IMF Executive Board Concludes 2021 Article IV Consultation with South Africa

February 10, 2022

Washington, DC : On February 7, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with South Africa.

The recovery has been faster than anticipated but its durability is uncertain. Despite the authorities’ strong policy response to the pandemic, real output contracted by 6.4 percent in 2020. As the mobility restrictions were phased out and terms of trade improved, real output is estimated to have rebounded by 4.6 percent in 2021.The rapid pace of recovery, despite the earlier surge in infections amid low vaccination rates and international travel bans brought by the Omicron variant, could be a source of optimism. However, the economic recovery is deemed fragile, as it was accompanied by worsening unemployment (34.9 percent), weak bank lending to the private sector, and anemic private investment. Despite the growth rebound, poverty and inequality did not show signs of improvement.

Against this backdrop, macroeconomic fundamentals have weakened, and vulnerabilities have increased. The fiscal position deteriorated following the introduction of COVID-19-related measures and the transfers to state-owned enterprises (SOEs), whose operational and financial performance deteriorated further. As a result, the fiscal deficit soared to 9.7 percent of GDP in 2020, before declining to an estimated 8.4 percent in 2021. Public debt is estimated to have reached almost 70 percent of GDP in 2021. The external current account balance turned into extraordinary surpluses as the pandemic compressed import volumes while favorable commodity prices, deemed temporary, boosted exports. Gross fiscal and external financing needs remained elevated. Inflation was well-anchored within the 3–6 percent target range during the pandemic, but rising inflation risks prompted the South African Reserve Bank to start unwinding monetary accommodation in late-2021. Bank soundness indicators, including profitability, solvency, and liquidity, remained solid.

The outlook points to some growth recovery in the near term but lackluster medium-term performance. Growth is projected at 1.9 percent in 2022, before easing to 1.4 percent in the medium term, capped by structural constraints to investment, prevailing policy uncertainty, and elevated public debt, which hinders job creation. Inflation would converge to the midpoint of the 3–6 percent target range. The fiscal deficit is projected to continue to narrow on recovering revenue and phasing out of COVID-19-related measures, but over the medium term, the growing interest bill and demands from SOEs and public servants will keep the fiscal deficit high, above 7 percent of GDP. The debt ratio is expected to continue rising. The external current account is projected to return to a deficit from 2022.

Executive Board Assessment [2]

Directors noted that COVID 19 has exacerbated already low growth, high unemployment and inequality, and elevated public debt. Directors commended the authorities’ strong policy response to the pandemic, which has been supported by anchored inflation expectations, a sound financial system, and a flexible exchange rate. They underscored the need to address longstanding challenges through sound fiscal policy and reforms to support sustainable, green, and inclusive growth.

Directors 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. They viewed the upcoming February budget as an opportunity to define concrete measures, including containing public sector compensation, rationalizing transfers to state owned enterprises (SOEs), streamlining tax expenditures, and better targeting education subsidies. Directors highlighted the need for well targeted social spending to reduce poverty and inequality. Noting the deteriorating performance of SOEs, Directors urged prompt action to strengthen their operations and finances and advance anti-corruption efforts in procurement and administration. They noted that restructuring the national electricity company is critical to ensure energy security, reduce fiscal risks, and transition away from coal powered energy.

Directors welcomed the South African Reserve Bank’s plan to gradually unwind accommodative monetary policy amid rising inflation risks. They recognized its commitment to price stability and focus on strengthening monetary policy transmission to support market functioning. Directors saw merit in reducing the inflation target when conditions allow.

Directors welcomed the financial sector’s resilience to the pandemic while calling for enhanced supervision and regulation and continued monitoring of the deepening bank sovereign nexus. They stressed that greater use of fintech to enhance financial inclusion should be complemented by adequate oversight. Directors encouraged swift completion of the bank resolution framework and the deposit insurance scheme, and measures to strengthen the AML/CFT framework.

Directors stressed the importance of improving economic efficiency and facilitating the green transition through increased competition in product markets and flexibility in labor markets. They emphasized that measures to reduce regulatory barriers and modernize labor markets would support greater private sector participation. These efforts are essential for boosting investment, creating employment, and strengthening the external position. Directors encouraged further actions to strengthen governance and fight widespread corruption, including by safeguarding pandemic related funds.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .

South Africa: Selected Economic Indicators, 2018–202 3

Social Indicators

GDP

Poverty (percent of population)

Nominal GDP (2020, billions of US dollars)

335

Lower national poverty line (2015)

40

GDP per capita (2020, in US dollars)

5,637

Undernourishment (2019)

7

Population characteristics

Inequality (income shares unless otherwise specified)

Total (2021, million)

60

Highest 10 percent of population (2015)

53

Urban population (2017, percent of total)

67

Lowest 40 percent of population (2015)

7

Life expectancy at birth (2017, number of years)

62

Gini coefficient (2015)

65

Economic Indicators

2018

2019

2020

2021

2022

2023

Est.

Proj.

National income and prices (annual percentage change unless otherwise indicated)

Real GDP

1.5

0.1

-6.4

4.6

1.9

1.4

Real GDP per capita 8/

0.0

-1.3

-7.8

3.7

0.3

-0.1

Real domestic demand

1.6

1.1

-8.0

4.0

3.0

1.9

GDP deflator

4.0

4.5

5.3

4.7

1.7

4.7

CPI (annual average)

4.6

4.1

3.3

4.4

4.5

4.5

CPI (end of period)

4.9

3.7

3.2

5.0

4.5

4.5

Labor market (annual percentage change unless otherwise indicated)

Unemployment rate (percent of labor force, annual average)

27.1

28.7

29.2

34.2

35.3

37.0

Unit labor costs (formal nonagricultural)

4.0

4.7

2.9

0.2

4.5

4.5

Savings and Investment (percent of GDP)

Gross national saving

13.6

13.4

14.7

15.3

11.8

11.3

Public (incl. public enterprises) 6/

1.0

0.0

-6.1

-5.3

-4.3

-3.9

Private

12.6

13.5

20.8

20.6

16.1

15.2

Investment (including inventories)

16.5

16.0

12.7

12.2

13.1

13.2

Public (incl. public enterprises excl. inventories) 7/

4.8

4.3

3.9

3.7

3.9

4.0

Private

11.0

11.1

9.8

9.7

9.8

9.8

Fiscal position (percent of GDP unless otherwise indicated) 1/

Revenue, including grants 2/

26.4

26.9

25.3

25.9

27.0

26.5

Expenditure and net lending

30.2

31.7

35.0

34.3

34.5

33.6

Overall balance

-3.7

-4.8

-9.7

-8.4

-7.5

-7.1

Primary balance

-0.3

-1.1

-5.5

-3.9

-2.6

-1.8

Structural balance (percent of potential GDP)

-3.5

-3.9

-4.8

-4.8

-5.0

-5.5

Gross government debt 3/

51.6

56.3

69.4

69.9

74.5

77.7

Government bond yield (10-year and over, percent) 4/

9.4

9.0

9.7

9.9

9.9

...

Money and credit (annual percentage change unless otherwise indicated)

Broad money

5.6

6.1

9.4

6.4

5.8

5.7

Credit to the private sector 5/

5.5

5.5

1.0

2.1

2.7

4.1

Repo rate (percent, end of period) 4/

6.8

6.5

3.5

3.8

3.8

...

3-month Treasury bill interest rate (percent) 4/

7.6

7.2

3.9

3.9

3.9

...

Balance of payments (annual percentage change unless otherwise indicated)

Current account balance (billions of U.S. dollars)

-12.0

-10.0

6.7

12.8

-5.2

-8.6

percent of GDP

-3.0

-2.6

2.0

3.1

-1.2

-2.0

Exports growth (volume)

2.8

-3.4

-12.0

13.5

7.0

3.0

Imports growth (volume)

3.2

0.5

-17.4

10.8

11.2

4.7

Terms of trade

-2.1

4.2

9.4

1.8

-9.7

0.5

Overall balance (percent of GDP)

0.2

0.5

-1.0

0.5

0.1

-0.2

Gross reserves (billions of U.S. dollars)

51.6

55.1

55.5

57.6

58.0

57.3

in percent of ARA (w/o CFMs)

72.0

74.2

78.1

81.0

81.6

80.5

in percent of ARA (w/ CFMs)

78.8

81.6

86.6

89.8

90.5

89.3

Total external debt (percent of GDP)

42.6

47.8

50.8

39.5

42.9

43.4

Nominal effective exchange rate (period average) 4/

-0.6

-5.2

-11.6

7.6

-2.2

...

Real effective exchange rate (period average) 4/

1.7

-3.3

-10.1

9.5

2.0

...

Exchange rate (Rand/U.S. dollar, end of period) 4/

14.4

14.0

14.7

15.9

15.6

...

Sources: Bloomberg, Haver, National Treasury, South African Reserve Bank, World Bank, and Fund staff estimates and projections.

1/ Consolidated government as defined in the budget unless otherwise indicated.

2/ Revenue excludes "transactions in assets and liabilities" classified as part of revenue in budget documents. This item represents proceeds from the sales of assets, realized valuation gains from holding of foreign currency deposits, and other conceptually similar items, which are not classified as revenue by the IMF's Government Finance Statistics Manual 2014.

3/ Central government.

4/ January 11, 2022.

5/ Other depository institutions' "loans and securities" in all currencies.

6/ Public savings are the sum of public corporations and general government gross savings, using SARB financial accounts data. This allows to obtain a private sector savings estimate that excludes SOEs (SOEs are included in the National Accounts), derived as the difference between the National Accounts gross national savings and the public savings.

7/ Inventories data are volatile and excluded from the investment breakdown to help clarify fixed capital formation developments.

8/ Per-capita GDP figures are computed using STATS SA mid-year population estimates.

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