South Africa: Staff Concluding Statement of the 2023 Article IV Mission
IMF News, March 22, 2023
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- Published: March 22, 2023
Mission and Context
- An International Monetary Fund (IMF) team led by Papa N’Diaye visited South Africa on March 1-17 for the 2023 Article IV annual consultation.
- Discussions focused on policies to ensure macro-financial stability and the far-reaching reforms needed to durably lift potential growth, create jobs, reduce poverty and inequality, and facilitate the transition to a greener economy.
- Key contextual challenges identified:
- Unprecedented energy crisis and increasingly binding infrastructure and logistics bottlenecks.
- Less favorable external environment and climate shocks.
- Employment remains below pre-pandemic levels and unemployment close to record highs amid already high poverty and inequality.
- Elevated public debt significantly limits fiscal space.
- Long-standing rigidities in product and labor markets, and governance and corruption vulnerabilities.
Outlook and Risks
- Growth:
- Real GDP growth is projected to decelerate sharply to 0.1 percent in 2023, mainly due to increased intensity of power cuts and weaker commodity prices and external environment.
- In the medium term, growth is expected to rebound to about 1½ percent per year, with income per capita likely to stagnate.
- Inflation:
- Headline inflation is projected to fall back within the SARB target range (3-6 percent) in the second half of 2023.
- Inflation is expected to reach the target range mid-point of 4.5 percent in 2024 and remain there through the medium term.
- Current account:
- Projected to move to a sizable deficit of 2.3 percent of GDP in 2023.
- Projected to deteriorate further to about 2½ percent in 2024.
- Expected to improve somewhat to around 2 percent of GDP over the medium term as temporary factors dissipate.
- Portfolio inflows likely to stay volatile; FDI inflows anticipated to remain low.
- Fiscal balance:
- Overall balance projected to widen to a deficit of about -6½ percent of GDP in the fiscal year (FY) 23/24, and deteriorate further through FY25/26, reflecting:
- Eskom debt relief operation (entails a capital transfer),
- Continued transfers to other loss-making state-owned enterprises (SOEs),
- Spending on the Social Relief Distress (SRD) grants,
- Increased interest payments.
- Deficit expected to narrow after FY26/27 assuming improved conditions at Eskom, though public debt would continue to rise.
- Risks:
- External downside: deeper/protracted global slowdown, further weakening of commodity prices, shift in investor sentiment away from emerging markets.
- Domestic downside: delays in addressing the energy crisis and Eskom’s and Transnet’s operational and financial weaknesses; slower-than-expected progress or reversal in reforms and fiscal consolidation; increased political uncertainty.
- Upside scenarios: decisive implementation of structural reforms combined with fiscal consolidation; stronger-than-expected private sector participation in the energy sector.
Key Statistics and Fiscal Position
- Public debt is estimated to reach about 70 percent of GDP by the end of FY22/23.
- Growth projections: 0.1 percent in 2023; about 1½ percent per year in the medium term.
- Inflation target range: 3-6 percent; expected midpoint 4.5 percent in 2024.
- Current account deficits: 2.3 percent of GDP in 2023; about 2½ percent in 2024; around 2 percent in the medium term.
- Overall fiscal deficit: about -6½ percent of GDP in FY23/24.
Safeguarding Macro-Financial Stability — Recommendations
- Fiscal policy:
- Support for government objectives to reduce debt vulnerabilities and create conditions for higher growth as articulated in the 2023 Budget and October 2022 Medium-Term Budget Policy Statement (MTBPS).
- Achieving the 2023 Budget objectives requires stronger fiscal consolidation efforts relative to the IMF Staff baseline, within a credible medium-term framework.
- Recommendations to stabilize and reduce public debt:
- Reduce public spending as a share of GDP.
- Continue efforts to reduce the public sector wage bill.
- Reduce costly and inefficient subsidies.
- Reduce transfers to poorly performing SOEs.
- Protect well-targeted social spending and productive public investment.
- Improve spending efficiency, including for SOEs, to facilitate adjustment with smaller near-term growth costs.
- Broaden the tax base by strengthening revenue administration and reducing tax gaps and tax expenditures.
- Strengthen the fiscal framework by:
- Introducing a debt ceiling to complement the nominal primary expenditure ceiling.
- Addressing deficiencies in public procurement.
- Improving public investment management.
- Monetary policy:
- The pace of withdrawal of monetary policy accommodation has been adequate and needs to remain data dependent.
- SARB’s increases in the policy rate have helped bring down headline inflation and keep inflation expectations anchored.
- Further tightening warranted if the energy crisis and tighter global financial conditions threaten to de-anchor inflation expectations.
- Consider enhancing the inflation targeting framework by formalizing the SARB’s focus on the midpoint and by lowering the target as fiscal consolidation and structural reforms advance; communication will be essential.
- Financial sector policies:
- Financial sector remains resilient but with pockets of vulnerabilities; greater holdings of government debt increase direct exposure to sovereign risk and should be closely monitored.
- Fiscal consolidation should be the main defense against the financial sector–sovereign nexus.
- Consider complementary prudential measures, mindful of procyclicality and unintended negative effects.
- Strengthen oversight by closing regulatory gaps and enhancing supervision, including:
- Implement FSAP-recommended measures: more structured and intrusive supervision, recalibrated on-site/off-site mix, greater focus on governance, less reliance on third-party auditors.
- Adopt and operationalize new bank resolution and deposit insurance legislation; step up crisis preparedness.
- Promote financial sector competition and an enhanced credit information system to expand SME credit access and financial inclusion.
- Promote digital technologies for inclusion while monitoring stability risks.
- Embed taxonomy of green economic activities and guidelines on climate-related financial disclosures to strengthen sustainable finance.
- FATF grey listing:
- FATF placed South Africa on its list of jurisdictions under increased monitoring (grey list) and identified eight key areas with strategic deficiencies in AML/CFT framework.
- South Africa has made significant progress, including passage of two key Acts of Parliament addressing technical compliance deficiencies.
- Exiting the grey list requires timely implementation of the agreed FATF action plan; adverse impacts increase the longer a country remains on the list.
- Mission encourages stakeholders to work to exit the list quickly and to closely monitor impacts on capital flows and the financial system.
Structural Reforms — Priorities to Achieve Job-Rich, Inclusive, and Greener Growth
- General reform approach:
- Implement gradual and sustained reforms with well-targeted compensatory measures that have clear sunset clauses.
- Leverage independent institutions, engage stakeholders early, and communicate effectively.
- Reform objectives: improve energy security, foster private investment, promote good governance, and create jobs.
- Urgent reform actions recommended:
- Restore energy security:
- Attract private sector participation in the electricity market.
- Address Eskom’s operational and financial deficiencies.
- Conditions attached to Eskom’s debt relief operation should ensure material operational improvement and establish long-term viability if strictly enforced.
- Stop further accumulation of municipal arrears to Eskom.
- Make electricity tariff setting fully cost reflective.
- Implement the Just Energy Transition Investment Plan:
- Change carbon intensity of consumption and production, including through the carbon tax and complementary measures.
- Provide well-targeted support to affected workers and communities.
- Use the energy crisis as an opportunity to expedite renewable energy rollout.
- Alleviate transportation logistics bottlenecks:
- Decisive actions to improve Transnet’s operational efficiency and commercial viability.
- Promote private sector participation in the transport sector to increase capacity and boost exports.
- Rationalize SOEs:
- Address inefficient SOEs that burden the budget and hinder growth.
- Rationalize entities with overlapping mandates or weak public finance rationale.
- Ensure remaining SOEs have clear, representative, transparent governance; operate under hard budget constraints; face competitive markets; and have proper autonomy and regulation.
- Foster competition and regional integration:
- Reduce regulatory burden and entry barriers to foster competitive product markets and private investment, especially for SMEs.
- Deepen regional trade integration and leverage the African Continental Free Trade Area.
- Tackle high structural unemployment:
- Ensure national minimum wage mechanism balances reducing in-work poverty and job prospects for disadvantaged groups.
- Introduce greater firm-level flexibility in collective bargaining and streamline enforcement of employment protection legislation.
- Improve education quality and facilitate high-skilled immigration to address skill shortages.
- Support school-to-job transitions, promote vocational training, improve employability of the inactive population, and make job search more effective.
- Increase entrepreneurial capacity, raise education levels, and reform social housing policies to boost participation from remote and traditional settlement areas.
- Promote good governance:
- Tackle state capture forcefully with strengthened criminal prosecution and enforcement of sanctions against corruption.
- Equip anti-corruption agencies with sufficient legal power, capacity, and operational autonomy to prevent political interference.
- Use new procurement legislation and regulations to centralize procurement, standardize processes, and increase transparency in line with international good practice.
- Address gender disparities:
- Gradually advance implementation of the Gender Responsive Budgeting Framework as planned.
- Continue efforts to decisively tackle gender-based violence.
International Monetary Fund — Staff Concluding Statement of the 2023 Article IV Mission (March 22, 2023).