Nicola Mawson
The International Monetary Fund (IMF) said yesterday that South Africa has an opportunity to take advantage of its new dispensation to “implement bold reforms to address long-standing challenges and achieve the economy’s full potential”.
The IMF, which was in South Africa between July 1 and 8, made this statement following the conclusion of its Post Financing Assessment (PFA) discussions with the National Treasury.
Its position is broadly in line with that of most market commentators, who see the recently formed Government of National Unity (GNU) as an opportunity to restore confidence in South Africa through the introduction of policies that will remove bottlenecks and fast-track growth.
Noting that South Africa continues to face persistent structural challenges, the IMF said that the government has the chance to “turn the economy around from the path of weak growth, high debt, and deteriorating living standards towards high growth, fiscal sustainability, and shared prosperity”.
Changing the situation will, however, require decisive structural and fiscal reforms, which must be accompanied by prudent monetary and financial policies, the Fund said.
“The new administration should build on the existing reform agenda but increase its ambition and accelerate implementation to put the economy on a permanently higher and more inclusive growth path,” the IMF said.
In assessing South Africa’s ability to repay it as “adequate”, the IMF added that structural reforms are vital when it comes to supporting job creation, growth, and prosperity.
The Post Financing Assessment is related to a $4.3 billion loan granted to South Africa in July 2020 to deal with the effects of the Covid-19 pandemic.
The IMF has indicated that gross domestic product (GDP) growth was expected to reach 1% this year because of improved investor sentiment and electricity generation, and stabilising at 1.4% in the medium-term, as structural bottlenecks ease only gradually.
On Tuesday, Statistics SA reported that second quarter growth was 0.4%, up from 0.0% in the first quarter.
The IMF said risks to growth were broadly balanced, with downside risks mostly relating to “the uncertain external environment and an inability of the new government to agree on needed fiscal and structural reforms”.
Inflation, currently at 4.6%, is expected to reach the midpoint of the target 3-6% range by the second quarter of next year, the IMF said.
It warned, however, that interest rates should only be cut once inflation reaches this midpoint, given risks to the outlook.
“Any change to the monetary policy framework should be carefully timed, well-co-ordinated and communicated to manage expectations and safeguard credibility.”
The IMF added that the fiscal deficit will remain elevated over the medium-term as the result of rising debt service, support to state-owned enterprises, and sizeable spending on public wages and transfers. “As a result, public debt is not expected to stabilise,” it said.
In responding to the IMF, National Treasury said that it recognised the macroeconomic challenges that the IMF highlighted.
“The South African government has affirmed its commitment to prioritise rapid, inclusive and sustainable economic growth to tackle prevailing high levels of poverty and inequality.
“The newly established GNU is firmly committed to addressing immediate and long-term economic challenges,” it said.
National Treasury also added that it was committed to stabilising debt, while preserving economic stability.
Among its focus areas when it comes to the “expenditure ceiling” are upcoming wage agreements, lowering government consumption, implementing fiscal reforms, and reducing risks emanating from state-owned enterprises.
The department, which concurred that there are downside risks to growth, will provide an updated indication of its GDP growth projections at the Medium-Term Budget Policy Statement to be held next month.
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