South Africa faces low growth, widespread unemployment, and a high reliance on foreign capital inflows. The weak global economic outlook is not helping, but the IMF says in its regular review of Africa’s largest economy, moving forward with planned structural reforms would boost growth and create jobs for a growing population.
South Africa has posted major achievements since the transition to majority rule in 1994. Per capita GDP has increased by 40 percent in inflation-adjusted terms. The poverty rate has dropped by 10 percentage points. Schools and hospitals have been built in previously underserved areas, and government-financed houses have been made available to many in need. Social transfers now reach more than half of all households.
South Africa benefits from strong macroeconomic policy institutions. The government’s medium-term fiscal policy framework has been a pillar of South Africa’s prudent fiscal policy. Monetary policy has anchored inflation expectations. And financial sector policies are at the forefront of international reforms, with the South African Reserve Bank having adopted the Basel III bank capital adequacy rules in January of 2013 and moving to a “twin-peaks” model of banking supervision in 2014.
Muted growth outlook
Still, in recent years, growth has been lower than in peer emerging markets and commodity exporters. Since 2009, South Africa’s growth has averaged 3 percent compared to 5 percent for emerging markets and 4 percent for commodity exporters.
Weak growth in South Africa’s main trading partners, in particular Europe, partly explains this. However, domestic factors played an important role, including labour disruptions or concerns over electricity supply.
The IMF projects growth to slow further to 2 percent in 2013 from 2½ percent in 2012, reflecting global factors as well as softer private consumption growth and sluggish private investment. As the global economy recovers and the government’s infrastructure drive bears fruit, South Africa’s growth should pick up to 3–3½ percent in the coming years.
At these growth rates, the economy creates jobs, but not enough for the growing labour force and those currently without work. Unemployment remains stubbornly above 20 percent, or more than 30 percent when including those who have given up looking for a job. Youth unemployment is even higher at more than 50 percent.
While inequality along racial lines has decreased, income distribution in South Africa remains globally among the most unequal. At the lower end of the wage distribution, households’ purchasing power has stagnated over the last two decades.
Fiscal policy supports activity
Government spending has supported economic activity. Since the global financial crisis, the government has stuck to its spending plans as revenues declined. The spending increases were in part driven by civil service wage increases and a growing numbers of civil servants. The fiscal deficit and government debt have increased as a result.
In its medium-term fiscal framework, the government plans to bring down the deficit and stabilize government debt. The three-year wage deal struck last year with public sector unions is a key element of this consolidation strategy, but spending increases are likely to be limited across the board. Hence, improved service delivery will have to be achieved mainly by doing things better.
Interest rates kept low
The South African Reserve Bank has appropriately kept interest rates low. The central bank has lowered its policy rate repeatedly since the beginning of the global financial crisis. With inflation tracking around 6 percent (6.4 percent year-on-year in August 2013) and global financial conditions set to tighten, the monetary policy stance is finely balanced.
Given South Africa’s high dependency on external capital inflows, exchange rate flexibility has been an important buffer. Developments since May of this year illustrate this.
Concerns over the unwinding of unconventional monetary policy in the United States triggered large outflows from emerging markets, including South Africa. In response, rand depreciation and higher yields increased the attractiveness of South African assets and capital outflows reversed.
But capital flow reversal is a risk which could be triggered by external developments, but also by domestic factors such as spikes in labour unrest. Higher central bank foreign exchange reserves would help lower vulnerabilities.
Structural reforms to the fore
The government’s National Development Plan is a blueprint for the structural reforms that will facilitate high and inclusive private sector–led growth, and a consensus around the plan and its implementation would be crucial to achieve the needed higher growth rates. Implementing the National Development Plan will take time, but will be key to tackling the most binding constraints to South Africa going forward. – IMF