Political uncertainty and stalled financial reform policies point to a challenging economic outlook for Africa’s traditional financial powerhouse, South Africa.
The young democracy is now facing a growth slowdown with authorities projecting GDP growth of only 0.7 percent for the 2017 financial year. To add to these woes the International Monetary Fund (IMF) predicts little improvement in growth for next year.
IMF team members who have visited South Africa since the end of October have urged South Africa’s Presidential Fiscal Committee to approve fiscal measures as soon as possible to avoid undue increases in debt-to-GDP ratio.
The mission – led by Ana Lucía Coronel – visited South Africa from 30 October to 8 November to discuss recent economic developments and outlook in the context of its regular surveillance activities. At the conclusion of the visit Coronel said despite South Africa’s institutional strength and favourable global conditions, increasing domestic political uncertainty and stalled reforms point to a challenging economic outlook. “Some sectors, including agriculture and mining, are certainly generating growth, but other key activities have stagnated or declined, as investment decisions are being postponed or abandoned.
“IMF staff anticipates that the subdued economic growth of 0.7 percent, projected by the authorities for 2017, is not likely to improve much in 2018. Growth would recover only gradually in the medium term, unless the pace of implementation of structural reforms accelerates quickly enough to prompt a clear recovery in business and consumer confidence. Against current structural constraints, the envisaged growth upturn would be insufficient to reverse the ongoing decline in per-capita income and generate enough jobs to absorb the growing labour force. Downside risks to the outlook relate to worsening perceptions of weak governance; tightening global financial conditions; and slowing trading partner growth.
“South Africa’s slow growth and inefficiencies in public enterprises have taken a toll on public finances by generating a substantial revenue shortfall and prompting unplanned expenditure, as described in the 2017 Medium Term Budget Policy Statement. Against this background, IMF staff welcomes the National Treasury’s candid acknowledgement of the challenges and its call to the Presidential Fiscal Committee to implement reforms to unlock the economy’s potential.
Coronel warned that the Presidential Fiscal Committee should to approve, “in a timely fashion”, fiscal measures to avoid undue increases in the debt-to-GDP ratio, including by strengthening tax revenue compliance and cutting unproductive outlays.
She said the South African economy will also benefit from expeditious action from the Presidential Fiscal Committee to signal the political will to tackle long-standing issues that have led to deteriorating market sentiment. Reforms to improve governance and procurement practices and remove any obstacles to investment are essential.
“Special emphasis should be placed on prompt implementation of sanctions against deviations from the Public Financial Management Act to increase deterrence. Early announcement and timely implementation of a strong adjustment and reform plan is now a priority to restore investor and consumer confidence. This would increase competition in key markets, reduce input costs for households and businesses, and, in turn, lead to a virtuous cycle between economic growth, job creation, and inequality reduction,” she said.