Numbers & Statistics

IMF Executive Board Concludes 2019 Article IV Consultation with South Africa

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Via IMF (Den Internationale Valutafond)

On January 24, 2020, the Executive Board of the International Monetary
Fund (IMF) concluded the Article IV consultation


with South Africa.

Given structural impediments to growth, South Africa’s economic
performance remains subdued, and risks are materializing. Weak private
investment and productivity growth have dampened economic activity to
levels insufficient to raise per-capita income and foster greater
social inclusion. While the sophisticated services sector has been
growing, most other sectors have been stagnant or contracting. South
Africa thus remains an extremely unequal society, with high and rising
unemployment (29 percent), particularly among the youth. Inflation is
estimated to have moderated in 2019 to below the midpoint of the
inflation target range, aided by one-off factors. The current account
deficit is relatively wide and largely financed by non-FDI inflows.
Banks are sound, albeit with pockets of vulnerabilities.

Fiscal deficits have been persistently large due to continued high
expenditure despite weakening revenue performance and state-owned
enterprise (SOE) bailouts. The government deficit is projected to reach
6½ percent of GDP in FY19/20, resulting in significant debt
accumulation—projected to exceed 60 percent of GDP in FY19/20—and
leaving South Africa with no fiscal space. Weaknesses in public
enterprises are resulting in poor service delivery and weighing on the
fiscus through bailouts or administrative interventions. An earlier
monetary policy tightening was unwound in mid-2019 following inflation
moderation, and the policy rate has remained unchanged since.

Policymakers have taken initial steps to advance reforms and streamline
regulations with the purpose of reigniting growth and fostering greater
social inclusion. The Medium-Term Budget Policy Statement (MTBPS)
released in October proposed savings from a rationalization of spending
in goods and services to partially offset large bailouts to the
electricity company Eskom, but projects increasing government debt that
does not stabilize.

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On current policies, staff projects a lackluster growth recovery from
an estimated 0.4 percent in 2019 to 0.8 percent in 2020 and 1.5 percent
in the outer years. Inflation is projected to rebound in 2020 (from an
estimated 4.2 percent in 2019) before easing to slightly below 5
percent in the medium term. The current account deficit is expected to
widen to around 4 percent of GDP over the medium term. The outlook is
subject to risks derived from further delays in adjustment and reform
or changes in investors’ appetite for emerging markets.

Executive Board Assessment


Directors commended South Africa’s monetary framework, anchored on a
credible inflation targeting regime, flexible exchange rate system, and
highly developed financial system. Notwithstanding these buffers,
Directors noted that South Africa is in a difficult situation, given
subdued growth, rising debt, and high poverty and unemployment rates.
In that context, they encouraged the authorities to implement strong
fiscal consolidation and SOE reforms to ensure debt sustainability,
accompanied by decisive structural reform measures to boost
private-sector led, inclusive growth.

With public debt on the rise, Directors encouraged the authorities to
focus on maintaining medium term debt sustainability, through a growth
friendly and expenditure based fiscal consolidation. Noting that the
upcoming budget discussion provides an opportunity for the authorities
to undertake necessary reforms, Directors suggested reductions in the
public wage bill and fiscal contingencies from SOEs, coupled with
improved tax administration and compliance. Directors also highlighted
the importance of protecting priority pro poor social spending and
making education and health spending more efficient given high poverty
and unemployment rates. They also supported introducing a debt anchor
to the fiscal framework and institutionalizing periodic spending

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Directors were concerned with the risks emanating from SOEs, especially
from the electricity company Eskom, and emphasized that budget support
to SOEs needs to be conditioned on well- defined governance and
operational and financial performance targets. They noted that tackling
Eskom’s challenges would not only reduce fiscal deficits and debt but
would also boost business confidence, encourage private investment,
including in green energy, improve macroeconomic policy credibility,
and convey a genuine ambition by the authorities to address state
capture legacies.

Directors also encouraged the steadfast implementation of structural
reforms to fully harness South Africa’s economic potential and foster
greater social inclusion. Beyond the initial steps undertaken,
Directors called for particular focus on product and labor market
reforms, including greater competition and private participation in
network industries, and efforts to improve the business climate and
human capital, and to promote an environment conducive to job creation,
particularly for the youth. Directors also encouraged the authorities
to accelerate reforms to strengthen governance and fight corruption,
including enhancing the AML/CFT framework.

Directors commended South African Reserve Bank’s (SARB) credibility and
strong performance. Amid rising fiscal risks and volatile global
conditions, Directors stressed the importance of continuing to durably
anchor inflation expectations at the targeted level by closely
monitoring upside and downside risks in the context of the flexible
exchange rate regime. They noted that monetary policy has limited
potency to boost growth at this juncture given structural impediments
to growth and called for close coordination between monetary and fiscal
policies. In the context of ongoing SARB reform discussions, Directors
indicated that the SARB’s independence and inflation mandate should be

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Directors welcomed the resilience of the financial sector and called
for continued vigilance, given the recent pick up in unsecured lending.
They also encouraged the SARB to use the forthcoming FSAP as an
opportunity to further strengthen its supervisory and regulatory
framework. Directors welcomed the entry of new players and
technological innovations to promote financial inclusion.

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