SA could lift its economic growth rate to above 3% within two years if it implements a strong package of reforms and fixes its public finances, the IMF says in its annual report on SA.
But while the IMF’s economists see an upside scenario in which growth hits 3.6% by 2025 and the public debt ratio subsides to below 65% of GDP, from 72% this year, their own economic forecasts indicate they don’t expect this to happen.
The IMF sees growth averaging just 1.4% in coming years, with the public debt ratio continuing to climb, in the context of a “lacklustre medium-term performance capped by structural constraints, weak confidence and less favourable terms of trade”.
While the upside scenario suggests the gains of reform could flow relatively quickly, the report makes it clear that this would require “a particularly swift, deep and comprehensive reform package cutting across all key areas”, to improve the business environment and lower the costs of key inputs.
The report is the annual Article IV assessment the IMF’s economists conduct for each of its member countries. In an in-depth study in this year’s report they again recommend a range of reforms, many of which SA has long promised.
They weigh in specifically on SA’s ailing state-owned enterprises (SOEs). They note that the SOEs account for more than a third of SA’s GDP and dominate the network industries that provide key inputs to business and investment. The IMF urges the government to reduce the SEOs’ large footprint in the economy and address their weak performance, both of which are major obstacles to economic efficiency and competitiveness, and to the growth of private sector firms, as well as posing fiscal risks.
The government should undertake an inventory of SOEs to decide whether to sell them, liquidate them or restructure and keep them, the IMF suggests, echoing some of the recommendations of a presidential committee on SOEs that reported almost a decade ago. Those it retains must have clear mandates and strong governance — and must operate in competitive markets, the IMF says.
Other emerging markets have SOEs operating in network industries, as do Eskom and Transnet, but the IMF study finds that the extent of state ownership is considerably higher in SA. In other emerging markets, 60% of utility companies have a mix of public and private sector owners, or are managed by private participants that can deliver higher productivity.
“Countries like Brazil and China have taken advantage of private participation to improve incentives for efficiency in SOEs,” says the report, which also details a range of options for successful SOE reform that other countries have followed to address similar difficulties.
“Markets where SOEs operate need to be sufficiently
competitive to encourage company managers to be efficient” through reforms that in other markets have included removing barriers to entry and levelling the playing field between SOEs and private sector players in their industries.
Some countries have promoted the entry of private capital by broadening the ownership structure or using management to hire private sector expertise in transparent competitive processes. The study emphasises that successful reforms require “hardened budget constraints” — so few or no subsidies or bailouts — as well as strengthened regulation to provide incentives.
In its upside scenario, the IMF sees growth of 2.3% this year and 2.8% next year, rising to 3.1% in 2024 and 3.6% in 2025, and the scenario would mean real growth in per capita incomes of 1%-2%, compared to years of stagnation or decline before the Covid pandemic. The fiscal deficit would decline to 1.8% of GDP by 2025 in the upside scenario, from an expected 6.3% this year.
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