IMF expresses concerns about SA as its outlook remains precarious

The International Monetary Fund (IMF) once more expressed solid concerns about the South African economy despite it having recovered strongly in 2021.

The country emerged from the abyss following an unprecedented real output contraction in 2020.

Macro-economist Miyelani Mkhabela, however, said South Africa’s outlook remained precarious amid projected future low growth below 2.5%, high unemployment – including youth unemployment above 65% – and adverse debt dynamics. He added that the recovery pace is unlikely to be sustained.

In its latest report the IMF was concerned about the country’s position. Following the IMF executive board’s consultation with South Africa, the fund said South Africa’s recovery had been faster than anticipated but its durability is uncertain.

Despite the strong policy response to the pandemic, real output contracted by 6.4% in 2020. As the mobility restrictions were phased out and terms of trade improved, real output is estimated to have rebounded by 4.6% in 2021.

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The IMF recommended ambitious fiscal consolidation to reduce public debt, while protecting the most vulnerable. “This consolidation should be mainly focused on the expenditure side and complemented by revenue administration enhancements and a credible public debt anchor,” its directors said.

The Fund said the February budget was an opportunity to define concrete measures, including containing public sector compensation, rationalising transfers to state owned enterprises (SOEs), streamlining tax expenditures, and better targeting education subsidies.

Late last year the IMF cautioned South Africa about its structural rigidities, such as regulatory barriers to investments, inefficient network connections, an inflexible labour market, graft in government and its SOEs. It said these would impede investment and growth.

Mkhabela, who is CEO and Chief Economist at Antswisa Transaction Advisory, said: “Government debt to GDP in South Africa increased to 83 percent in 2020 from 62.20 percent in 2019. Practically, 2022 will record a government debt of 100% to GDP. For a developing country, this is too risky.”

The South African Reserve Bank (SARB) and the Prudential Authority (PA) preserved adequate liquidity conditions and financial-sector stability.

“Transformation in South Africa will be realised when the Reserve Bank is operating like other Central Banks of the world, such as the United States and European countries. South Africans are at the edge [and some] claim that democracy is not working, as it still doesn’t favour the historically disadvantaged South Africans or black people,” Mkhabela said.

The cyclical recovery from the deep contraction had been faster than expected but its strength is unlikely to be sustained. Bank soundness indicators remain solid, but a deepening bank-sovereign nexus raises some concerns.

ericn@citizen.co.za

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