IMF praise, caution for SA economy

22 September 2010

Commending South Africa’s “impressive” economic performance in recent years, the International Monetary Fund (IMF) forecasts that the SA economy will grow by 3.2% in 2010 and 4.5% over the medium term, with the gap between actual and potential growth closing by around 2014.

This is provided that the global economic recovery is not interrupted, the IMF says in its latest annual report on South Africa’s economy, with Euro zone weakness in particular posing considerable risks to SA’s economic growth.

The IMF projects that South Africa’s employment levels are only likely to return to their 2008 peak by around 2015 – or by 2013, if the economic growth can be raised to 5.5% to 6% percent a year.

“South Africa therefore needs to raise its growth rate to 6 percent, with this growth being more labour-intensive, if it is to create jobs on a large scale,” South Africa’s National Treasury said in a statement on Tuesday. “This is in line with the recent statements by Finance Minister Pravin Gordhan that South Africa needs sustained growth of at least 7 percent a year over a 20-year period to significantly reduce unemployment and poverty.”

Management of capital inflows

On the management of capital inflows, the IMF report supports South Africa’s flexible and floating exchange rate system, while noting that the volatility of the local currency, the rand, has been very high.

“This is accounted for by the fact that non-residents account for nearly 75 percent of the daily turnover of US$10-$12-billion in the South African foreign exchange market,” the Treasury said, with the size of the market and its dominance by non-residents limiting the government’s ability to influence the level of the rand.

The IMF report notes that while increasing foreign exchange reserves may not have much effect on the level of exchange rate, it could be helpful in absorbing large shocks.

Similarly, a small tax on inflows might help slow down the volume of inflows or change its composition. However, taxing inflows might be easily circumvented and its effectiveness eroded over time.

Prudent policies, solid financial sector

The IMF praised South Africa for the prudent fiscal and monetary policies it has been implementing since 2002, saying these had helped to cushion the country’s economy from the full impact of the global economic recession, while giving the government the fiscal and monetary space to support the economic recovery now that the recession was over.

The report commends South Africa for the strength and solid regulation of its financial services sector, a point also noted World Economic Forum earlier this month in its Global Competitiveness Report for 2010.

It also welcomed “ongoing initiatives to increase investment in infrastructure and improve education and health services” in the country.

Challenges

At the same time, the IMF said, South Africa faces several challenges, the overriding policy challenge being “to reduce unemployment and income inequality through labour and product market reforms aimed at raising the country’s growth potential.”

Noting the sharp increase in unemployment resulting from the global economic slowdown, the IMF encouraged the South African authorities “to re-examine labour market institutions, in particular with a view to reduce any policy distortions, and to ensure that businesses and unions have greater flexibility in the wage bargaining framework.”

The Treasury said on Tuesday that, while the government did not share all the views expressed in the IMF’s report, it was “a fair assessment of the economic conditions in South Africa”, and would be carefully considered by the government.

“Many of the issues raised by the IMF report mirror the list of priorities that government is already addressing, including work on inclusive growth and policies aimed at tackling youth unemployment,” the Treasury said.

“Regarding the volatility of the currency, the Minister of Finance has on numerous occasions, including in the 2010 Budget, called for a stable and competitive real exchange rate. In addition, National Treasury has agreed to support the South African Reserve Bank to accumulate foreign exchange reserves.”

The government will update its macroeconomic forecasts on 27 October, when Finance Minister Pravin Gordhan tables the country’s 2010 medium-term budget policy statement.

SAinfo reporter

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