IMF Executive Board Concludes 2021 Article IV Consultation with South Africa
IMF News, February 10, 2022
Source details
- Canonical URL
- IMF Executive Board Concludes 2021 Article IV Consultation with South Africa
Other formats
Bibliographic details
- Published: February 10, 2022
Recovery and near-term developments
- Real output contracted by 6.4 percent in 2020 and is estimated to have rebounded by 4.6 percent in 2021.
- The recovery has been faster than anticipated but its durability is uncertain given low vaccination rates and the Omicron variant’s travel impacts.
- The recovery was accompanied by worsening unemployment (34.9 percent), weak bank lending to the private sector, and anemic private investment.
- Poverty and inequality did not show signs of improvement despite the growth rebound.
Macroeconomic fundamentals and vulnerabilities
- The fiscal position deteriorated after COVID-19-related measures and transfers to state-owned enterprises (SOEs); SOE operational and financial performance worsened.
- The fiscal deficit soared to 9.7 percent of GDP in 2020, before declining to an estimated 8.4 percent in 2021.
- Public debt is estimated to have reached almost 70 percent of GDP in 2021.
- The external current account balance turned into extraordinary surpluses as the pandemic compressed import volumes while favorable commodity prices boosted exports (described as temporary).
- Gross fiscal and external financing needs remained elevated.
- Inflation remained within the 3–6 percent target range during the pandemic, but rising inflation risks prompted the South African Reserve Bank to start unwinding monetary accommodation in late-2021.
- Bank soundness indicators, including profitability, solvency, and liquidity, remained solid.
Outlook and projections
- Growth is projected at 1.9 percent in 2022, before easing to 1.4 percent in the medium term.
- Constraints cited: structural constraints to investment, prevailing policy uncertainty, and elevated public debt that hinders job creation.
- Inflation is projected to converge to the midpoint of the 3–6 percent target range.
- The fiscal deficit is projected to continue narrowing on recovering revenue and phasing out COVID-19-related measures, but over the medium term the growing interest bill and demands from SOEs and public servants will keep the fiscal deficit high, above 7 percent of GDP.
- The debt ratio is expected to continue rising.
- The external current account is projected to return to a deficit from 2022.
Executive Board assessment and policy recommendations
- Directors noted COVID-19 exacerbated already low growth, high unemployment and inequality, and elevated public debt.
- Directors commended authorities’ strong policy response, anchored inflation expectations, a sound financial system, and a flexible exchange rate.
- Fiscal policy:
- Recommended ambitious fiscal consolidation to reduce public debt while protecting the most vulnerable.
- Consolidation should be mainly focused on the expenditure side and complemented by revenue administration enhancements and a credible public debt anchor.
- The upcoming February budget seen as an opportunity to define concrete measures, including containing public sector compensation, rationalizing transfers to state owned enterprises (SOEs), streamlining tax expenditures, and better targeting education subsidies.
- Highlighted need for well targeted social spending to reduce poverty and inequality.
- SOEs and governance:
- Urged prompt action to strengthen SOE operations and finances and advance anti-corruption efforts in procurement and administration.
- Noted restructuring the national electricity company is critical to ensure energy security, reduce fiscal risks, and transition away from coal powered energy.
- Monetary and financial sector policy:
- Welcomed South African Reserve Bank’s plan to gradually unwind accommodative monetary policy amid rising inflation risks; recognized commitment to price stability and strengthening monetary policy transmission.
- Saw merit in reducing the inflation target when conditions allow.
- Welcomed financial sector resilience while calling for enhanced supervision and regulation and continued monitoring of the deepening bank-sovereign nexus.
- Recommended greater oversight of fintech, swift completion of the bank resolution framework and the deposit insurance scheme, and measures to strengthen the AML/CFT framework.
- Structural reforms:
- Stressed importance of improving economic efficiency and facilitating the green transition through increased competition in product markets and flexibility in labor markets.
- Emphasized reducing regulatory barriers and modernizing labor markets to support greater private sector participation, boost investment, create employment, and strengthen the external position.
- Encouraged further actions to strengthen governance and fight widespread corruption, including safeguarding pandemic related funds.
Key statistics (selected, preserved exactly as presented)
- Real output: -6.4 percent (2020); 4.6 percent (2021 est.)
- Unemployment: 34.9 percent (text); annual average unemployment rates in table: 27.1 (2018), 28.7 (2019), 29.2 (2020), 34.2 (2021 est.), 35.3 (2022 proj.), 37.0 (2023 proj.)
- Fiscal deficit (overall balance): -9.7 percent of GDP (2020), -8.4 percent of GDP (2021 est.), projected -7.5 percent (2022), -7.1 percent (2023)
- Public debt (gross government debt): 51.6 (2018), 56.3 (2019), 69.4 (2020), 69.9 (2021 est.), 74.5 (2022 proj.), 77.7 (2023 proj.)
- Growth projections: 1.9 percent (2022), 1.4 percent (medium term)
- CPI target range: 3–6 percent
- CPI (annual average): 4.1 (2018), 3.3 (2019), 4.4 (2020), 1.7 (2021)
- CPI (end of period): 4.9 (2018), 3.2 (2019), 5.0 (2020)
- Nominal GDP (2020, billions of US dollars): 335
- GDP per capita (2020, in US dollars): 5,637
- Poverty—Lower national poverty line (2015): 40 (percent of population)
- Inequality—Highest 10 percent of population (2015): 53; Lowest 40 percent of population (2015): 65; Gini coefficient (2015): 65
- Current account balance (billions of U.S. dollars): -12.0 (2018), -10.0 (2019), 6.7 (2020), 12.8 (2021 est.), -5.2 (2022 proj.), -8.6 (2023 proj.)
- Current account (percent of GDP): -3.0 (2018), 2.0 (2019), 3.1 (2020), -1.2 (2021 est.), -2.0 (2022 proj.)
- Gross reserves (billions of U.S. dollars): 55.1 (2018), 55.5 (2019), 57.6 (2020), 58.0 (2021 est.), 57.3 (2022 proj.)
- Total external debt (percent of GDP): 42.6 (2018), 47.8 (2019), 50.8 (2020), 39.5 (2021 est.), 42.9 (2022 proj.), 43.4 (2023 proj.)
- Exchange rate (Rand/U.S. dollar, end of period): 14.4 (2018), 14.0 (2019), 15.9 (2020), 15.6 (2021 est.)
Press Release No. 22/31