IMF welcomes SA’s reform efforts but says more is needed

The IMF has welcomed South Africa’s reform efforts, but says more is needed, noting that despite early signs of economic recovery, economic activity in the country remains subdued. There are simply not enough signs of economic recovery above the 2% needed for growth.

The latest Article IV Consultation of the International Monetary Fund (IMF) provides a sensible assessment of the South African economy, which is broadly aligned with our views, Jee-A van der Linde, senior economist at Oxford Economics Africa, says.

“Although the formation of the government of national unity (GNU) has led to the emergence of a few economic green shoots in the near term, the IMF stresses that the country’s medium- and long-term prospects depend on the implementation of ambitious reforms.”

He points out that while the IMF welcomes the GNU’s commitment to reforms, it notes that despite early signs of economic recovery, “…economic activity remains subdued amid heightened global uncertainty and long-standing structural impediments”.

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IMF’s economic growth expectations

The IMF expects the domestic economy to grow by 1.5% this year, with growth set to increase to 1.6% in 2026 and to 1.7% the following year. Van der Linde says these short-term real gross domestic product (GDP) growth projections are on par with Oxford Economics Africa’s growth forecasts.

“We consider these growth rates sensible given the slow pace of reform implementation.”

President Cyril Ramaphosa’s upcoming state of the nation address (Sona) will probably carry the usual aspirational tone, Van der Linde says. “The necessity of more private sector funding and involvement will be highlighted, but the Sona will likely lack a convincing and bold pro-growth narrative.

“With Finance Minister Enoch Godongwana set to deliver the 2025 Budget on 19 February, South Africa’s developmental needs will challenge government’s commitment to fiscal consolidation. The IMF believes that the budget deficit will stay elevated and that government debt will not stabilise over the medium term.”

This year’s fiscal forecast is notably downcast, with the IMF expecting a wider budget deficit equal to 6.6% of GDP and a primary budget shortfall totalling 1.0% of GDP, Van der Linde says. “Consequently, gross government debt will continue to increase and reach 78.3% of GDP this year, with the IMF forecasting debt levels of 85.6% of GDP in 2030, in line with our debt trajectory.

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IMF’s proposed debt ceiling target

“The IMF’s proposal of a debt ceiling target of 70% of GDP by 2030 and 60% over the long term, aided by an effective fiscal rule, offers a surer path to sustainable debt. However, this would require a careful and concerted effort by government as a debt ceiling might constrain fiscal flexibility, which might be politically unpalatable.”

This chart shows how the IMF’s budget forecasts are slightly more pessimistic than Oxford Economics Africa’s although they expect similar GDP growth rates:

Source: Oxford Economics Africa/IMF

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Some improvements, but not enough says IMF

Van der Linde says private consumption has improved somewhat since the elections in May last year, owing to greater confidence in South Africa’s economic prospects. “Effective monetary policy management, in the form of lower interest rates and benign inflation, is among the main economic contributors in this regard.

“Private-sector business conditions also appear to be improving, with the government seemingly more open to private-sector participation. However, this process remains far too slow amid visible disunity in the government about several policy announcements, which is fuelling political uncertainty.”

Although there has not been load shedding for nearly a year, the domestic economy has little to show for it from a growth perspective as private sector investment has yet to take off, Van der Linde points out.

“The national electricity grid remains vulnerable and Eskom confirmed on 31 January that Stage 3 load shedding would be implemented over the weekend.

“Meanwhile, ongoing logistical constraints remain a concern. Realistically speaking, the economic fundamentals to achieve growth levels north of 2% on a sustained basis are not in place. This not only holds implications for fiscal sustainability but also bodes ill for social cohesion.”