How South Africa Can Unlock its Economic Potential

IMF News, February 19, 2026

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South Africa demonstrated remarkable economic resilience in the face of global turbulence in 2025, successfully maintaining macroeconomic stability and keeping inflation under control.
In 2025: growth picked up, inflation and interest rates fell, government bond yields narrowed, and both the stock market and Rand strengthened.
Contributing factors cited: sound institutions, flexible exchange rate, abundant natural resources, and credible monetary policy framework.
Significant developments that boosted investor confidence:
- Adoption of a lower, 3 percent inflation target.
- Removal from the Financial Action Task Force (FATF) gray list.
- A credit rating increase from S&P Global.

The new 3 percent inflation target is described as an important policy milestone to strengthen the economic framework and ensure macroeconomic stability.
Expected benefits of low inflation:
- Boost real incomes and purchasing power, with low-income households benefiting the most.
- Relieve pressures on the Rand.
- Lower borrowing costs for individuals, businesses, and the government, encouraging investment, growth, and fiscal sustainability.
Staff analysis finding: greater central bank credibility leads to more rapid declines in inflation and inflation expectations, making it easier to reduce inflation without hurting growth.
Since the new target was announced, inflation has stayed around 3 percent and inflation expectations have declined steadily, enabling the central bank to reduce policy rates and driving down government bond yields.

Given subdued inflation and declining inflation expectations, the current monetary policy stance is viewed as suitably positioned to steer expectations toward the new target.
Conditional outlook:
- Should these conditions persist, the central bank would have room to continue to reduce gradually policy rates, fostering investment and economic growth.
Caveats and operational guidance:
- Persistent global uncertainties and elevated risks necessitate a cautious approach relying on robust economic data.
- Transparent communication and publication of alternative scenarios (as practiced by the South African Reserve Bank) are essential to uphold policy credibility and anchor inflation expectations.

The financial sector demonstrated resilience in the uncertain environment of the prior year.
Contributing measures:
- Strengthening banking resolution and safety‑net frameworks.
- Proactive approach to ensuring banks maintain sufficient buffers.
- Measures to exit the FATF gray list, which contributed to market confidence.
Recommended ongoing actions:
- Remain vigilant and manage risks proactively.
- Regulators should closely monitor emerging risks and enhance supervisory practices.
- Improve small and medium-sized enterprise access to financing.
- Enhance payment system efficiency to promote dynamic, inclusive growth.

Government fiscal strategy (as set out in the 2025 Medium-Term Budget Policy Statement):
- Focus on stabilizing public debt in the near term and lowering it to about 70 percent in the long run.
Role of the 2026 budget:
- Crucial to achieving the strategy’s goals.
- Authorities need to deliver on their target of a primary budget surplus of 1.5 percent of GDP.
Policy measures recommended to achieve fiscal objectives:
- Control the public-sector wage bill.
- Make public procurement more efficient and transparent.
- Maintain close oversight of state-owned enterprises.
- Boost administrative efficiency, including cutting ineffective or duplicated programs.
- Better target social grants and eliminate fraud to direct more resources to those most in need.
- Make full use of digital and AI technology in tax collection to raise compliance and increase revenues.
Longer-term recommendation:
- Establish a clear, well-designed fiscal rule based on prudent debt targets to encourage discipline, build trust in policies, and reduce borrowing costs.

Progress reported under ‘Operation Vulindlela’:
- Electricity sector: reforms permitting private participation contributed to stabilizing supply, including from renewable sources.
- Logistics: reforms opened freight rail and ports to private investment and competition.
- Water sector: ongoing reforms aim to enhance the delivery of municipal services.
Recommended continuation and expansion:
- Continued, resolute implementation of sectoral reforms is crucial for reliable electricity, railways, ports, and water infrastructure.
- Recommend a comprehensive package of cross-sectoral reforms to:
- Improve the business environment.
- Address governance challenges and corruption.
- Increase labor market flexibility.
Quantified potential gains:
- Closing half of the gap between South Africa and emerging market best practices in these areas could result in an increase in real output of up to a 9 percent over the medium term.
- This may support annual growth rates of up to 3 percent, facilitating more sustainable reductions in unemployment and public debt.

International Monetary Fund