Press Release No. 24/317

IMF Executive Board Concludes Post Financing Assessment Discussions with South Africa

September 4, 2024

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Post Financing Assessment (PFA)[1], and endorsed the Staff Appraisal on a lapse-of-time basis. South Africa’s capacity to repay the Fund is assessed as adequate.

The new government of national unity that took office in June faces significant challenges, including declining real per capita growth, high unemployment, poverty, and inequality, and a rising level of public debt. 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.

Growth slowed to 0.7 percent in 2023, depressed in part by widespread power shortages and disruptions at rails and ports. Unemployment remained elevated, reaching 32 percent at end-2023. Following decisive monetary policy tightening during 2022 and early 2023, inflation fell within the SARB’s 3–6 percent target range last year, moderating further to 5.1 percent in June 2024. The current account deficit widened to 1.6 percent of GDP in 2023 (from
0.5 percent in 2022), driven by higher imports. The budget deficit remained in line with the revised budget target thanks to robust revenues and expenditure restraint, although public debt continued to rise to just above 74 percent of GDP.

Looking ahead, growth is expected to reach 1 percent in 2024, on the back of improved investor sentiment and electricity generation, stabilizing at 1.4 percent in the medium term, as structural bottlenecks ease only gradually. Inflation is projected to decline toward the midpoint of the target range 2025Q2. The current account deficit is expected to increase modestly to 2.2 percent 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, public debt is not expected to stabilize. 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.

Executive Board Assessment[2]

South Africa’s economy has shown resilience in the face of massive disruptions, but persisting structural challenges risk a further erosion of living standards. Despite unprecedented electricity shortages and bottlenecks at rails and ports last year, growth stayed positive, as economic agents adapted. However, per-capita income growth continued to decline, public debt rose further, and unemployment and poverty rates remained at unacceptably high levels.

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. 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.

Structural reforms are paramount to support job creation, growth, and prosperity. Wide-ranging electricity and transportation-sector reforms, including to foster private sector participation, are indispensable to reinvigorating activity, boosting exports, and supporting the green transition. Product-market reforms improving business environment and removing obstacles to trade, complemented by labor-market reforms, are essential to boost investment and employment. Strengthening governance and reducing corruption are essential to reap reform gains, which should be broadly distributed.

An ambitious fiscal consolidation is essential to restore the sustainability of public finances. Durable expenditure-based consolidation of at least 3 percent of GDP over the next three years is required to place debt on a sustained downward path, while protecting vulnerable groups. Reliance on gains on foreign reserves has helped lower borrowing needs but does not substitute for 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.

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. Any change to the monetary policy framework should be carefully timed, well-coordinated and communicated to manage expectations and safeguard credibility.

Financial policies should continue to support financial stability. Ongoing banking resolution and safety-net reforms, together with the new loss-absorbing capacity requirement, significantly strengthen crisis management tools and enhance depositors’ protection. Continued monitoring of risks remains critical, given the sovereign-financial sector nexus. Implementation of prudential regulations, along with the countercyclical buffer, could play a vital role.

Staff assess that South Africa’s capacity to repay the Fund is adequate under the baseline and downside scenarios. South Africa is expected to be able to repay the Fund by end-2025 given ample reserves and manageable external debt service. 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. 

[1] After completing an IMF lending program, a country may be subject to a Post Financing Assessment (PFA). It aims to identify risks to a country’s medium-term viability and provide early warnings on risks to the IMF’s balance sheets. For more details click here.

[2] The Executive Board takes decisions under its lapse-of-time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions.