IMF sends a warning to South Africa

The International Monetary Foundation (IMF) says South Africa’s new ‘Government of National Unity’ (GNU) needs to focus on fast-tracking structural reforms if it wants to put the economy on a higher and more inclusive growth path.

The group flagged persistent problems in the country—infrastructure issues, unemployment, low growth and high debt—which are major impediments to the turnaround, recommending that it double down on initiatives like Operation Vulindlela to forge ahead.

Following financing assessment discussions with South Africa on 4 September 2024, the IMF executive board released a statement saying that “structural reforms are paramount to support job creation, growth, and prosperity.”

“Such a mandate can turn the economy around from the path of weak growth, high debt, and deteriorating living standards toward high growth, fiscal sustainability, and shared prosperity,” said the IMF.

The GNU, comprising 10 disparate South African parties, took office in June 2024 after the African National Congress (ANC) lost its long-standing parliamentary majority in the recent general elections.

It was acknowledged that the new multi-party government faces significant challenges, including declining real per capita growth, high unemployment, poverty, and inequality, and a rising level of public debt.

In 2023, growth slowed to 0.7% due to power shortages and disruptions, while unemployment hit 32% (now 33.5% with the expanded rate sitting at 42.6%).

Inflation fell to 4.6% in July, within the South African Reserve Bank’s target range. The current account deficit (2023) widened to 1.6% of GDP from 0.5% in 2022, driven by increased imports.

Additionally, despite rising public debt above 74% of GDP, the budget deficit aligned with targets due to strong revenues and spending restraint.

Despite unprecedented electricity shortages and bottlenecks at rails and ports last year, growth stayed positive as economic agents adapted. However, this has left much to be desired, averaging less than 1% growth over the last decade.

“South Africa’s economy has shown resilience in the face of massive disruptions, but persisting structural challenges risk a further erosion of living standards,” said the Washington-based lender.

“Per-capita income growth continued to decline, public debt rose further, and unemployment and poverty rates remained at unacceptably high levels.”

The new administration has said that it is committed to addressing these challenges by continuing structural reforms aimed at addressing supply constraints and bolstering inclusive growth while maintaining fiscal discipline.

This is to be a continuation of Operation Vulindlela,  a joint initiative between the National Treasury and the Presidency, which was created in 2020 and has already hit most of its policy reform targets.

It aims to accelerate economic growth via structural reforms, with a specific focus on energy, digital infrastructure, transport, and water. This should boost investment in the country, improve service delivery, and enhance competitiveness.

It also aims to streamline regulatory processes, eliminate bureaucratic obstacles, and promote public-private partnerships to drive economic development.

So far, it has increased the role of independent power producers, restructured Eskom into three branches, and implemented e-visas and visa waivers.

“The new administration should build on the existing reform agenda but increase its ambition and accelerate implementation to put the economy on a permanently higher and more inclusive growth path,” added the group.

The group touted wide-ranging electricity and transportation-sector reforms, including to foster private sector participation, saying that these have been “indispensable to reinvigorating activity, boosting exports, and supporting the green transition.”

The IMF said that now, “product-market reforms improving the business environment and removing obstacles to trade, complemented by labour-market reforms, are essential to boost investment and employment.”

This was recently echoed by a study by the World Bank, which said that driving an export-oriented strategy can enhance economic growth and job creation while strengthening the economy’s resilience to shocks.

Department of Trade, Industry and Competition’s (DTIC) Deputy Minister Andrew Whitfield previously outlined that this is already part of the new administration’s priorities.

“The creation of an export-oriented economy can be realised through a dedicated focus on implementing measures to boost the competitiveness of local industries in global markets, streamlining export processes, lowering trade barriers, offering financial and technical assistance to exporters, and cultivating beneficial trade alliances with other nations,” explained Whitfield.

Other IMF suggestions

• To restore public finance sustainability, the group suggests that a fiscal consolidation of at least 3% of GDP over three years is needed, focusing on expenditure cuts while protecting vulnerable groups.
• Spending on inequality and health should be deficit-neutral. Strengthening fiscal institutions and improving public investment management will support this adjustment.
• Monetary policy should aim to reduce inflation to the target midpoint, with rate cuts considered only after a sustained decline. Any changes to the policy framework should be carefully managed.
• Financial policies should continue to enhance stability through banking reforms and improved crisis management tools. Ongoing risk monitoring and prudent regulations are crucial.
• Strengthening governance and reducing corruption are essential to reap reform gains, which should be broadly distributed.

With this, the lender expects Africa’s most industrialised economy to grow 1% in 2024 and 1.3% next year. 

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