Without decisive action to remove obstacles to investment and reduce the government’s need to borrow, SA will be unable to create lasting growth or employment, the IMF has warned.
In a statement after its most recent mission to SA, the IMF said the country’s cyclical recovery from the pandemic shock has done little to address rocketing joblessness amid deteriorating confidence — worsened by July’s riots, anaemic private sector investment, and weak credit extension.
The IMF expects the economy to come back from 2020’s 6.4% contraction, estimating that output will recover to about 4.6% in 2021. But this is lower than the National Treasury’s forecast of 5.1%. The IMF views the external factors that have helped support the turnaround — such as strong commodity prices and benign financial conditions — as temporary.
It warned of a much more lacklustre medium-term outlook, forecasting that growth will average 1.4% in the following years.
“Declining private investment and productivity, which have been a hindrance to economic growth, need to be urgently reversed so that the country can produce goods and services of higher quality at lower costs that can compete in global markets,” it said.
“The pandemic has also highlighted the crucial need to put the country’s public finances in order to reverse the upward public debt trajectory, thus reducing financing costs, increasing market confidence and attracting investment.”
SA urgently needs to address the structural rigidities that are depressing private investment and hindering inclusive growth and job creation, said the IMF, highlighting issues it has repeatedly warned of in previous years.
These reforms include the need to increase the efficiency of the economy, particularly in network industries such as electricity, telecommunications and transportation that are expensive, unreliable and contribute to the high cost of doing business.
These efforts must be underpinned by “steadfast action” to address the operation and financial problems of two of the most problematic state-owned companies — Eskom and Transnet, it noted.
The IMF also highlighted the need to remove existing regulatory barriers to private investment. It flagged SA’s localisation and industrial policies, which it said “should not be used as a blunt instrument to serve protectionist views and vested interests, which could hinder industrial development and harm competitiveness”.
It emphasised the need for labour market reform — including by introducing greater firm-level flexibility in wage bargaining and improved educational outcomes to better match skills of the young population with the needs of employers.
SA’s public debt should furthermore be put on a more sustainable path, it said.
“An ambitious fiscal consolidation is necessary to restore fiscal space and maximise the impact of structural reforms by welcoming private investment,” it said, arguing that a credible debt anchor such as a self-imposed debt ceiling by the government would help limit debt accumulation when economic activity remains weak.
The IMF lauded the Reserve Bank for its accommodative monetary policy stance, which has helped cushion the economy. It backed governor Lesetja Kganyago’s recent calls for a lower inflation target, warning that the central bank needs to remain vigilant against rising inflation.
SA’s inflation is above that of its main trading partners and emerging-market peers.
“[SA’s] citizens — particularly the poor — would benefit from lower inflation out-turns and expectations,” it said. “Thus, when circumstances allow in the future, the authorities are encouraged to lower the inflation target within a transparent and well-communicated strategy.”
Last month’s decision to increase the benchmark interest rate to 3.75% was appropriate, the IMF said, and in line with the Bank’s planned gradual withdrawal of monetary policy support and commitment to price stability.
In response to the statement, the Treasury said the government notes the risks and policy recommendations outlined by the IMF. The IMF’s concerns are aligned with the government response to boost growth, guided by President Cyril Ramaphosa’s Economic Reconstruction and Recovery Plan, it said.
The recent medium-term budget policy statement outlined the government’s commitment to fiscal sustainability through narrowing the budget deficit and stabilising debt, it noted.
It pointed to reforms in the energy market and at Transnet’s National Ports Authority that are intended to promote private investment, as well as other areas where work on reforms is at an “advanced” stage.
These include the restructuring of Eskom, a review of the skilled migration regime, and work to release high-demand spectrum, slated for March 2022.
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