IMF Staff Completes Virtual Staff Visit to South Africa

IMF News, January 27, 2021

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Virtual meetings held with South African authorities during January 15–26, 2021.
Mission led by Ana Lucía Coronel.
Statement issued at end of the visit on January 27, 2021.
Purpose: discuss recent economic developments and the outlook in the context of the IMF’s regular surveillance activities.

COVID-19 has exacerbated South Africa’s growth and fiscal vulnerabilities.
In 2020:
- Output contracted sharply.
- Employment losses were significant.
- Public finances suffered severely, with the budget deficit and public debt increasing significantly amid the recession and pandemic-related expenses.
The resurgence of infections and the protracted vaccination procurement and distribution processes will likely weigh on the economic recovery this year, notwithstanding improved external conditions.
The government is prioritizing the response to the pandemic; plans to provide adequate public funding for vaccination are welcome.

The pandemic has further exposed long-standing fiscal and structural vulnerabilities.
Tackling fiscal and structural challenges is critical to set the stage for a robust recovery and pursue strong, durable, and inclusive growth.
Creating conditions to boost private investment, redefining the role of the public sector in network industries to facilitate competition, and tightening fiscal policy to rein in rapidly increasing debt are imperative.
Recurring power outages amid a deep recession underscore the need for bold action to redefine Eskom’s business model so that it becomes self-sustaining.
The banking system’s buffers remain strong at the aggregate level, but continued close supervision is warranted, including with respect to asset quality developments during the pandemic.
With short-term real interest rates in negative territory, the monetary policy stance remains appropriately accommodative.

A growth-friendly but sizable fiscal consolidation effort over the coming years will be required to stabilize debt and put it on a declining path, thus reducing country risk premia and improving investor confidence.
While phasing out COVID-19 outlays once the pandemic subsides, recommended measures include:
- Make transfers to SOEs conditional on meeting ambitious but realistic performance targets.
- Rationalize compensation.
- Dismantle ill-targeted subsidies.
- Improve enforcement of tax compliance.
Objective: reduce sovereign borrowing needs while preserving fiscal space for well-targeted outlays for infrastructure, health, education, and social protection.
Reining in large fiscal deficits and debt will require containing the wage bill and avoiding ill-targeted subsidies and transfers to inefficient state-owned enterprises (SOEs).

Fiscal consolidation needs to be accompanied by a decisive reform package that removes constraints to growth and job creation.
Key components:
- Attract investment and promote competition to modernize network industries.
- Facilitate private-sector participation in all sectors to reduce vulnerabilities and inefficiencies from relying on a few large players.
- Promote a business-friendly and competitive environment.
- Accelerate governance reforms.
- Inject firm-level flexibility into collective bargaining while simplifying employment protection legislation.
Special attention to SOEs:
- Improve efficiency and service quality by hardening budget constraints.
- Undertake well-defined strategic equity partnerships, particularly in the energy sector.
- Without fundamental reforms, Eskom’s problems will continue to weigh on public finances and constrain economic growth prospects.

Monetary policy has ensured adequate liquidity conditions and safeguarded financial sector stability during the pandemic while paying due attention to the central bank inflation mandate.
Short-term real interest rates are in negative territory; stance remains appropriately accommodative.
Continued close supervision of the banking system is warranted.

The IMF welcomes the authorities’ commitment to transparently disseminate the roll out of support.
Fiscally responsible measures to support vulnerable households and businesses would mitigate the impact of tighter mobility restrictions.

IMF Communications Department — January 27, 2021