Corruption, poorly-run SOEs and 4 other major obstacles holdings SA back

Following a consultation period and a recent visit to the country, the executive board of the International Monetary Fund (IMF) has noted that amid a marked growth deceleration, some of South Africa’s economic and social achievements after the end of apartheid have ‘recently unwound’.

“While the economy is globally positioned, sophisticated, and diversified, gaps in physical infrastructure and education create large productivity differentials across sectors,” it said.

“Low consumer and business confidence has dampened productivity growth. Fast growing debt has constrained policy space.

“As a result, per-capita growth has turned negative, the poverty rate stands at around 40%, unemployment has crept up to 27% – almost twice that level for the youth – and income inequality is one of the highest globally.”

It added that while fiscal and monetary policies were eased, growth has remained subdued and the FY 2017/18 consolidated fiscal deficit is estimated to have expanded to 4.8% of GDP from 4% of GDP in FY 2016/17.

Major obstacles to growth include:

  • A regulatory environment not conducive to private investment;
  • Inefficiencies in SOEs increasing the cost of key inputs;
  • Labor market rigidities;
  • Insufficient competition in product markets;
  • Corruption; and
  • Policy uncertainty.

“On current policies, staff projects a modest growth recovery to 1.5% in 2018 and 1.8% in the outer years, slightly above population growth,” it said.

“Inflation is projected to ease to 4.9% in 2018 and edge higher to 5.5% in the outer years. The current account deficit is expected to widen to 2.9% of GDP in 2018 and to around 3.5% percent of GDP over the medium term.”

State-owned enterprises

The IMF said that this baseline scenario is subject to upside developments – but that downside risks seemed more prominent.

“Should structural bottlenecks be addressed, South Africa has broad-based potential to boost growth significantly, aided by deep and liquid financial markets, a solid domestic investor base, a floating exchange rate, and limited susceptibility to exchange rate risk (low foreign currency exposures) and rollover risk (long debt maturities and access to segments of the global financial safety net),” it said.

“However, significant vulnerabilities arise from fiscal risks related to weak and poorly managed state-owned enterprises and other spending pressures,” it warned.

“External risks include large gross external financing needs, and a current account deficit financed by flows that are prone to sudden reversals in response to abrupt changes in global financial conditions and sovereign credit ratings. Disruption in trade flows and a fall in commodity prices would worsen the twin deficits and dampen growth.”

The IMF further urged authorities to deepen the fight against corruption and advance the ambitious reforms in product and labor markets to raise productivity and enhance private sector participation.

They recommended the forceful application of the Public Financial Management Act to increase deterrence against corruption.

It also called for the completion of measures in the telecommunications and mining sectors to attract higher private investment and create employment, and that further progress is needed to contain fiscal risks from state-owned enterprises and rethink the business model.

This should include engaging in strategic equity partnerships with the private sector, it said.

Read: High risk of load shedding today: Eskom

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Corruption, poorly-run SOEs and 4 other major obstacles holdings SA back