If South Africa continues to implement structural reforms in the electricity and logistics sectors, as well as in respect of business enablement, the economy could reach a 3% GDP growth rate, says the International Monetary Fund (IMF).

IMF senior resident representative for South Africa Tidiane Kinda presented the findings of the organisation’s bilateral discussions, which it holds with member countries every year under Article IV of IMF’s Articles of Agreement, on March 11.

The IMF held Article IV consultations with South African stakeholders including academia and government, between November 11 and 25 last year, having published a report subsequently on January 30 this year.

The IMF held these consultations with the South African government to collect economic and financial information, as well as discuss the country’s economic developments and policies.

South Africa’s GDP grew by 0.7% in 2023 against an average consumer price inflation of 5.9% in the year, which is inefficient to make inroads into alleviating inequality and unemployment.

The IMF expects South Africa’s GDP to grow by 1.5% this year and by 1.8% by 2030.

While GDP growth has slowly been recovering following the appointment of the Government of National Unity in May 2024, risks remain tilted to the downside.

Kinda said some of the country’s domestic risks included non-implementation or slow implementation of structural and fiscal reforms to support growth and stabilise public debt, increasing financing costs and persistent unemployment and inequality.

As of September last year, South Africa’s government debt-to-GDP ratio was at an all-time high of 75.1%, compared with an average ratio of 46% from 2000 to 2023.

Some of the external risks include geo-economic fragmentation and intensification of protectionist policies, as well as disruptions to the global monetary policy calibration or sudden eruptions in financial market volatility.

Slowdowns in major economies such as China could also lead to volatile commodity prices and lower demand for South Africa’s exports, Kinda explained.

To safeguard South Africa’s financial sustainability, a more ambitious fiscal consolidation is needed to put debt on a firmly downward path, with the IMF having suggested a 1% of GDP consolidation a year for three years; continued realism in revenue projects as in the Medium-Term Budget Policy Statement; and the introduction of a fiscal rule introducing a debt ceiling.

The IMF also recommended reducing State-owned enterprise (SOE) operating costs through reforms, since support to lossmaking SOEs has cost an estimated 5% of GDP since 2008.

In this regard, government can rationalise wages and staffing, tackle wasteful expenditure, divest noncore assets and focus on core mandates.

Additionally, implementing regulations and better governance – including for beneficial ownership – in terms of procurement can bode well for South Africa’s fiscal sustainability, as well as more efficient and transparent procurement processes, appeals and monitoring mechanisms.

Importantly, the public sector wage bill has increased by 2.2 percentage points of GDP since 2007 owing to hiring and compensation growing faster than inflation.

The IMF suggested limiting wage increases to below inflation, reducing allowances and pay progression, introducing evidence-based approaches to pay-setting and controlling public-sector workforce growth including through early retirement.

Moreover, Kinda recommended better targeting subsidies toward vulnerable households. One example is the growing allocation of resources to tertiary education subsidies, which largely benefit better-off students and crowd out spending on basic education.

Other reform suggestions by the IMF included broadening the revenue base by ending poorly targeted tax exemptions, strengthening tax administration and raising other taxes to finance health insurance or increasing the effective carbon tax. 

With inflation declining, monetary policy should continue to carefully manage the normalisation of the policy rate towards its neutral level in a flexible and data-driven manner – which the IMF confirmed the South African Reserve Bank is already doing.

However, shifting from the current target band to a lower point target at an appropriate time could help support macroeconomic stability.

Ultimately, accelerating structural reforms remained critical to boost economic growth, including ongoing electricity and logistics reforms and a more business-friendly environment across sectors, including for small and medium-sized businesses to ensure fair access to markets.

The IMF also suggested governance improvement across the board to ensure better whistle-blower protection, operational independence of the National Prosecuting Authority and more professionalised public administration.

The IMF was invited by the Mapungubwe Institute for Strategic Reflection to present its Article IV findings, in Johannesburg, on March 11.