Boosting Growth and Prosperity in South Africa

IMF News, March 10, 2025

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Authors: Kamil Dybczak, Delia Velculescu March
Published: March 10, 2025

Key challenges

Declining real per-capita income.
Persistent unemployment, pervasive poverty, and one of the highest inequality rates in the world.
Deepening structural rigidities and governance weaknesses, evidenced by the negative contribution of Total Factor Productivity to growth over the past 15 years.
One in three adults and two in three young people out of work.

Recent political and reform context

New Government of National Unity in power since June 2024 committed to provide new impetus to ongoing structural reforms initiated in 2020.
Government statements: “We are steadily removing the obstacles to meaningful and faster growth... [through] economic reforms that we are implementing as part of Operation Vulindlela,” — South African President Cyril Ramaphosa.
Major sectoral reforms underway:
- Electricity sector reforms allowing for private-sector participation in electricity generation, including from renewable sources.
- Logistics sector reforms allowing private sector participation in freight rail and port operations.
- Streamlining digital communications regulations and water licensing procedures.
- Modernizing the eVisa system.

IMF-recommended structural reform package (summary)

Fully implement reforms already underway and pursue further structural reforms.
Actions to enhance the business environment:
- Cut excessive red tape and administrative requirements.
- Ensure small and medium enterprises have fair access to markets to support entrepreneurship, firm growth, and job creation.
Governance and public administration:
- Fight corruption.
- Professionalize public administration.
- Improve governance of state-owned enterprises to build trust and create a more stable business climate.
Labor-market reforms:
- Reduce spatial disparities.
- Help young people enter the labor force.
- Make regulations for small and medium-sized enterprises more flexible to durably reduce the high unemployment rate.

Quantified impacts from IMF analysis and key statistics

Reforms halving South Africa’s business regulation, governance, and labor-market gaps relative to peers could:
- Increase medium-run output by 9 percent.
- Further boost employment.
- Reduce poverty and ensure more widely shared benefits of growth.
Inequality impact:
- South Africa’s Gini coefficient would decline by 10 points, bringing South Africa closer to its peers.
Electricity cost context:
- Providing information about the cost of electricity in South Africa, which is 68 percent higher than in the US, was found to boost support for electricity reforms by 9 percentage points.
Reforms communication and compensatory support:
- Providing compensatory support to vulnerable groups affected by the reforms would lead 75 percent ofindividuals initially opposed to reforms to become reform supporters.

Policy implementation and social support considerations

Building broad social support is essential to achieve full benefits of reforms.
Communication and engagement, along with policies to support vulnerable groups, are vital to increase acceptance of reforms.
Specific behavioral findings:
- Information provision about relative costs (example: electricity costs) can materially increase reform support.
- Compensatory support transforms opposition into support for a large share of initially opposed individuals.

Outlook

While challenges are massive, the new government’s mandate provides a unique opportunity to implement an ambitious package of reforms to put the economy on a path toward higher growth and prosperity for all.
The IMF stands ready to support South Africa in its efforts.

By Kamil Dybczak and Delia Velculescu — March 10, 2025. Delia Velculescu is the IMF’s mission chief for South Africa. Kamil Dybczak is a senior economist for South Africa in the IMF's African Department.