SA facing many economic challenges, says IMF team

7 days ago written by

Numerous constraints, like political uncertainty, have held South Africa’s economic growth back, the International Monetary Fund (IMF) says in a statement at the end of an official staff visit to the country. 

The IMF team was led by Ana Lucía Coronel who visited South Africa from 28 May to 11 June to conduct its regular Article IV surveillance activities. Discussions focused on measures and reforms to reignite growth and reduce poverty and inequality.

Cornell says South Africa’s potential is significant, yet growth over the past five years has not benefitted from the global recovery. The economy is globally positioned, sophisticated, and diversified, and several sectors—agribusiness, mining, manufacturing, and services—have capacity for expansion. Combined with strong institutions and a young workforce, opportunities are vast. However, several constraints have held growth back. Policy uncertainty and a regulatory environment not conducive to private investment have resulted in GDP growth rates that have not kept up with those of population growth, reducing income per capita, and hurting disproportionately the poor.

This year, growth is projected to be somewhat higher —at 1.5 percent—but still insufficient to make a meaningful dent in unemployment, poverty, and inequality. South Africa is one of the most unequal economies in the world. More than half of the population lives in poverty and 27 percent of the labor force is unemployed. Absent reform implementation, growth is unlikely to exceed 2 percent over the medium term.

Authorities’ recent reform efforts

The authorities’ stated priorities of strengthening governance and promoting employment present an opportunity to accelerate the growth momentum. Measures adopted to tackle corruption, such as changes in boards and/or management of major state-owned enterprises (SOEs), an inquiry into tax administration, actions to strengthen procurement, the signing of contracts with independent power producers, and in general, the intention to eliminate wasteful expenditure are welcome. However, to durably improve growth and lift people out of poverty, these actions need to be followed by strict enforcement of good regulations, such as the Public Financial Management Act, and the implementation of a broad set of reforms.

Structural reforms to create jobs and improve welfare for all South Africans

Materially turning the economy around toward strong and inclusive growth will require swift implementation of a bold reform agenda. Reforms in product and labor markets must span all sectors of the economy, and implementation carried out expeditiously.

Reforms with a potential for quick payoffs should be implemented right away. These include maximising the benefits of social grants for the poor by reducing intermediation costs; clarifying mining regulation to foster private investment in the sector; and allocating broadband spectrum to the private sector to increase competition, improve the quality of service, and reduce user charges. Other possible quick wins include mitigating skill shortages by addressing onerous visa requirements for hiring skilled workers.

While more wide-reaching reforms may take longer to implement, these should also be promptly initiated. Increasing private-sector participation would support cost-effective energy distribution and transportation. Improving efficiency of SOEs would lower the costs to businesses and consumers, and reduce fiscal risks. Reducing red tape would lower entry barriers for businesses and strengthen competition. Enhancing flexibility in the labor market, improving basic education, and aligning training with business needs would help increase employment over time, particularly that of the youth.

The introduction of the national minimum wage has the potential to benefit workers, but its impact should be carefully monitored, and complementary measures envisaged if undue effects on youth employment and small- and medium-sized enterprises ensue.

Clearly articulating policy and regulatory decisions related to land reform in a fair, transparent, and market-friendly manner would help remove uncertainty, which is currently weighing on investor sentiment.

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