, and inclusive growth. As per our previous advice, creating conditions to boost private investment, redefining the role of the public sector in network industries to facilitate competition, and tightening fiscal policy to rein in rapidly increasing debt are imperative.

“A growth-friendly but sizable fiscal consolidation effort over the coming years will be required to stabilize debt and put it on a declining path, thus reducing country risk premia and improving investor confidence. While phasing out COVID-19 outlays once the pandemic subsides, we encourage the government to make transfers to SOEs conditional on meeting ambitious but realistic performance targets; rationalize compensation; dismantle ill-targeted subsidies; and improve enforcement of tax compliance. This would reduce sovereign borrowing needs while preserving fiscal space for well-targeted outlays for infrastructure, health, education, and social protection.

“Fiscal consolidation needs to be accompanied by a decisive reform package that removes constraints to growth and job creation. Attracting investment and promoting competition to modernize network industries is a key component of this package. Facilitating private-sector participation in all sectors will reduce the vulnerabilities and inefficiencies from relying on a few large players. This will require sustained efforts to promote a business-friendly and competitive environment; accelerate governance reforms; and inject firm-level flexibility into collective bargaining while simplifying employment protection legislation.

“Special attention should be given to improving the efficiency of SOEs and the quality of their services by hardening their budget constraints and undertaking well-defined strategic equity partnerships, particularly in the energy sector. Recurring power outages in the midst of a deep recession underscore the need for bold action to redefine Eskom’s business model so that it becomes self-sustaining. In the absence of fundamental reforms, Eskom’s problems will continue to weigh on public finances and constrain economic growth prospects.

“Monetary policy has played an important role in ensuring adequate liquidity conditions and safeguarding financial sector stability during the pandemic, while paying due attention to the central bank inflation mandate. With short-term real interest rates in negative territory, the monetary policy stance remains appropriately accommodative. The banking system’s buffers remain strong at the aggregate level, but continued close supervision is warranted, including with respect to asset quality developments during the pandemic.

“The IMF team thanks the authorities and other counterparts for the very productive and open discussions.”