IMF warns that SA’s persisting structural challenges pose risk to living standards

The International Monetary Fund (IMF) has warned that South Africa’s persisting structural challenges pose a risk of a further erosion of living standards although the country’s economy demonstrated resilience in the face of massive disruptions.

In a statement released after financing assessment discussions with South Africa last week, IMF’s executive board said growth in South Africa remained positive in 2023 despite unprecedented electricity shortages and bottlenecks at rails and ports as economic agents adapted.

However, the IMF pointed out, that per capita income growth continued to decline, public debt increased further and unemployment and poverty rates remained at unacceptably high levels. The IMF said the new government should use the opportunity of a new mandate to implement bold reforms to address long-standing challenges and achieve the economy’s full potential.

“Such a mandate can turn the economy around from the path of weak growth, high debt and deteriorating living standards toward high growth, fiscal sustainability and shared prosperity. This requires determined structural and fiscal reforms, complemented by prudent monetary and financial policies.”

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New administration must accelerate reform

“The new administration should build on the existing reform agenda but increase its ambition and accelerate implementation to put the economy on a permanently higher and more inclusive growth path.”

The IMF emphasised that structural reforms are vital to support job creation, growth and prosperity.

“Wide-ranging electricity and transport sector reforms, including reforms to foster private sector participation are indispensable to reinvigorate activity, boost exports and support the green transition.

“Product-market reforms improving the business environment and removing obstacles to trade, complemented by labour market reforms are essential to boost investment and employment. Strengthening governance and reducing corruption is essential to reap reform gains, which should be broadly distributed.”

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SA needs ambitious fiscal consolidation – IMF

In addition, the IMF highlighted how important it is for an ambitious fiscal consolidation to restore the sustainability of public finances. “Durable expenditure-based consolidation of at least 3% of GDP over the next three years is required to place debt on a sustained downward path while protecting vulnerable groups.

“Relying on gains from foreign reserves has helped lower borrowing needs but does not substitute the needed fiscal consolidation. Any additional spending initiatives to lower inequality and improve health should be financed in a deficit-neutral way.

“Improving the institutional fiscal framework by adopting a debt rule, bolstering the procurement framework and improving public-investment management can support the adjustment and mitigate fiscal risks.”

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IMF: monetary policy must be carefully managed

The IMF also says monetary policy should carefully manage the descent of inflation to the mid-point of the target range and stay data-dependent. “Given continued uncertainty about the inflation outlook, rate cuts should be considered only once inflation declines sustainably towards the mid-point of the target range.”

The IMF staff assessed that South Africa’s capacity to repay the Fund is adequate under the baseline and downside scenarios. The country is expected to be able to repay the Fund by the end of 2025 and the capacity to repay is also assessed as adequate under a downside scenario, where policies will need to be tightened to contain inflationary pressures and safeguard debt sustainability while protecting vulnerable groups. The flexible exchange rate is expected to act as a shock absorber.

The new government of national unity faces significant challenges, including declining real per capita growth, high unemployment, poverty and inequality, as well as a rising level of public debt, the IMF warned.

“The new administration has committed to address these challenges by continuing ongoing structural reforms aimed at addressing supply constraints and bolstering inclusive growth while maintaining fiscal discipline.”

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IMF economic expectations for SA

The IMF expects South Africa’s growth to reach 1% in 2024 on the back of improved investor sentiment and electricity generation, stabilizing at 1.4% in the medium term, as structural bottlenecks ease only gradually.

Inflation is projected to decline toward the midpoint of the target range in the second quarter of next year. The current account deficit is expected to increase modestly to 2.2% of GDP by 2029, as imports accelerate in line with domestic demand.

The fiscal deficit is projected to remain elevated over the medium term, given rising debt service, support to state-owned enterprises and sizeable spending on public wages and transfers. As a result, the IMF does not expect that public debt will stabilise.

“Risks to the outlook are broadly balanced, with faster reform implementation under the new government of national unity representing an upside risk to growth, while downside risks largely relate to the uncertain external environment and an inability of the new government to agree on needed fiscal and structural reforms.”