SA economy to grow by 1%. Unemployment will increase, says IMF

4 months ago written by

Thanks to a resumption of solid agricultural production as the drought in the country abates, South Africa’s rate of real GDP growth is projected to be at least 1% during the rest of 2017. It remains unlikely that this will prevent the further increase of unemployment.

These are some of the finding of the International Monetary Fund (IMF) after a staff team led by Mr. Paolo Mauro visited Pretoria, Johannesburg, and Durban from 3 May to 16 May to conduct the 2017 Article IV consultation discussions with South Africa.

At the conclusion of the visit, Mauro said South Africa is showing signs that a modest improvement in the pace of economic growth is underway. The pace of recovery this year and the next is unlikely to prevent a further increase in unemployment and a continued decline in per capita incomes. An increase in mining output prompted by a moderate rebound in the prices of South Africa’s commodity exports also helped to underpin this moderate outlook.

He said hHeadline inflation is expected to return to below 6% in the second half of 2017 and in 2018. With limited room for stimulus through macroeconomic policies, the priority to stimulate economic growth and job creation rests with structural reforms, notably in product and service markets and in the labour market.

“Against the background of declining business and consumer confidence and rising impatience with longstanding inequalities, the authorities face the dual challenge of reigniting growth and rendering it more inclusive. Addressing that challenge will require early action through an initial set of policy measures to foster entry of new firms in product and service markets and to enhance flexibility in the labor market, as well as clear and consistent communication of the strategy to be pursued. In this regard, staff welcomes the authorities’ recent reaffirmation of their budget objectives as approved by parliament. Implementation of the budget and of an initial set of reforms will be necessary to improve confidence in the next few months.

“In view of the rising public debt ratio, fiscal policy is appropriately focused on maintaining medium-term debt sustainability. To reduce the likelihood of a sizable increase in the cost of government borrowing, a mild but steady reduction in the fiscal deficit would be advisable during the next few years. In addition, reforms of public enterprises would reassure investors and the public at large, with associated benefits for public finances and economic efficiency. Such reforms should focus on stronger governance, enhanced transparency and imposition of penalties for failures to adhere to public procurement guidelines, and quantification of public service obligations.

“Under the current stance of monetary policy, headline inflation is expected to return only somewhat below 6% in the second half of 2017 and in 2018. In line with the inflation targeting framework, it would thus be appropriate for policy rates to remain on hold, and for the central bank to stand ready to increase rates if inflation expectations were to rise.

“With limited room for stimulus through macroeconomic policies, the priority to stimulate economic growth and job creation rests with structural reforms, notably in product and service markets and in the labor market. The focus should be on sectors that provide crucial inputs for most firms in the economy, such as power generation, telecommunications, transportation, and financial services for small-and medium-sized enterprises.”

The team met with Finance Minister Malusi Gigaba, South African Reserve Bank Governor Lesetja Kganyago; senior officials of the National Treasury, South African Reserve Bank, and other government departments; the Congress of South African Trade Unions; and financial market and business representatives.

 

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