{
  "title": "South Africa: Staff Concluding Statement of the 2023 Article IV Mission",
  "publication": "IMF News, March 22, 2023",
  "sourceUrl": "https://www.imf.org/en/news/articles/2023/03/21/mcs032223-south-africa-2023-article-iv-mission",
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  "summary": "An International Monetary Fund (IMF) team led by Papa N’Diaye visited South Africa on March 1-17 to hold meetings with the economic authorities and other counterparts from the public and private sectors for the 2023 Article IV annual consultation.",
  "publishDate": "2023-03-22",
  "sections": [
    {
      "heading": "Mission and Context",
      "content": "- 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.\n- 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.\n- Key contextual challenges identified:\n  - Unprecedented energy crisis and increasingly binding infrastructure and logistics bottlenecks.\n  - Less favorable external environment and climate shocks.\n  - Employment remains below pre-pandemic levels and unemployment close to record highs amid already high poverty and inequality.\n  - Elevated public debt significantly limits fiscal space.\n  - Long-standing rigidities in product and labor markets, and governance and corruption vulnerabilities."
    },
    {
      "heading": "Outlook and Risks",
      "content": "- Growth:\n  - 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.\n  - In the medium term, growth is expected to rebound to about 1½ percent per year, with income per capita likely to stagnate.\n- Inflation:\n  - Headline inflation is projected to fall back within the SARB target range (3-6 percent) in the second half of 2023.\n  - Inflation is expected to reach the target range mid-point of 4.5 percent in 2024 and remain there through the medium term.\n- Current account:\n  - Projected to move to a sizable deficit of 2.3 percent of GDP in 2023.\n  - Projected to deteriorate further to about 2½ percent in 2024.\n  - Expected to improve somewhat to around 2 percent of GDP over the medium term as temporary factors dissipate.\n  - Portfolio inflows likely to stay volatile; FDI inflows anticipated to remain low.\n- Fiscal balance:\n  - 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:\n    - Eskom debt relief operation (entails a capital transfer),\n    - Continued transfers to other loss-making state-owned enterprises (SOEs),\n    - Spending on the Social Relief Distress (SRD) grants,\n    - Increased interest payments.\n  - Deficit expected to narrow after FY26/27 assuming improved conditions at Eskom, though public debt would continue to rise.\n- Risks:\n  - External downside: deeper/protracted global slowdown, further weakening of commodity prices, shift in investor sentiment away from emerging markets.\n  - 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.\n  - Upside scenarios: decisive implementation of structural reforms combined with fiscal consolidation; stronger-than-expected private sector participation in the energy sector."
    },
    {
      "heading": "Key Statistics and Fiscal Position",
      "content": "- Public debt is estimated to reach about 70 percent of GDP by the end of FY22/23.\n- Growth projections: 0.1 percent in 2023; about 1½ percent per year in the medium term.\n- Inflation target range: 3-6 percent; expected midpoint 4.5 percent in 2024.\n- Current account deficits: 2.3 percent of GDP in 2023; about 2½ percent in 2024; around 2 percent in the medium term.\n- Overall fiscal deficit: about -6½ percent of GDP in FY23/24."
    },
    {
      "heading": "Safeguarding Macro-Financial Stability — Recommendations",
      "content": "- Fiscal policy:\n  - 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).\n  - Achieving the 2023 Budget objectives requires stronger fiscal consolidation efforts relative to the IMF Staff baseline, within a credible medium-term framework.\n  - Recommendations to stabilize and reduce public debt:\n    - Reduce public spending as a share of GDP.\n    - Continue efforts to reduce the public sector wage bill.\n    - Reduce costly and inefficient subsidies.\n    - Reduce transfers to poorly performing SOEs.\n    - Protect well-targeted social spending and productive public investment.\n  - Improve spending efficiency, including for SOEs, to facilitate adjustment with smaller near-term growth costs.\n  - Broaden the tax base by strengthening revenue administration and reducing tax gaps and tax expenditures.\n  - Strengthen the fiscal framework by:\n    - Introducing a debt ceiling to complement the nominal primary expenditure ceiling.\n    - Addressing deficiencies in public procurement.\n    - Improving public investment management.\n- Monetary policy:\n  - The pace of withdrawal of monetary policy accommodation has been adequate and needs to remain data dependent.\n  - SARB’s increases in the policy rate have helped bring down headline inflation and keep inflation expectations anchored.\n  - Further tightening warranted if the energy crisis and tighter global financial conditions threaten to de-anchor inflation expectations.\n  - 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.\n- Financial sector policies:\n  - 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.\n  - Fiscal consolidation should be the main defense against the financial sector–sovereign nexus.\n  - Consider complementary prudential measures, mindful of procyclicality and unintended negative effects.\n  - Strengthen oversight by closing regulatory gaps and enhancing supervision, including:\n    - 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.\n    - Adopt and operationalize new bank resolution and deposit insurance legislation; step up crisis preparedness.\n  - Promote financial sector competition and an enhanced credit information system to expand SME credit access and financial inclusion.\n  - Promote digital technologies for inclusion while monitoring stability risks.\n  - Embed taxonomy of green economic activities and guidelines on climate-related financial disclosures to strengthen sustainable finance.\n- FATF grey listing:\n  - 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.\n  - South Africa has made significant progress, including passage of two key Acts of Parliament addressing technical compliance deficiencies.\n  - Exiting the grey list requires timely implementation of the agreed FATF action plan; adverse impacts increase the longer a country remains on the list.\n  - Mission encourages stakeholders to work to exit the list quickly and to closely monitor impacts on capital flows and the financial system."
    },
    {
      "heading": "Structural Reforms — Priorities to Achieve Job-Rich, Inclusive, and Greener Growth",
      "content": "- General reform approach:\n  - Implement gradual and sustained reforms with well-targeted compensatory measures that have clear sunset clauses.\n  - Leverage independent institutions, engage stakeholders early, and communicate effectively.\n  - Reform objectives: improve energy security, foster private investment, promote good governance, and create jobs.\n- Urgent reform actions recommended:\n  - Restore energy security:\n    - Attract private sector participation in the electricity market.\n    - Address Eskom’s operational and financial deficiencies.\n    - Conditions attached to Eskom’s debt relief operation should ensure material operational improvement and establish long-term viability if strictly enforced.\n    - Stop further accumulation of municipal arrears to Eskom.\n    - Make electricity tariff setting fully cost reflective.\n  - Implement the Just Energy Transition Investment Plan:\n    - Change carbon intensity of consumption and production, including through the carbon tax and complementary measures.\n    - Provide well-targeted support to affected workers and communities.\n    - Use the energy crisis as an opportunity to expedite renewable energy rollout.\n  - Alleviate transportation logistics bottlenecks:\n    - Decisive actions to improve Transnet’s operational efficiency and commercial viability.\n    - Promote private sector participation in the transport sector to increase capacity and boost exports.\n  - Rationalize SOEs:\n    - Address inefficient SOEs that burden the budget and hinder growth.\n    - Rationalize entities with overlapping mandates or weak public finance rationale.\n    - Ensure remaining SOEs have clear, representative, transparent governance; operate under hard budget constraints; face competitive markets; and have proper autonomy and regulation.\n  - Foster competition and regional integration:\n    - Reduce regulatory burden and entry barriers to foster competitive product markets and private investment, especially for SMEs.\n    - Deepen regional trade integration and leverage the African Continental Free Trade Area.\n  - Tackle high structural unemployment:\n    - Ensure national minimum wage mechanism balances reducing in-work poverty and job prospects for disadvantaged groups.\n    - Introduce greater firm-level flexibility in collective bargaining and streamline enforcement of employment protection legislation.\n    - Improve education quality and facilitate high-skilled immigration to address skill shortages.\n    - Support school-to-job transitions, promote vocational training, improve employability of the inactive population, and make job search more effective.\n    - Increase entrepreneurial capacity, raise education levels, and reform social housing policies to boost participation from remote and traditional settlement areas.\n  - Promote good governance:\n    - Tackle state capture forcefully with strengthened criminal prosecution and enforcement of sanctions against corruption.\n    - Equip anti-corruption agencies with sufficient legal power, capacity, and operational autonomy to prevent political interference.\n    - Use new procurement legislation and regulations to centralize procurement, standardize processes, and increase transparency in line with international good practice.\n  - Address gender disparities:\n    - Gradually advance implementation of the Gender Responsive Budgeting Framework as planned.\n    - Continue efforts to decisively tackle gender-based violence.\n\nInternational Monetary Fund — Staff Concluding Statement of the 2023 Article IV Mission (March 22, 2023).\n\n---\n\n\n References\n\n- South Africa and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2023/03/21/mcs032223-south-africa-2023-article-iv-mission"
    }
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    "Published: March 22, 2023",
    "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:",
    "Growth:",
    "Inflation:",
    "Current account:",
    "Fiscal balance:",
    "Risks:",
    "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.",
    "Fiscal policy:",
    "Monetary policy:",
    "Financial sector policies:",
    "FATF grey listing:",
    "General reform approach:",
    "Urgent reform actions recommended:",
    "[South Africa and the IMF](http://www.imf.org/external/country/ZAF/index.htm)",
    "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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