Structural reform is silver bullet needed for SA economy to grow – OECD

After the disappointing Gross Domestic Product (GDP) figures Statistics SA announced last week that showed the South African economy grew by only 0.1% during the first quarter of the year, everybody is looking for the silver bullet that will help the economy out of its misery. The silver bullet is structural reform.

According to the Organisation for Economic Co-operation and Development (OECD) Economic Surveys: South Africa 2025, South Africa’s GDP is projected to increase by 1.3% in 2025 and 1.4% in 2026, but high uncertainty and declining confidence will weigh on domestic demand, although easing monetary policy will provide support.

The survey found that these four issues should be tackled to help South Africa’s economy grow:

• Sustaining higher growth hinges on undertaking structural reforms
• Reforms are needed to ensure higher potential growth and debt sustainability
• Boosting job creation and improving access to employment opportunities
• Reducing emissions and boosting resilience requires efficient climate policies

The OECD says in the report that swiftly implementing reforms would support fiscal consolidation and investment. “High government debt-servicing costs, close to 22% of revenues, are limiting the fiscal space available for social and growth-enhancing policies.

“Strengthening the fiscal framework through stricter spending controls and reinforced fiscal rules anchored to a stable debt target would support fiscal consolidation and help reduce the risk premium, as well as the risk that elevated government borrowing crowds out private investment.

“Swift implementation of reforms will be key to boosting the current low level of investment. Easing burdensome licensing, permits and complex procurement rules will support firm entry and expansion.”

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Structural reform needed as incentives for investment to grow economy

In addition, the OECD says, reforms in the electricity sector would enhance businesses’ ability to operate efficiently and strengthen their incentives to invest. Lastly, creating a business-friendly environment would support rail investment needs by reforming the governance of transport state-owned enterprises, including by establishing a regulator and promoting competition.

“The increase in tariffs on imports into the US will weigh on exports. An easing in access to pension savings from late 2024 will support consumption. Inflation will fall in the near term following the decline in global oil prices but will strengthen during the second half of 2025 and in 2026, as activity strengthens,” the OECD says.

The organisation expects that fiscal consolidation in 2025 and 2026 will help stabilise public debt, while reinforcing spending rules and broadening the narrow tax base would further support debt sustainability.

“Monetary policy is projected to continue easing in 2025 to slightly below neutral rates. Continued progress in reforms to improve the efficiency and governance of state-owned enterprises, increase the supply of electricity and ease logistics bottlenecks and regulation will support investment and stronger potential growth.”

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Decreasing consumer confidence and volatile rand

However, the OECD points out, consumer confidence fell and exchange rate volatility increased. “Consumer confidence fell in the first quarter of 2025 alongside domestic political uncertainty and geopolitical tensions, wiping out more than its increase over 2024.

“Business confidence remained above its long-term average in the first quarter of 2025, while the unemployment rate increased to 32.6% in the first quarter after decreasing over the previous three quarters. Core inflation continues to ease, reaching 3% in April, slightly above headline inflation, which was 2.8%.”

The OECD also notes that the US increased tariffs on imports from South Africa to 10%, although the exclusion of certain critical minerals and bullion slightly lowers the effective rate. South Africa sends around 7.6% of its exports to the United States, limiting the impact on GDP.

Spreads between South African and US long-term bond yields increased in recent months, suggesting that the perceived risk of investing in South Africa increased. The exchange rate against the US dollar depreciated sharply in early April, although it has reversed since then.

The OECD also says that fiscal policy is consolidating while easing monetary policy will support activity. “The primary fiscal balance excluding one-off items is projected to improve by 0.2% of GDP in 2025 and 0.8% of GDP in 2026.

“Revenue measures include no inflationary adjustment to income-tax brackets, adding 0.2% of GDP of revenues in each fiscal year and additional tax measures to be announced in the 2026 Budget, representing 0.2% of GDP for the 2026/27 fiscal year.

“Conversely, expenditure as a share of GDP is expected to increase in the 2025/26 fiscal year, before easing. This is driven by a 0.2% of GDP increase in water, sanitation and road infrastructure investment and exceptional debt relief for the state electricity operator, Eskom, of around 1% of GDP.”

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Gold and Financial Contingency Reserve Account will help economy

The OECD also says that transfers from the central bank to government accounts (via the Gold and Financial Contingency Reserve Account), equivalent to 0.3% of GDP, will contribute to debt reduction for the second consecutive year, although to a lesser extent.

The organisation notes that the South African Reserve Bank (Sarb) lowered the repo rate by 75 basis points to 7.5% between September and January as inflation eased. The OECD projects that the repo rate will decrease by a further 50 basis points over 2025, but adds that further volatility in the exchange rate is creating significant uncertainty around the outlook for inflation and monetary policy.

Meanwhile, the OECD expects that activity will increase moderately in an environment of significant uncertainty and projects that the economy will grow moderately in 2025 and 2026. “Monetary policy easing and progress in electricity availability are set to support investment.

“Private consumption will benefit to some extent from the 2024 pension reform, which eases access to retirement funds. However, exports will increase only gradually, weighed down by the increase in US tariffs.”

The organisation also says that as economic growth strengthens gradually and the negative output gap narrows, inflation will increase to 4.2% in 2026 while the unemployment rate will decrease slightly to 32.1% in 2026.

However, the OECD warns that risks to the outlook remain high. “On the downside, trade tensions heightened uncertainty and slower progress than expected in easing freight and port bottlenecks could weigh on activity. On the positive side, it says accelerated reform of electricity availability would strengthen the recovery in investment, boosting potential growth.”