The International Monetary Fund (IMF) held virtual consultations with South African officials from 17 November to 7 December to discuss recent economic developments and the outlook of the economy.
In its findings published on Wednesday (8 December), the group noted that South Africa’s cyclical recovery in 2021 has been relatively strong, with estimates of a 4.6% GDP rebound after the economy contracted by -6.4% in 2020.
The recovery was also supported by external factors, such as favourable commodity prices and benign financial conditions, which are likely temporary, it said.
However, it warned that the rebound has not decreased the unemployment rate amid deteriorating confidence, exacerbated by the July social unrest episode, anaemic private-sector investment, and weak credit extension.
“Staff, therefore, projects a lacklustre medium-term outlook, with growth averaging 1.4% per annum, inflation returning to the midpoint of the 3%–6% target range, and the external current account reverting to its structural deficit.”
Without decisive action to address obstacles to investment and reduce the government’s need to borrow, growth and employment will not pick up, it said.
The group further warned that declining private investment and productivity – which have been a hindrance to economic growth – need to be urgently reversed so that the country can produce goods and services of higher quality at lower costs that can compete in global markets.
“Greater investment will generate more job opportunities for many South Africans, reducing poverty and inequality. The pandemic has also highlighted the crucial need to put the country’s public finances in order to reverse the upward public debt trajectory thus reducing financing costs, increasing market confidence and attracting investment.
“Improving the quality of public expenditure will make room for investment in infrastructure and basic services for the population and the provision of well-targeted social support.”
With the ongoing Covid-19 wave, downside risks to the outlook are more prominent, the IMF said.
These include, externally, an extended period of travel restrictions to the region, a sharp drop in the prices of commodities that the country exports, and a sudden tightening of global liquidity conditions.
Domestic risks include additional Covid-19 outbreaks, exacerbating already deteriorating health conditions, continued worsening performance of state-owned enterprises (SOEs), delays or reversals in reform implementation, and social instability.
On the upside, South Africa’s formidable economic potential would sustain strong growth should the necessary reforms and adjustments remove longstanding obstacles to durable economic expansion and poverty reduction.
Reducing growth impediments
The IMF said the government needs to address the following impediments immediately to increase the economy’s productivity and competitiveness and reduce poverty and inequality:
Raise the efficiency of the economy, particularly in network industries
Essential services, such as electricity, telecommunications, and transportation, are expensive and/or unreliable, contributing to the high cost of doing business. The issue needs to be addressed by enhancing competition in these sectors.
There is a need to ensure energy security, upgrade infrastructure, and expedite the long-delayed spectrum auctions to facilitate the digital transition. These reforms will allow entrepreneurs to set up businesses and create jobs, thereby addressing the growing unemployment issue, especially for the youth.
Reduce the existing regulatory barriers to private investment
Red tape and burdensome bureaucratic procedures should be streamlined to give better opportunities for businesses to start and innovate. The option of establishing a business should be open to all entrepreneurs on a level playing field.
Localisation and industrial policies should not be used as a blunt instrument to serve protectionist views and vested interests, which could hinder industrial development and harm competitiveness. It is also important to ensure consistency of localisation and industrial policies with South Africa’s international trade commitments.
Increase labour market flexibility to boost job opportunities and facilitate workforce management
South Africa can benefit from an expanding labour force – something that many other countries cannot because of their demographics. Introducing greater firm-level flexibility in wage bargaining and streamlining the enforcement of employment protection legislation are necessary steps for this labour force to find the right jobs.
Importantly, improving the quality of education and vocational training programs would allow the young population to acquire the skills demanded by employers.
Intensify actions to address weak governance and corruption
Eradicating corruption will help channel talent, investment, and technology toward their best uses and foster public trust in government institutions.
Strengthening the autonomy of anti-corruption agencies, enhancing criminal prosecution, establishing credible deterrence mechanisms, and increasing the transparency of beneficial ownership in procurement contracts are all essential steps.
The restructuring and unbundling of Eskom will be costly for the government and must be accompanied by a substantial downsizing and structural transformation of its operations, notably through a meaningful reduction of procurement and personnel costs.
Eskom spends more than it earns, reflecting both its operational inefficiencies and unsustainable debt level. Competition from private firms is necessary. The resulting higher level of private investment should help finance the energy transition away from coal, contributing to climate change objectives.
The unbundled subsidiaries should operate efficiently without resorting to budgetary funds and maintain sound governance and financial frameworks to guarantee their commercial viability.
Efforts to address the problems in logistics and infrastructure should be accelerated so that South Africa can fully benefit from favourable commodity prices and boost exports without the constraint of transportation deficiencies.
Necessary actions include injecting greater discipline into the company’s operations and fostering private sector participation in the port and railway sectors.
A full inventory of SOEs at all levels of government should be carried out. SOEs that do not meet their objectives or lack economic relevance should be divested or liquidated depending on commercial viability.
SOEs carrying out predominantly government business should have their functions merged into a related government department or an agency under the purview of the budget.