IMF sends a warning to South Africa

 ·31 Jan 2025

The International Monetary Fund (IMF) has warned that several ongoing issues in South Africa—including elevated fiscal deficits and higher public debts —might dampen its economic prospects for the coming years.

The IMF published the outcome of its Article IV Consultation with South Africa, which was held from 11 to 25 November 2024.

This requires the IMF to conduct economic and financial assessments of its member countries.

Notably, the IMF forecasted that real GDP output growth would accelerate from an estimated 0.8% in 2024 to 1.5% in 2025.

This comes off the back of improved electricity generation, monetary policy easing, and a return of investor and consumer confidence post-elections

The IMF also projects that growth will reach 1.8% by the end of the decade, supported by ongoing electricity and logistics reforms.

However, risks are pointed to the downside, which is related to a possible intensification of geoeconomic fragmentation and protectionist policies in the context of an uncertain global environment.

Although fiscal deficits are moderating, they are still elevated over the medium term.

The IMF also warned that public debt will likely continue to rise under its baseline scenario, and has recommended a more ambitious-than-envisaged fiscal consolidation.

This continues to be a huge problem area for the country and one that might get worse in 2025 due to another round of likely above-inflation wage hikes for government workers and increased social spending.

The fund also indicated that meeting South Africa’s climate goals requires more efforts to increase effective carbon taxation and accelerate the rollout of renewable energy.

More positively, it expects inflation to stabilise around the midpoint of the central bank’s target range (4.5%).

The IMF recommended that the central bank continue to manage the normalization of the policy rate toward the neutral level in a flexible and data-driven manner.

The South African Reserve Bank (SARB) cut interest rates by 25 basis points yesterday, 30 January. This brought the repo rate to 7.50%, which is getting closer to the neutral level of 7.0%.

However, the IMF also argued that transitioning from a target band, currently 3% to 6%, to a lower point target with a well-calibrated tolerance band at an appropriate time can help strengthen macroeconomic stability.

The SARB has regularly called for a lower inflation target from the National Treasury, which it argues will improve South Africa’s competitiveness.

Other more positive aspects for South Africa include the ongoing banking resolution and safety-net reforms, together with macro-prudential measures to bolster capital buffers.

The IMF also welcomed ongoing electricity and logistics reforms, which aim to alleviate critical supply constraints, and called for their ambitious implementation.

Government’s response

National Treasury said that the IMF’s concerns are aligned with the government’s response to addressing immediate and long-term economic challenges.

It said that South Africa’s economic growth prospects are poised to recover in 2025, following a lacklustre economic performance in 2023 and 2024, as household consumption gradually increased.

This was supported by rising purchasing power, employment recovery and wealth gains.

The National Treasury is estimating growth to increase from an expected 1.1% in 2024 to 1.7% in 2025, above and below the IMF’s projections, respectively.

Moreover, risks to the domestic outlook are seen as more balanced than at the time of the 2024 Budget Review.

It added that it is committed to fiscal consolidation and to setting debt on a sustainable path, noting that the fiscal year 2023/24 was also a major success, with the first primary surplus in 15 years being recorded in 2023/24.

A main budget deficit of 4.7% of GDP is expected for the current year, which is then expected to decline to 4.3% in the following financial year.

“Meanwhile, debt as a percentage of GDP is expected to stabilize in the 2025/26 financial year, with debt-service costs as a percentage of revenue also peaking at the same time,” said Treasury.

“The current focus of South Africa’s reform agenda includes the stabilisation of the electricity grid, enhancing the efficacy of freight and ports operations, implementing e-Visas, as well as prioritizing the advancement of targeted industries to enhance the business climate and promoting equitable growth.”

“Nearly 94% of the reforms aimed for implementation by 2024 have been accomplished or are significantly progressing.”

It added that following the success of Operation Vulindlela’s first phase, it will now target reversing local government decline, tackling spatial inequality and advancing a digital government to improve service delivery.

Operation Vulindlela is a joint initiative by the Presidency and National Treasury to unlock growth in the local economy and has dealt with electricity, water telcos and visa reforms.

National Treasury added that ongoing efforts to exit the Financial Action Task Force’s grey list during 2025 are underway, with 16 of the 22 action items having been addressed.

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