South Africa: Restoring Confidence to Oil the Wheels for Growth

IMF News, August 2, 2018

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The IMF's latest assessment projects real GDP growth will stay "slightly below 2 percent in the medium term", which IMF staff state is "not enough to increase living standards or make a dent in unemployment."

"Confidence" is central: weak consumer and investor confidence has contributed to low growth.
Corruption has undermined trust in leaders and institutions, reducing investment and consumption decisions.
Signs of political will to address governance problems:
- President Ramaphosa has publicly prioritized combating corruption and increasing transparency as part of his economic strategy.
- Changes in boards and management of key state-owned enterprises to replace questionable officials with credible officials.
- Major revamping of the tax revenue service to recover taxes "that were in the past lost to corruption."
- Prosecutions of public officials involved in illegal practices are underway.
IMF view: given South Africa's "good laws and good institutions," restoring adherence to these institutions should be comparatively feasible.
Strong political commitment to governance reforms can enable complementary reforms in products and labor markets needed to fight unemployment and inequality.

South Africa is described as "one of the most unequal societies in the world," with persistent legacies of apartheid:
- "Black South Africans are still by far poorer than white South Africans."
- A pay gap between women and men of "about 30 percent."
Skills mismatch is a central constraint:
- Firms "find it difficult to find workers that fit their high standards," while jobseekers "find it difficult to find a job that accepts their limited skills."
Policy directions emphasized:
- Facilitate competition in the production of goods and services to attract more industries and investment.
- Introduce more flexible labor laws to expand labor force participation.
- Improve the business environment to attract investment.
- Invest in improving the quality of education to address skills mismatches.
- Improve delivery of targeted transfers so "more money goes to the poor."

Increased government spending in areas like education has not translated into better outcomes due to inefficiencies:
- Wage increases often reflect negotiations with trade unions rather than teacher performance.
- A sizable portion of teachers are "not well prepared to be teachers."
- Uneven distribution of funds: public schools in urban areas receive more funding per pupil than rural areas.
- Non-tuition costs (e.g., transportation) drive dropout rates in low-income sectors.
Education outcomes cited:
- "About half of South African students drop out of school before completing secondary education."
- "Less than five percent of students who start primary school end up with a university diploma."
IMF recommendation: improve efficiency and targeting of education spending and strengthen teacher quality and resource distribution.

South Africa is "at the forefront of the digital revolution in Africa" with technology improving financial inclusion (e.g., mobile banking).
Central bank initiatives:
- A financial technology unit is "piloting interbank clearing and settlement of transactions using distributive ledger technology."
Digitalization is aiding governance:
- Emphasis on electronic tax payments to reduce tax avoidance.
- Electronic customs declarations.
- A new automated procurement system capturing data on beneficiaries of government contracts, increasing transparency and expanding participation of smaller enterprises in tenders.
Constraints and IMF recommendations:
- Internet cost is high and quality is low due to limited competition.
- IMF staff recommend increasing competition across sectors (telecommunications, energy, transport, and others) to attract domestic and foreign private investment.

Source: IMF News — South Africa: Restoring Confidence to Oil the Wheels for Growth (August 2, 2018).