SA stands out as having one of the world’s most restrictive business environments, the IMF says, citing burdensome and costly government regulations and high regulatory obstacles, and urging for a package of reforms to cut through the red tape to boost growth and employment.
The IMF’s economists calculate that SA could add 1.8 percentage points to its annual economic growth rate over the medium term, and 1.5 percentage points to annual job growth, as well as cut inequality, with a package of reforms that would close the gap with its emerging market peers.
It would need to control petty and grand corruption, make government more effective, and improve the regulatory and business environment. It would also need to tackle rigidities in the labour market, by streamlining labour laws and wage bargaining, as well as tackling the high cost of commuting.
The IMF’s estimates come after the Reserve Bank said at last week’s monetary policy committee meeting that a scenario of accelerated structural reforms in SA could see economic growth pick up to 3% in 2027, with inflation and interest rates coming down.
The IMF’s findings, in its annual Article IV report on SA published last week, will shift the reform goalposts, reminding SA that it cannot just tackle its immediate crises in electricity and logistics but must also urgently address the broader regulatory and governance morass that plunged the economy into a “growth trap” for more than a decade. IMF economists estimate that productivity has declined by 1.3% a year on average over the past 15 years, and that living standards have eroded, with per capita incomes receding to 2007 levels.
The IMF commended SA for its structural reform efforts and urged the government to implement the next steps in its electricity and logistics reforms with resolve, including by promoting private sector participation.
But it found that SA is lagging far behind other emerging markets on the pace of reforms to enhance its business and regulatory environment and improve labour market flexibility. And it put numbers to the big difference it could make for growth and jobs if SA closed even half the gap with its peers.
It cautioned, however, that “careful communication of reforms and their benefits will be key to maximise support and achieve reform gains”.
In a survey last year it found widespread concerns among South Africans about job losses and the privatisation of the electricity sector.
“These findings suggest that lack of trust can fuel resistance to policy changes, even when the benefits are clearly communicated and mitigating measures are proposed,” the IMF study reported.
Policymakers globally are being urged to reform their economies urgently, to make them more competitive and deal with sectoral and labour force changes, but reform momentum has waned since the global financial crisis because resistance to policy changes has often been an obstacle to broad social support for policy changes, the IMF noted.
The IMF’s annual Article IV reports on its member countries are comprehensive reviews of economic and financial sector performance and of fiscal and monetary policy, but they also usually include in-depth studies on topical issues for each country. This year’s SA report includes a study on implementing a new fiscal anchor and the best way of implementing the lower inflation target that the Reserve Bank has urged.
“Directors saw merit in shifting, at an opportune time, from the current inflation target band to a lower point target, which will require careful design, gradual implementation, close co-ordination and appropriate communication,” the IMF’s board said in its assessment.
The IMF identified a set of “first generation” reforms to address deteriorating governance, citing surging crime rates, corruption, “political gridlock”, opposition to private sector participation and loss of talent among factors that had contributed to SA’s decline. Ambitious governance reforms could boost average medium-term real growth by up to 1.4 percentage points a year, it estimated.
It zeroed in on SA’s very restrictive business environment relative to its peers, pointing to data showing SA’s gap to best practice regulation has widened since 2010 on bureaucratic costs — which capture the extent to which bureaucratic processes and regulations impose costs on individuals and businesses — and administrative requirements, which reflect “the extent and complexity of administrative processes that businesses must navigate to comply with government regulations”. SA also lacks sufficiently impartial public administration.
The IMF urged a set of “second generation” reforms to the labour market, to address SA’s unemployment rate, which is almost six times as high as the average for the largest upper-middle-income countries, with SA also having lower information employment opportunities than countries such as Mexico.
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