Johannesburg – The International Monetary Fund (IMF) has kept growth projection for the South African economy at 1% for 2017. The IMF said there is little room for fiscal and monetary policy instruments to boost the economy.
This is according to the latest report issued by the IMF, following the conclusion of the Article IV Consultation of South Africa on June 26.
Given the “near-standstill” in economic activity experienced in 2016, growth is projected at 1% for 2017, and 1.2% for 2018. This is due to the recovery in mining and agriculture output, and expected improvements in consumption and investment.
The current account deficit is projected to decline to 3% of GDP in 2017, due to mining and agricultural exports. It is expected to widen to just below 4% of GDP in the medium term.
“Consumer and investor confidence remain low. South Africa’s vulnerabilities have risen, owing to rising government debt and contingent liabilities, especially in state-owned enterprises, and perceptions of weakening governance,” the report read.
Other risks to the economy are related to a decline in commodity process, faster-than-expected rises in global interest rates and declining cross-border integration.
Government debt is expected to reach 56% of GDP by 2020. The IMF also expects inflation to remain below the upper end of the 3% to 6% target band for 2017 and 2018.
The IMF said that the implementation of the budget and a moderate improvement in the fiscal balance will be key in strengthening confidence. The executive board assessment shows a need for a prudent fiscal policy to maintain debt sustainability. It should also focus on growth and pro-poor spending.
Government debt should be stabilised significantly to below 60% of GDP. The board emphasised the need to monitor and manage fiscal risks from explicit or implicit government guarantees. The board also emphasised the reform of state-owned enterprises.
The IMF expects the Reserve Bank to hold interest rates, with a hike expected only if inflation expectations rise.
Reforms needed urgently
“Reforms are urgently needed to reignite growth and render it more inclusive,” the report read. The IMF suggested that entry of new firms in the power generation, telecommunications and transport sectors may reduce costs for a wide range of businesses and support output and job creation.
It further said that wage setting should be reflective of firm-specific circumstances. “Introduction of the national minimum wage, expected in mid-2018, could help millions of employees; its impact on jobs should be monitored, standing ready to take complementary measures to support small firms or youth,” the IMF advised.
“They also encouraged them to promote parallel initiatives to improve labour relations, including implementation of a code of good practice in collective bargaining,” the report read. “Strengthening governance and fighting corruption will also be critical.”
In the financial sector, reforms to the prudential and resolution framework should be completed. “Greater financial inclusion is needed to provide affordable credit to small firms and low-income households,” said the IMF.
Reforms should be complemented with greater competition in the banking system. “Robust implementation of the Financial Intelligence Centre Amendment Act will be important to strengthen the integrity of the financial system.”
Among South Africa’s strengths are its flexible exchange rate, low reliance on foreign currency debt, large domestic investor base, and broadly balanced international investment position. Attracting more “durable” foreign investment and increasing international reserves would make South Africa more resilient, said the IMF.
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