IMF: SA must address governance, corruption vulnerabilities to foster private investment

The International Monetary Fund (IMF) has highlighted three major factors impeding South Africa’s job creation efforts.

These are just part of the outcomes from its “Article IV Consultation with South Africa,” which was held from 17 November to 7 December 2021.

Part of the surveillance function, as prescribed in the IMF’s Articles of Agreement, requires that the IMF has consultations with each member country at least once a year to conduct economic and financial assessments of government policies and provide policy recommendations.

The IMF staff held virtual meetings with the South African government, the South African Reserve Bank, Eskom, business, organised labour and academia.

The outcome of their consultations is summarised in an Article IV Staff Report, which was also considered by the IMF Executive Board on 7 February 2022.

IMF Findings

The IMF, while acknowledging that South Africa faced formidable challenges brought about by the Covid-19 pandemic, found that economic output is capped by structural constraints, weak confidence and less-favourable terms of trade.

The IMF’s outlook for South Africa points to some growth recovery in the near-term but lacklustre medium-term performance.

“South Africa’s economic growth at 4.6 % in 2021 and projects growth at 1.9 % in 2022 with an average of 1.4 % over the medium term,” said the article.

Inflation is to converge to the midpoint of the 3–6 % target range.

The IMF highlights the main downside risks as “slow progress in the implementation of structural reforms, deteriorating health and travel conditions from prospective Covid-19 waves, tightening of global liquidity conditions and Eskom’s operational and debt problems that raise macro-critical challenges.”

On the positive side, the IMF noted that key economic strengths acted as mitigating factors, including a flexible exchange rate regime, a sound inflation targeting framework underpinned by strong central bank credibility and deep domestic financial markets and healthy banks.

The IMF recommends that the SARB continues to unwind the accommodative monetary policy stance.

The IMF believes that efforts to mitigate the pandemic’s impact, notably accelerating vaccination, is a key priority.

Furthermore, it recommended urgently advancing long-standing reforms in order to reignite growth.

“The country needs to address governance and corruption vulnerabilities in order to foster private investment to improve the economy’s productivity and competitiveness.

The IMF also argues that an ambitious and growth-friendly fiscal consolidation over the next three years is necessary to reverse the risky upward trend in the debt ratio and reduce high financing costs while protecting well-targeted social expenditures and investment.

It noted there is an urgent need to reduce transfers to state-owned entities.

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Government’s response

The National Treasury said it acknowledges the difficult juncture South Africa is at.

“In general, the IMF’s concerns are aligned with Government’s response programme to stimulate economic growth, which is guided by South Africa’s Economic Reconstruction and Recovery Plan (ERRP),” said National Treasury in a statement.

The EERP aims to transform the economy through reindustrialising, accelerating economic reforms, improving competitiveness, reducing the high cost of doing business and addressing the weak public sector balance sheet.

The ERRP also seeks to unlock private sector investment and green growth in line with the Vision 2030 National Development Plan.

National Treasury’s economic outlook is somewhat more optimistic than the IMF on the medium-term growth and fiscal outlook.

It is expecting growth in the medium term to be driven by a gradual recovery in confidence and private investment.

But Treasury admits there are significant downside risks.

“National Treasury remains committed to ensuring fiscal and debt sustainability through growth friendly fiscal consolidation to place public debt on a declining path,” it said in a statement.

“Fiscal policy has to balance supporting the economic recovery with rebuilding public finances.”

The South African Government is pinning its hopes on Operation Vulindlela to fast-track structural reforms and foster job-led growth and address long-term structural constraints.

There has been some progress in implementing structural reforms including:

• Increasing the licensing threshold for embedded generation
• Corporatising the Transnet National Ports Authority
• Restructuring Eskom
• Developing the e-visa system
• Reviewing the legal regime governing skilled migration
• Addressing issues blocking the release of high demand spectrum
• Accelerating infrastructure investment
• Securing grant funding to support South Africa’s just transition to a low-carbon, climate resilient future.

“Given the importance of energy security, work is underway to restructure Eskom with the establishment of the Transmission Company as a subsidiary, which was registered by the Companies and Intellectual Property Commission as of 31 December 2021,” said Treasury.

Eskom has also applied to the National Energy Regulator of South Africa for the transmission license for the Transmission Company.

The legal separation of the Generation and Distribution subsidiaries is expected to be concluded by the end of the year.

Government recognises the need to address deep-rooted socioeconomic challenges, including unemployment and poverty while stabilizing government debt.

To this end, they remain committed to a growth-friendly fiscal consolidation, while prioritizing structural reforms
critical to foster strong, sustainable, inclusive, and green growth that will improve the lives of South Africans.

Monetary policy decisions remain data-dependent and the authorities stand ready to take necessary steps to safeguard price and financial stability.

Compiled by Narissa Subramoney

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