IMF: high praise for SA economy
19 September 2005
In its 2005 annual country assessment, the International Monetary Fund (IMF) has given a firm thumbs-up to South Africa's economic policies, which it says have resulted in strong growth, low inflation, good fiscal policy management and a marked increase in foreign reserves.
Under Article IV of the IMF's Articles of Agreement, the fund has discussions with members every year. An IMF team visits the country, collects economic and financial information, discusses the country's economic developments and policies with officials and prepares a report.
The IMF's latest report on South Africa, released on Thursday, commends the country's authorities for the remarkable economic progress achieved since democracy in 1994.
"The economy is now growing strongly, inflation has been lowered and has become more predictable, public finances have been strengthened, and the external position has improved markedly," the IMF said. "The expansion in economic activity has created additional jobs.
"Given South Africa's position in the region, the country's strong economic performance has benefited the rest of Africa."
The fund described the short-term economic outlook as favourable. Robust growth is expected from low interest rates, a moderately expansionist fiscal policy and healthy growth in the world economy.
The IMF directors did note that serious economic challenges remain: persistent high unemployment, poverty, large wealth disparities and a high incidence of HIV/Aids.
But they came out in support of the SA authorities' approach to these problems, with policies aimed at raising economic growth in a stable economic environment and initiatives to reduce unemployment and improve social conditions.
The IMF said this strategy could be bolstered by labour market reforms and further trade liberalisation.
Social spending and inflation targeting
The fund said sound fiscal
management had created space for a moderate increase in government expenditure. They supported additional targeted social spending, as well as spending on infrastructure to improve living conditions and expand the productive capacity of the economy.
It also applauded the policy of inflation targeting, which has kept inflation within the target band for two years - and gained credibility, as revealed by the decline in inflation expectations.
"Continued clear communication with the public, emphasising inflation as the overriding objective of monetary policy, will further enhance credibility," the IMF said.
But noting some risks to the inflation outlook - higher oil prices, a weaker rand and higher labour costs - the fund encouraged the authorities to be prepared to adjust interest rates, if necessary, to keep inflation within the target.
Competitiveness
The IMF described South Africa's management of the exchange rate as
"flexible" and beneficial to the country - "being an integral element of its inflation targeting regime and facilitating the adjustment of the economy to external shocks".
It also commended policies aimed at increasing competitiveness through improving productivity and reducing costs. It supported the additional accumulation of international reserves, and agreed with the gradual relaxation of capital controls.
South Africa's banking system was described as "fundamentally sound", with the IMF commending the authorities on initiatives, such as Msanzi, to widen the banking services net to include the poor. The fund said the implementation of the Financial Services Charter and a regulatory framework for specialised basic banking services should accelerate this process.
Employment and income disparities
However, the IMF directors stressed that reducing unemployment was critical to getting the most from the country's economic reforms. They
expressed support for the government's approach, which includes programmes to enhance skills and provide temporary jobs in infrastructure and other projects, as well as measures to foster small business.
They also recommended, however, a "relaxation" of labour market regulations, encouraging the authorities to consider "reducing the scope" of centralised collective bargaining, simplifying the minimum wage structure and moderating minimum wage adjustments, and "streamlining dismissal procedures".
The IMF commended initiatives to improve the efficiency of state-owned enterprises, which it said would increase productivity, encourage infrastructure investment and reduce the cost of doing business in South Africa.
Coming out in support of broad-based black economic empowerment, the fund said a further reduction in social and wealth disparities was key for improving the living standards of the entire population, and ensuring a favourable environment for further social and economic progress.
It noted that progress with land reform had been more limited, and felt it was important to address the obstacles to faster progress, while keeping the programme grounded on well-defined legal principles.
The IMF also said continued firm action against HIV/Aids would help contain the social impact of the disease.
The numbers
The IMF report cited a number of indicators of SA's economic growth:
"South Africa's macroeconomic performance was strong in 2004 and early 2005. Growth was supported by a continuation of sound policies and a favourable external environment. Real GDP grew by 3.7% in 2004, and 3.5% in the first quarter of 2005.
"The fairly broad-based expansion was mainly driven by strong final domestic demand, fueled by growing disposable income, a large reduction in interest rates, and wealth effects arising from rising housing and stock prices.
"The rapid expansion in economic activity led to some increase in employment, contributing to reduce the unemployment rate to 26.2% in September 2004, some four percentage points lower than two years earlier. Subsequently, employment continued to grow, but not sufficiently to offset the impact of a growing labour force, and the unemployment rate rose marginally to 26.5% by March 2005.
"CPIX inflation has remained within the official 3% to 6% target band since September 2003; it fell to the lower end of the target in February 2005, before edging up to 3.5% in June 2005.
"During 2004, the continued strengthening of the rand helped contain inflationary pressures and softened the impact of higher oil prices. Expected CPIX inflation for 2005 and 2006 has been within the target band since late 2004. Growth in broad money and bank credit to the private sector has remained robust.
"The South African Reserve Bank (SARB) has maintained its flexible exchange rate policy while building up international reserves. Gross international reserves increased from the equivalent of 70% of short-term external debt at end-2003 to an estimated 178% as of end-June 2005.
"The higher level of reserves and sound macroeconomic policies have contributed to a further decline in sovereign risk spreads.
"The rand continued to strengthen in 2004, a process that started in 2002. This appreciation … was associated with a rise in commodity prices. Also, large capital inflows resulting from strong global appetite for emerging assets, helped support the rand. This pattern was reversed during 2005, however, with the rand depreciating moderately.
"The external current account deficit widened to 3.2% of GDP in 2004, from 1.5% of GDP in 2003, owing to the rapid growth in domestic demand and the strength of the rand. Import volumes grew strongly, exceeding the growth in export volumes, while the terms of trade remained broadly unchanged. The current account deficit was easily financed by capital inflows.
"The fiscal deficit fell to 1.5% of GDP in 2004/05, from 2.3% of GDP a year earlier, reflecting strong tax revenue performance. Tax revenue rose significantly owing to buoyant domestic demand and greater efficiency in tax collection. An increase in social spending, mainly in the form of targeted grants, was partially offset by the impact of lower domestic interest rates on debt-service payments.
"Asset prices rose strongly in 2004 and early 2005. Low domestic interest rates, favourable growth prospects, and improved business confidence pushed the Johannesburg Stock Exchange all-share index up by 18% in real terms during 2004, and a further 10% in the first half of 2005.
"Also, boosted by falling interest rates and new demand by an emerging black middle class, residential property prices rose by 28% in real terms in 2004, and at a lower rate in recent months."
SouthAfrica.info reporter
