Economy faces challenges: IMF

23 October 2008

The International Monetary Fund (IMF) has welcomed the significant economic progress made by South Africa in recent years, reflected in the country’s relatively high economic growth and rising employment.

“These achievements have been based on sound macroeconomic policies and a transparent policy framework,” the IMF said in its latest annual country report, released on Wednesday.

“South Africa’s economic fundamentals remain strong, the external debt is low, and the financial system is resilient.”

Recent developments, however, had heightened South Africa’s economic vulnerabilities and made the country’s medium-term growth targets more challenging.

“In particular, global food and fuel price shocks have boosted inflation and the external current account deficit, while economic growth has slowed in the context of still-high levels of unemployment and inequality,” the IMF said.

“On the domestic side, an elevated household debt and debt service burden poses further risks to growth.”

The report, completed on 8 September, was compiled by the IMF’s executive board following a staff team visit to South Africa.

The IMF’s executive directors warned in the report that the deteriorating economic outlook had increased the risk to South Africa’s economy posed by a slowdown in capital inflows.

Protecting the economy from a rising current account deficit would require “redoubled efforts to raise South Africa’s national saving rate, improve infrastructure, and implement further structural reforms.”

The IMF welcomed the South African government’s prudent fiscal policies, “and their intention to maintain a broadly neutral fiscal stance in 2008 while strengthening the social safety net in response to the increase in food prices.”

While acknowledging South Africa’s pressing infrastructure and social spending needs, the IMF urged the government to explore ways of meeting these needs without weakening fiscal policy – “for example, by relying more widely on public-private partnerships established within an appropriate transparent regulatory regime.”

The IMF backed the SA Reserve Bank’s policy of inflation targeting, supported the Bank’s monetary tightening in response to food and fuel price hikes, and said the Bank should be ready to “raise interest rates further if supply shocks resume or domestic demand pressures do not dampen as expected”.

While South Africa’s financial system was “sound, well capitalized, and well regulated,” the IMF urged the country’s financial authorities to continue engaging with banks to ensure that their capital and liquidity buffers were adequate.

The IMF also “stressed the importance of structural reforms to boost productivity and employment growth”, while encouraging the government “to persevere with steps to open the economy to greater international competition, strengthen product and labour market competition, and improve education outcomes.”

SAinfo reporter