10 lost years for South Africa

South Africa’s real GDP growth has been flat for a decade, and the OECD has highlighted the need for urgent reform.

The OECD’s latest economic survey for South Africa said that reforms are needed to advance the country towards meeting its goals of reducing poverty, inequality and unemployment.

Economic growth has averaged only 0.7% per year over the last decade, and with the population growing at a faster rate, GDP per capita is declining.

The unemployment rate has increased in the past decade, averaging 32.5% in 2023/24 compared to around 25% from 2010-15.

South Africa also has one of the most significant income inequalities in the world, with a large part of the population depending on social grants due to struggles in accessing the labour market.

The economy was severely hit by the pandemic, which further pushed up inequality and government debt.

The OECD noted that while real GDP overtook its pre-pandemic level in early 2023, the unemployment rate has not.

Constant primary deficits and sluggish growth have increased debt, putting the nation’s fiscal sustainability at risk.

Public debt has skyrocketed from 31.5% of GDP in 2010 to a projected 77% of GDP in 2025. Debt servicing costs are thus expected to reach 5.2% of GDP in 2025.

“Elevated debt-servicing costs are limiting the government’s ability to fund much-needed social spending and public investment,” said the group.

It added that persistent electricity shortages and logistics bottlenecks have weighed on activity, investment, exports and living standards over recent years.

Limited public and private investment, the high cost of doing business and corruption have also limited growth over the last decade.

Low levels of competition and shortages of skilled workers in several sectors have also limited potential growth.

Recent growth figures stood at 0.7% in 2023 and 0.6% in 2024 amidst load shedding and uncertainty over the national elections.

The latest figures showed that 2025 had a weak start with only 0.1% quarter-on-quarter growth in Q1, which would have been worse had there not been a strong performance from the agricultural sector.

What steps can be taken

However, all is not lost as South Africa has already started to undergo significant reform efforts to address many of these structural constraints.

“Continuing this progress will help rebuild potential growth as supply constraints ease, business and investor confidence increase and job creation accelerates,” said the OECD.

As structural constraints start to lessen, economic growth should accelerate. However, OECD stressed that several reforms need to be prioritised.

On the fiscal side, high public spending pressures have called for a continued consolidation strategy.

The OECD said that this strategy should include stricter spending controls, reinforced spending rules, improved governance and administrative efficiency and reforming SOEs to reduce fiscal transfers

These initiatives should not come at the expense of social and investment spending.

Activity is still projected to increase to 1.3% in 2025 and 1.4% in 2026, which is limited by uncertainty.

Although contractionary fiscal policy limits government spending, monetary policy easing since late 2024 also supports activity.

Exports are expected to increase, but trade tensions will gradually impact them. The pension reform, which eases access to retirement funds, will support consumption.

Investment will benefit from lower interest rates, with the increase expected to lower the unemployment rate to around 32% in 2026.

Reforms to ease bottlenecks in rail transport and ports should support exports, further benefiting jobs and investment.

Conditional on consumer price inflation, the policy interest rate is projected to increase towards the midpoint of the inflation target, growing from 3.2% in 2025 to 4.2% in 2026.

The OECD said that South Africa’s major trading partners have far lower inflation, which weakens the country’s competitiveness.

“Targeting the midpoint of the band and, in a second step, reducing the inflation target band
could more closely align inflation with that of trading partners,” said the group.

“Making the band narrower could better anchor inflation expectations and prevent any target drift in the future.”

While the South African Reserve Bank sets interest rates to meet the target, the National Treasury is the one that sets the range. The Reserve Bank has constantly called for more growth.

The OECD, however, warned that the inflation target is carefully timed, coordinated across government and clearly communicated, which will help minimise output losses and keep expectations anchored.