IMF staff completes staff visit to South Africa

8 June 2022

The economy’s recovery from the pandemic should continue this year as lagging sectors (tourism, hospitality, and construction) gradually catch up. Mitigating the impact from COVID-19 and recent floods and preserving well-targeted social outlays are key priorities.

- South Africa needs to urgently remove obstacles to private investment and encourage competition to reignite economic growth in the medium term. Eskom and Transnet should transform their business models to contribute to the sustainability of the public finances.

- A continuation of the monetary-policy tightening, timely initiated by the South African Reserve Bank (SARB), is indispensable to keep inflation expectations anchored.

- Reining in unproductive fiscal spending and using the bulk of the temporary revenues to reduce borrowing needs are key steps to put the debt-to-GDP ratio on a declining path and boost confidence. Strengthening governance will help to ensure durable and inclusive growth.

Washington, DC – June 7, 2022: A staff team from the International Monetary Fund (IMF), led by Ana Lucía Coronel, met with the South African economic authorities and several other counterparts during May 26–June 6, 2022, to discuss recent developments and the economic outlook in the context of its regular surveillance cycle. At the end of the visit, Ms. Coronel issued the following statement:

“As South Africa’s economy emerges from the pandemic-induced contraction, it is benefiting from favorable commodity prices, which have raised exports and government revenue. However, a series of shocks is adversely affecting its outlook. The flooding in Durban, uncertainty about the war in Ukraine, tightening of global financial conditions, and China’s slowdown pose challenges to growth and price stability. Policy action needs to focus on mitigating the impact of these shocks while addressing longstanding structural economic obstacles to growth. Frequent load shedding is an impediment to conducting business in South Africa. Similarly, failures in the transportation system limit the gains from the commodity price boom. Rising inflation hurts the purchasing power of low-income households and negatively affects the country’s competitiveness and financing costs.

“While the IMF staff team expects medium-term inflation to remain near the mid-point of the targeted range, thanks to the SARB’s vigilant monetary policy, Fund staff is increasingly concerned about the growth outlook and its implications on employment, poverty, and inequality. The team reaffirmed its finding that low growth in the last decade has been caused by binding structural constraints, rendering demand-side policies (whether fiscal or monetary) less effective in boosting economic activity. Despite some important progress in addressing the scarring effects of state capture on governance and institutions, sustained efforts are needed to improve procurement processes and deter corruption. It is more urgent than ever to transform the network industries and foster competition to attract private investment, create jobs, and reverse the slide in social conditions.

“The recent conclusion of the digital spectrum auction, and the changes in the licensing of generation capacity in the energy sector are welcome. These actions need to be complemented by broad-based removal of regulatory barriers to investment and competition, while resisting detrimental protectionist policies. There remains a large gap between encouraging policy statements and reform implementation, which undermines the confidence and growth impact of those statements. Improving the functioning of the labor market and the quality of education are also essential to tackle South Africa’s high structural unemployment.

“The operations, finances, and governance of Eskom and Transnet need to be improved decisively and quickly. Any solution to Eskom’s debt problem must be preceded and accompanied by concrete and credible actions to downsize the company’s balance sheet and restore its commercial viability. These include efforts to cut costs and collect arrears, as well as a more predictable tariff-setting mechanism.

Otherwise, Eskom will continue relying on government support and remain a constraint to economic growth and a threat to the sustainability of the public finances. Transnet needs to restore the operational capacity of the freight rail system and improve the efficiency of its ports, including by accelerating reforms that attract private sector investment. These reforms will also contribute to the success of the country’s low-carbon transition and its financing.

“A growth-friendly fiscal consolidation is indispensable to restore policy space, put debt on a declining and sustainable path, and increase market confidence. This will require thoughtful streamlining and re-prioritization of unproductive outlays in favor of crucial ones—notably, promoting COVID-19 vaccination, addressing the damage from the floods, and continuing to support the most vulnerable groups.

Efforts to contain compensation costs and streamline transfers to SOEs while they advance operational and governance reforms need to be stepped up. The financial condition of some municipalities is causing continued deterioration in service delivery and needs to be remedied. The bulk of the fiscal revenues resulting from the temporary commodity price boom should be used to reduce borrowing requirements, as the gains could easily fade away and would not sustain a permanent increase in expenditure.

“The SARB’s focus should continue to be on inflation expectations and ensuring low and stable inflation, while letting the rand absorb shocks. With the unwinding of temporary regulatory easing, banks’ financial indicators should be closely monitored, particularly in small institutions with vulnerabilities. Urgent actions are needed to address shortcomings identified by the Financial Action Task Force in the areas of anti-money laundering and combating the financing of terrorism, which would strengthen South Africa’s role as a financial hub.

“The IMF staff team would like to thank the authorities and all other counterparts for their warm hospitability and very productive discussions.”

Issued by IMF, 8 June 2022

RESPONSE BY TREASURY: 

The 2022 International Monetary Fund (IMF) staff visit to South Africa

The International Monetary Fund (IMF) staff held meetings with South Africa from 26 May to 6 June, 2022 as part of their routine economic surveillance function, as prescribed in the IMF’s Articles of Agreement. The IMF staff discussed economic developments in the country with the Government, the South African Reserve Bank, state-owned enterprises (SOEs), business and academia. The visit by the Staff does not result in a Board discussion or publication of a report on South Africa’s economy

Main findings of IMF as contained in their press statement

The IMF staff is of the view that South Africa’s economic recovery from the pandemic should continue this year as some sectors including tourism, hospitality, and construction, gradually improve. The Staff notes that South Africa is benefiting from favourable commodity prices, which have raised exports.

Nonetheless, the IMF points to various shocks that continue to impact South Africa’s economic outlook; namely the flooding in KwaZulu-Natal, uncertainty arising from the conflict in Ukraine, tightening of global financial conditions and lower economic growth in China.

The IMF staff acknowledges progress made in implementing structural reforms and encouraged South Africa to deepen and speed up implementation of structural reforms to address a number of obstacles. Areas needing urgent attention include: growth, load shedding, and addressing deficiencies in the transportation system which limit the benefits from the higher commodity prices. Other key reform areas highlighted include: improving procurement processes, transforming network industries, fostering competition to attract private investment; and advancing the functioning of the labour market.

In addition, the Staff underscores that operations, finances and governance of Eskom and Transnet should be improved to contribute to the sustainability of public finances.

The Staff emphasised the need to implement growth-friendly fiscal consolidation to ensure that the country’s debt as a percentage of GDP is on a declining and sustainable path. Containment of compensation costs and streamlining transfers to SOEs were some of the recommendations tabled. In addition, the Staff underscored that operations, finances and governance of Eskom and Transnet should be improved to contribute to the sustainability of public finances.

The Staff recommends that the SARB’s focus should continue to ensure low and stable inflation; and that urgent actions are needed to address the shortcomings identified by the Financial Action Task Force (FATF) in the areas of anti-money laundering and combating the financing of terrorism.

Government’s response

The National Treasury acknowledges that South Africa’s economic recovery has been un-even and that risks remain high. In general, the IMF’s concerns are aligned with Government’s response programme to stimulate economic growth, which is guided by South Africa’s Economic Reconstruction and Recovery Plan (ERRP) as well our commitment towards growth and fiscal sustainability as highlighted in the 2022 Budget.

(a) Fiscal framework

In the 2022 Budget, it was emphasized that permanent increases in spending will be financed in a way that does not worsen the fiscal deficit.

On fiscal risks posed by some SOEs, the Presidential State-Owned Enterprises Council is considering their value add and which SOEs will be rationalised or consolidated to reduce their continuing demand on South Africa’s public resources.

The National Treasury is working on a sustainable solution to deal with Eskom’s debt in a manner that is equitable and fair to all stakeholders. Any solution will be contingent on continued progress to reform South Africa’s electricity sector and Eskom’s own progress on its turnaround plan and its restructuring.

(b) Structural reform implementation

National Treasury remains committed to fast-tracking structural reforms to foster job-led growth, as supported through Operation Vulindlela. A total of 26 structural reforms were prioritised and of this total, 8 reforms have been completed while another 11 are progressing well.

Key achievements to date on structural reforms implementation include: concluding the spectrum auction, opening bid windows 5 and 6 of the renewable energy programme, publishing the draft electricity regulation amendment bill, Cabinet approval of the white paper on the National Rail Policy, publishing of the Green Drop report to ensure better monitoring of water and wastewater treatment quality, publishing the revised critical skills list, issuing of the RFP (Request For Proposal) to initiate third party access to the freight rail network. Looking ahead, work is also underway to reform the procurement system and launching of the e-Visa system in 14 countries.

Concerning energy security, the process of unbundling Eskom is underway. On 17 December 2021 the National Transmission Company South Africa SOC Limited (NTCSA) was executed. Eskom has also applied to the National Energy Regulator of South Africa for the transmission license for the Transmission Company.

On environmental matters, South Africa remains committed to address climate change based on science, equity and sustainable development. South Africa’s Presidential Climate Finance Task Team will advise the country on the execution of the Just Energy Transition (JET).

Conclusion

Government recognizes the need to address deep-rooted socioeconomic challenges, including unemployment, inequality, and poverty, while stabilizing government debt. To this end, Government’s steadfast commitment to restoring sustainability to public finances is supported by better than expected revenue collection, albeit temporary, and fiscal restraint. As stated in the 2022 Budget, government is using a portion of the additional revenue to reduce the fiscal deficit and stabilise debt, with the majority targeted to address urgent social needs, promote job creation through the presidential employment initiative, and support the public health sector. Faster implementation of economic and SOE reforms, accompanied by fiscal consolidation to provide a stable foundation for growth, easing of investor concerns, and support a faster recovery and higher levels of economic growth.

Issued by National Treasury, 8 June 2022