Cape Town – The International Monetary Fund (IMF) has released its latest report on South Africa, highlighting the country’s mounting economic and social challenges.
In its latest Article IV Staff Report on South Africa, the IMF projects a minimal GDP growth rate of 0.1% for the year, attributed to increased power outages and weaker commodity prices.
The country’s economy has experienced a sharp slowdown, with growth moderating from 4.9% in 2021 to a mere 2.0% in 2022. This significant decline can be attributed to a series of unfortunate events, including Russia’s war in Ukraine, global monetary policy tightening, severe floods, and an unprecedented energy crisis, the report says.
The impact of these challenges has been far-reaching, affecting various sectors of South Africa’s economy.
“Business and consumer confidence and investor sentiment remain weak, and the sovereign spread for South Africa remains higher than the pre-pandemic level. The average employment level in 2022 was still about 5% lower than in 2019, threatening social cohesion,” the report says.
Adding to the economic woes, South Africa has witnessed a surge in inflation, primarily driven by higher food and energy prices. The headline inflation rate has exceeded the target range set by the South African Reserve Bank (SARB) of 3-6%. Although inflation expectations remain within the target range, the economy is grappling with the adverse effects of rising prices on the cost of living for its citizens.
“In 2022, the current account balance decreased to a -0.5% GDP deficit from a 3.7% GDP surplus in 2021, due to lower commodity prices and logistical bottlenecks. This, together with tighter global financial conditions, shifts in investors sentiment, and increased domestic political uncertainty have weakened the rand,” the report says.
IMF Executive Board Concludes 2023 Article IV Consultation with South Africahttps://t.co/zT49Js00tc
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On the fiscal front, the report says the country has made some progress in narrowing its deficit, which stood at 4.2% of GDP in the fiscal year 2022/23, down from 4.8% the previous year. This improvement can be attributed to increased revenue and expenditure restraint. However, despite this positive development, the government debt-to-GDP ratio has increased to an estimated 70%. This mounting debt burden threatens the country’s long-term fiscal stability.
“Despite this improvement, the government debt-to-GDP ratio is estimated to have increased to 70%. The SARB has proactively raised interest rates to bring down inflation within the target range and anchor inflation expectations, continuing the removal of monetary accommodation,” says the report.
It says the outlook of the economy remains bleak.
“Looking ahead real GDP growth is projected at 0.1% in 2023, reflecting a significant increase in the intensity of power outages, and weaker commodity prices and external environment. Annual growth is expected at about 1½ percent over the medium term, as long-standing structural impediments, such as product and labor market rigidities and human capital constraints offset expected improvements in energy supply, higher private spending on energy-related infrastructure, and a more supportive external environment.”
Furthermore, the fiscal position is projected to deteriorate further due to weakening mineral revenue, the Eskom debt relief arrangement, wage bill pressures, and rising debt service, it says.
“The growth level would be too low to create enough jobs to absorb the new labor market entrants. The fiscal position is projected to deteriorate due to weakening mineral revenue, the Eskom debt relief arrangement, wage bill pressures, and rising debt service. As a result, public debt is not expected to stabilize. Headline inflation would return to the midpoint of the target range by end 2024. The current account deficit is projected to deteriorate to about 2.5 % of GDP in the near term. The outlook is subject to significant uncertainty related to the pace of reform domestically and the challenging external environment,” the report says.
Recognising the gravity of the situation, the Executive Board of the IMF has assessed South Africa’s economic condition and stressed the urgency of implementing reforms to promote sustained and inclusive growth as a means to address the mounting economic and social challenges.
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Compiled by Betha Madhomu
