South Africa’s GDP per capita has been in recession for the last 5 years: IMF

The International Monetary Fund (IMF) has published the outcome of its consultations with government and other authorities in South Africa, warning that the country’s GDP per capita will continue to decline if it does not act now.

As part of the consultation, IMF staff held meetings with the South African government, the Reserve Bank, state-owned enterprises (SOEs), business, organised labour, and academia.

In its findings, the IMF said that South Africa has undeniable economic potential, but it remains largely untapped. It noted that there are are several downside risks to the economy going forward, including:

  • Weak economic growth;
  • Deteriorating fiscal and debt positions;
  • Difficulties in the operations of state-owned enterprises (SOEs).

The IMF’s baseline scenario assumes that partial reform implementation and continued governance improvement will lift business confidence and gradually allow a limited recovery of investment and consumption.

However, while it forecasts South Africa’s growth will gradually increase from 0.4% in 2019 to 0.8% in 2020 and to 1% in 2021, it warned that per-capita growth will continue to contract in the near term, after it recorded its fifth consecutive decline in 2019.

GDP per capita is a measure of a country’s economic output that accounts for its number of people. It is often used a more accurate representation of real economic growth in a country, as a higher population should yield a greater GDP output.

So while South Africa has avoided overall GDP decline over the years of economic hardship – on a per capita basis, we’re getting poorer, as the growing population becomes less productive.

“With structural constraints largely unaddressed, economic growth remains on a trend decline. Unlike other major emerging markets, growth failed to benefit from the global recovery in the last decade following governance weaknesses and persistent structural rigidities,” the IMF said.

“With annual growth reaching only 0.2% in January-September 2019, per-capita GDP growth is set to contract for the fifth year in 2019. Sub-par returns and falling business confidence, derived from policy uncertainty and rigid labour and product markets, have depressed private investment and exports, and weakened the pace of productivity improvements.” it said.

“Fiscal spending has focused on current outlays with a low growth multiplier, increasing the relative price of non-tradable goods while crowding out investment.”

The IMF further recommended that South Africa create a conducive environment for private sector investment and take a decisive approach to implement structural reforms to boost economic growth.

These include reducing the cost of doing business, streamlining operations of SOEs, releasing the spectrum, improving governance, promoting competition in product markets and addressing labour market issues.

Treasury response 

National Treasury acknowledged the IMF’s report and agreed that South Africa is at a ‘difficult juncture’.

Treasury projects subdued short-term growth, but expects a stronger recovery in confidence moving forward that would result in GDP growth of 1.7% by 2022.

Average inflation expectations for 2019 have fallen from 6% to 4.5%. Most recently, in January 2020, the South African Reserve Bank cut its repurchase rate by 25 basis points, taking into consideration inflation expectations.

“The economic outlook is subject to risks, both domestic and external. Domestically, failure to address governance and operational issues, specifically at SOEs, would continue to weigh negatively on the outlook,” it said.

“National Treasury is mindful of the fiscal risks that SOEs, particularly electricity utility Eskom, present to the fiscal framework. Furthermore, there is commitment to resolve the challenges facing South African Airways (SAA).”

Read: How to fix South Africa’s unemployment crisis

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South Africa’s GDP per capita has been in recession for the last 5 years: IMF