IMF Executive Board Concludes Post Financing Assessment Discussions with South Africa

IMF News, September 4, 2024

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IMF Executive Board Concludes Post Financing Assessment Discussions with South Africa

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• Published: September 4, 2024

Summary of assessment and context

• The Executive Board concluded the Post Financing Assessment (PFA) and endorsed the Staff Appraisal on a lapse-of-time basis.
• South Africa’s capacity to repay the Fund is assessed as adequate.
• The new government of national unity (took office in June) faces challenges including declining real per capita growth, high unemployment, poverty, inequality, and rising public debt.
• The new administration has committed to continue structural reforms to address supply constraints and bolster inclusive growth while maintaining fiscal discipline.

Recent macroeconomic performance (selected points)

• Growth slowed to 0.7 percent in 2023, depressed in part by widespread power shortages and disruptions at rails and ports.
• Unemployment reached 32 percent at end-2023.
• Inflation fell within the SARB’s 3–6 percent target range in 2023 and moderated to 5.1 percent in June 2024.
• Current account deficit widened to 1.6 percent of GDP in 2023 (from 0.5 percent in 2022), driven by higher imports.
• Budget deficit remained in line with the revised budget target; public debt rose to just above 74 percent of GDP.

Outlook and projections

• Growth is expected to reach 1 percent in 2024, stabilizing at 1.4 percent in the medium term as structural bottlenecks ease only gradually.
• Inflation is projected to decline toward the midpoint of the target range 2025Q2.
• Current account deficit expected to increase modestly to 2.2 percent of GDP by 2029 as imports accelerate with domestic demand.
• Fiscal deficit projected to remain elevated over the medium term due to rising debt service, support to state-owned enterprises, and sizeable spending on public wages and transfers; public debt is not expected to stabilize under the baseline.
• Risks: broadly balanced. Upside—faster reform implementation under the new government. Downside—uncertain external environment and inability to agree on needed fiscal and structural reforms.

Executive Board assessment — structural and policy priorities

• Structural reforms are paramount to support job creation, growth, and prosperity:
  • Wide-ranging electricity and transportation-sector reforms, including to foster private sector participation, are indispensable to reinvigorating activity, boosting exports, and supporting the green transition.
  • Product-market reforms to improve the business environment and remove obstacles to trade, complemented by labor-market reforms, are essential to boost investment and employment.
  • Strengthening governance and reducing corruption are essential to reap reform gains that should be broadly distributed.
• Fiscal policy:
  • An ambitious expenditure-based consolidation of at least 3 percent of GDP over the next three years is required to place debt on a sustained downward path while protecting vulnerable groups.
  • Reliance on gains on foreign reserves has helped lower borrowing needs but does not substitute for the needed fiscal consolidation.
  • Any additional spending initiatives to lower inequality and improve health should be financed in a deficit-neutral way.
  • Improve institutional fiscal framework by adopting a debt rule, bolstering the procurement framework, and improving public-investment management to support adjustment and mitigate fiscal risks.
• Monetary policy:
  • Should carefully manage the descent of inflation to the mid-point of the target range and stay data dependent.
  • Rate cuts should be considered only once inflation declines sustainably towards the mid-point of the target range.
  • Any change to the monetary policy framework should be carefully timed, well-coordinated and communicated to manage expectations and safeguard credibility.
• Financial sector policy:
  • Continue to support financial stability through ongoing banking resolution and safety-net reforms and the new loss-absorbing capacity requirement.
  • Continued monitoring of risks is critical given the sovereign–financial sector nexus.
  • Implementation of prudential regulations, along with the countercyclical buffer, could play a vital role.

Capacity to repay and scenario assessment

• Staff assess capacity to repay the Fund as adequate under the baseline and downside scenarios.
• South Africa is expected to be able to repay the Fund by end-2025 given ample reserves and manageable external debt service.
• Under a downside scenario, capacity to repay is also assessed as adequate, but policies will need to be tightened to contain inflationary pressures and safeguard debt sustainability while protecting vulnerable groups.
• The flexible exchange rate is expected to act as a shock-absorber.

Key statistics (selected figures from South Africa: Selected Economic Indicators, 2022–26)

• Social and population:
  • Nominal GDP (2022, billions of US dollars): 407
  • GDP per capita (2022, in US dollars): 6,712
  • Population total (2022, million): 62
  • Urban population (2020, percent of total): 67
  • Life expectancy at birth (2020, number of years): 64
  • Lower national poverty line (2015, percent of population): 40
  • Undernourishment (2019, percent): 7
  • Highest 10 percent of population (2015, income share): 53
  • Gini coefficient (2015): 65
• National income and prices (annual percentage change):
  • Real GDP: 2022: 1.9; 2023: 0.7; 2024: 1.0; 2025: 1.3; 2026: 1.4
  • Domestic demand: 2022: 3.9; 2023: 0.8; 2024: 1.2; 2025: 1.5
  • GDP deflator: 2022: 5.0; 2023: 4.9; 2024: 4.5
  • CPI (annual average): 2022: 6.9; 2023: 5.9; 2024: 5.2; 2025: 4.6
  • CPI (end of period): 2022: 7.4; 2023: 5.5
• Labor market:
  • Unemployment rate (percent of labor force, annual average): 2022: 33.5; 2023: 33.1; 2024: 33.8; 2025: 34.2; 2026: 34.5
• Savings and investment (percent of GDP):
  • Gross national saving: 2022: 14.4; 2023: 15.0; 2024: 13.9; 2025: 13.7
  • Investment (including inventories) 2/: 2022: 12.4; 2023: 15.4; 2024: 15.5; 2025: 15.7; 2026: 15.8
• Fiscal position (percent of GDP):
  • Revenue, including grants 4/: 2022: 25.0; 2023: 27.6; 2024: 26.8; 2025: 27.0; 2026: 27.1
  • Expenditure and net lending 5/: 2022: 34.6; 2023: 31.9; 2024: 32.7; 2025: 33.2; 2026: 33.4
  • Overall balance: 2022: -9.6; 2023: -4.3; 2024: -5.9; 2025: -6.3; 2026: -6.4; (alternate entry) -5.5
  • Primary balance: 2022: -5.4; 2023: 0.3; 2024: -0.9; 2025: 0.2
  • Gross government debt 6/: 2022: 69.0; 2023: 70.8; 2024: 73.4; 2025: 75.0; 2026: 77.6; (alternate entry) 79.3
  • Government bond yield (10-year and over, percent) 7/: 2022: 9.7; 2023: 11.3; 2024: 11.6
• Money and credit:
  • Broad money: 2022: 9.4; 2023: 8.3; 2024: 6.5; 2025: 7.5
  • Credit to the private sector 8/: 2022: 8.9; 2023: 4.4
  • Repo rate (percent, end-period) 7/: 2022: 3.5; 2023: 7.0; 2024: 8.25
• Balance of payments:
  • Current account balance (billions of U.S. dollars): 2022: 6.7; 2023: -1.8; 2024: -6.1; 2025: -6.9; 2026: -7.7; (alternate) -8.6
  • Current account percent of GDP: 2022: 2.0; 2023: -0.5; 2024: -1.6; 2025: -1.9; 2026: -2.0
  • Exports growth (volume): 2022: -11.9; 2023: 3.6; 2024: 3.7
  • Imports growth (volume): 2022: -17.4; 2023: 14.9; 2024: 4.1; 2025: 4.0; 2026: 3.8
  • Terms of trade: 2022: 9.3; 2023: -4.8; 2024: -1.2; 2025: -1.4
  • Overall balance (percent of GDP): 2022: -1.0; 2023: 0.5
  • Gross reserves (billions of U.S. dollars): 2022: 55.5; 2023: 60.6; 2024: 62.5
  • Gross reserves (in percent of ARA): 2022: 78.1; 2023: 88.9; 2024: 97.0; 2025: 95.3
  • Total external debt (percent of GDP): 2022: 50.5; 2023: 40.4; 2024: 41.5; 2025: 42.2; 2026: 43.6; (alternate) 44.9
  • Nominal effective exchange rate (period average) 7/: 2022: -11.6; 2023: -4.9
  • Real effective exchange rate (period average) 7/: 2022: -10.1; 2023: -9.0
  • Exchange rate (Rand/U.S. dollar, end-period) 7/: 2022: 14.7; 2023: 17.0; 2024: 18.4

International Monetary Fund — Press Release No. 24/317, September 4, 2024.

References

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