South Africa: Selected Economic Issues

This Selected Economic Issues paper examines economic development in South Africa during 1995–96. The paper highlights that in 1995, the economy of South Africa grew by 3.3 percent, the third consecutive year of economic growth, and it is expected to grow between 3½ and 4 percent in 1996. Some aspects of the unemployment problem are addressed in this paper. The paper also focuses on the implications for policy of the steps taken in 1994 and 1995 to establish an outward-oriented economy, after many years of effective autarky.

Abstract

This Selected Economic Issues paper examines economic development in South Africa during 1995–96. The paper highlights that in 1995, the economy of South Africa grew by 3.3 percent, the third consecutive year of economic growth, and it is expected to grow between 3½ and 4 percent in 1996. Some aspects of the unemployment problem are addressed in this paper. The paper also focuses on the implications for policy of the steps taken in 1994 and 1995 to establish an outward-oriented economy, after many years of effective autarky.

I. Recent Economic Developments

In 1995, South Africa grew by 3.3 percent, the third consecutive year of economic growth, and it is expected to grow between 3 ½ and 4 percent in 1996. Private fixed investment rose strongly, inflation fell, and the renewed access to international private capital markets has accommodated an increase in international reserves, several measures of liberalization of controls on capital flows—most notably the removal of controls on nonresidents when the financial rand mechanism was abolished—and the emergence of a current account deficit. And though private nonagricultural employment stopped falling in mid-1994, it barely grew since then, despite the most favorable macroeconomic conditions in many years, implying yet further increases in open unemployment.

The success of the political transition has far exceeded expectations, in large part because the Government of National Unity acted swiftly to address the negative investor sentiment prevailing prior to the national elections in 1994. Its initiatives encompassed the development of a consensual style of decision-making and commitments to a set of prudent financial and structural policies. These included a program of progressive fiscal deficit reduction, the constitutional guarantee of the independence of the Reserve Bank, a program of trade liberalization under the Uruguay Round, measures to begin to address the many social backlogs, reform of labor legislation to reduce tensions in industrial relations, and commitments to a progressive elimination of capital controls.

The impact of these broad-ranging actions Was evident in the strong recovery of investor confidence during 1994 and 1995, which was achieved notwithstanding the contagion from the Mexican crisis after December 1994. But the depreciation of the rand after mid-February 1996 serves to emphasize that a number of challenges remain.

This paper discusses a number of issues related to these challenges. Some aspects of the unemployment problem are addressed as part of the review of economic developments in the remainder of this chapter. 1/ Subsequent chapters focus on the implications for policy of the steps taken in 1994 and 1995 to establish an outward-oriented economy, after many years of effective autarky. Chapter II discusses the recent experience of capital flows into and out of South Africa, while Chapters III and IV focus on trade policy. Chapter V considers some implications for fiscal policy of the renewed access to international private capital markets, and discusses the potential role of fiscal policy in efforts to strengthen the long-run growth and employment performance of the economy in this context. Chapter VI discusses narrow monetary aggregates in light of concerns that capital inflows may be altering the behavior of M3 and bank credit to the private sector, the principal indicators used currently to assess the monetary stance. Chapter VII focuses on tax policy issues relating to South Africa’s principal export sector, the mining industry, reexamining the issues involved in a context of an outward-oriented growth strategy.

1. Real sector developments

The recovery in economic activity, which had started in 1993, continued through 1995. GDP at market prices grew by 3.3 percent, despite a sharp decline in drought-affected agricultural production and a poor performance by the mining sector (Appendix Table 1 and Chart 1). The major contribution to growth continued to come from domestic demand, rather than net exports, and in particular from private consumption and private fixed investment. Private consumption expenditure continued on a strong upward trend, rising by 4.9 percent in 1995. All the major categories of consumer expenditure grew robustly, but expenditure on durable goods rose particularly vigorously, increasing by 19.4 percent (Appendix Table 4) Public consumption, in contrast, grew by a modest 0.3 percent in 1995.

Chart 1
Chart 1

South Africa: EXPENDITURE ON GDP, 1990–95

(Seasonally adjusted, at 1990 prices)

Citation: IMF Staff Country Reports 1996, 064; 10.5089/9781451840926.002.A001

Source: South African Reserve Bank, Quarterly Bulletin.

Gross fixed investment rose rapidly throughout 1995, led by the private sector (Appendix Table 2). The latter grew by 13.3 percent in 1995, and was particularly robust in the manufacturing sector, where it rose by 21.3 percent; net fixed investment in the manufacturing sector increased by almost 50 percent. Unlike 1993 and 1994, when the growth in manufacturing fixed investment had come mainly from large mineral-beneficiation projects, 1/ the growth in 1995 was broadly based, particularly in the second half of the year. Gross fixed investment by public corporations continued on an upward trend, largely because of an increase in investment by Eskom, the electricity utility, but the increase in gross fixed investment was not sufficient to prevent a further decline in the fixed capital stock of the public corporations. Investment by public authorities 2/ continued on a downward trend in 1995. Since 1990, gross fixed investment by public authorities has declined by over 30 percent with gross fixed investment by general government falling by 15 percent, and that by public business enterprises by around 60 percent. Net fixed investment for the whole economy (at constant prices) increased from 2.6 percent of GDP in 1994 to 3.8 percent of GDP in 1995. The recovery in net investment has been broad based across the economy, with only agriculture, mining, and electricity continuing to show substantial negative net investment.

Inventory accumulation, which had made a substantial contribution to growth of GDP in 1993 and 1994, slowed in the second half of 1995 (Appendix Table 1 and Chart 1). Inventory accumulation in real terms was still running at about 2.3 percent of GDP in the second half of 1995, but this was below the peak levels of close to 3 percent of GDP in the first half of 1995.

As a result, gross fixed investment rose by almost one percentage point to 16.9 percent of GDP in 1995 (Appendix Table 3). Including inventory accumulation, total gross investment increased from 17.7 percent of GDP in 1994 to 19.3 percent in 1995.

Domestic saving dropped from 17.2 percent of GDP to 16.7 percent of GDP, despite a decline in government dissaving, as household saving fell for the second consecutive year, from 6.0 percent of GDP in 1994 to 4.8 percent in 1995, given that the rapid growth in consumption expenditure outstripped growth in personal disposable income; corporate saving remained relatively unchanged, dropping slightly from 15.2 percent of GDP in 1994 to 15.0 percent in 1995. The contribution of foreign saving to the financing of domestic expenditure increased sharply in 1995 from 0.5 percent of GDP in 1994 to 2.6 percent in 1995.

On the supply side, economic activity was dominated by the contrasting fortunes of the primary and nonprimary sectors of the economy (Appendix Table 5). As noted above, value added in the agriculture sector was adversely affected by drought conditions in the summer growing season, and declined by 15 percent in real terms. The mining sector also performed poorly with value added declining by 3.6 percent (Appendix Table 6). Gold production was adversely affected by a fall in productivity 1/ and a decline in the availability of higher grade ores; both contributed to a substantial decline in the average grade of ore milled. Diamond production was also affected by labor unrest, but these problems were compounded by difficulties in the international market for diamonds associated with an increase in the sale of diamonds outside of the cartel organized by the De Beers Central Selling Organization. 2/

In contrast, the performance of the nonprimary sectors was much stronger: value added increased by 4.7 percent in 1995, compared to 2.5 percent in 1994, with industry growing by 6.4 percent and services by 3.6 percent. Growth in industry was particularly strong in the first three quarters of the year, averaging more than 7 percent on an annualized basis, but fell sharply in the fourth quarter because of a decline in value added in the manufacturing sector. Manufacturing production, as opposed to value added, had been subdued for most of the second half of 1995 (Appendix Table 7). Sales and new orders appear to have remained firm, but there was a substantial decline in unfilled orders in the first half of the year, suggesting that a backlog of deliveries had been cleared. Early indications suggest that manufacturing production rebounded at the start of 1996. The service sector grew strongly throughout the year, particularly private sector services. Wholesale and retail trade recovered from a relatively poor first quarter, and grew at a rate of 8–9 percent subsequently. Similarly, the transport sector performed well as did the financial service sector. Growth in general government was very modest, averaging less than 1 percent on an annualized basis.

The upward trend in both producer and consumer prices, which had been a source of some concern in the early part of 1995, was reversed decisively in the second half of 1995 (Appendix Table 10 and Chart 2). The 12-month rate of increase of producer prices declined from 11.1 percent at the. end of the first quarter to 8.8 percent by end-1995, and that of consumer prices declined from 10.0 percent to 7.0 percent over the same period. As discussed below, the tightening of financial policies from the third quarter of 1994 to the middle of 1995 played an important role in the improvement of investor sentiment in the second half of 1995, which underpinned the strength of the rand, and contributed significantly to the deceleration in the rate of inflation in the second half of 1995.

Chart 2
Chart 2

South Africa: CONSUMER AND PRODUCTION PRICES, 1990–1995

(End period)

Citation: IMF Staff Country Reports 1996, 064; 10.5089/9781451840926.002.A001

Source: South African Reserve Bank, Quarterly Bulletin.

The decline in the rate of inflation reflected a sharp fall in the rate of food price increases in the second half of 1995, as a result not only of climatic factors—the drought-depressed meat prices and a mild winter moderated the rate of price increases for fruit and vegetables—but also a number of policy changes. The latter included most notably a reduction of import tariffs on agricultural products, especially meat, and the introduction of agricultural marketing reforms which served to enhance price flexibility (see Chapter III). The decline in food prices provides only a partial explanation of the deceleration of inflation in the second half of 1995, as both the SARB measure for the underlying rate of consumer price inflation and the rate of increase in producer prices (excluding agro-based products) also declined sharply in the second half of 1995. The fall in the underlying rate of inflation was closely linked to downward pressure on prices of imported goods brought about by a combination of a stable rand in the second half of 1995 and lower tariffs (see Chapter III). Prices of imported goods, which were essentially flat in the second half of the year also put downward pressure on domestically produced goods.

More generally, however, the anti-inflationary monetary stance in recent years has clearly achieved a significant degree of success: the underlying rate of inflation has been reduced from around 17 percent in 1991 to 7–8 percent by late 1995 and wage settlements have moderated significantly in nominal terms (Appendix Table 9). Between 1990 and 1994, the 12-month rate of growth of remuneration per worker in the private sector declined from 17 percent to around 10 percent.

Despite the moderation of nominal private sector wage growth in recent years, average remuneration in the private sector increased by 4.6 percent in real terms between 1990 and 1994. As most wage settlements in 1995 reflected the acceleration of inflation that had taken place through May 1995, and did not anticipate the substantial decline in the rate of inflation in the second half of the year, real wages are likely to have increased further in 1995. The impact of this increase in real wages on unit labor costs since 1990 has been partly offset by higher labor productivity, albeit at the cost of a substantial loss of employment. Nevertheless competitiveness has continued to deteriorate since 1990 (Chart 3): the ratio of export prices to private sector unit labor costs declined further, as did the ratio of manufacturing prices to manufacturing labor costs.

Chart 3
Chart 3

South Africa: COMPETITIVENESS AND EMPLOYMENT, 1971–95

(Seasonally adjusted, at 1990 prices)

Citation: IMF Staff Country Reports 1996, 064; 10.5089/9781451840926.002.A001

Sources: South African Reserve Bank, Quarterly Bulletin.1/ Nongold export prices divided by unit labor costs In nonagricultural sector.2/ Manufacturing prices divided by unit labor costs in the manufacturing sector.

The response of employment to the upturn in economic activity in the last three years has been disappointing (Appendix Table 8). Since reaching its nadir in mid-1994, a full year after the start of the economic recovery, employment in the nonagricultural private sector has increased by about 1 percent, representing a net gain of only 30,800 jobs. The modest increase in employment levels must be set against the substantial decline in employment during the recession of 1990–92. Since 1990, employ-ment in the nonagricultural private sector has declined by some 10 percent; employment by public authorities increased somewhat, but overall employment has fallen by more than 6.3 percent, a net loss of some 350,000 jobs.

These trends in employment occur in a context where unemployment is very high. The October Household Survey (QMS) of 1994—which provides the official measure of unemployment—estimates open unemployment at 32 percent of the labor force and Indicates that most of the unemployed—4 million—were black people among whom the unemployment rate was more than 40 percent.

A number of insights into the composition and roots of the unemployment problem and its links to the problem of competitiveness may be derived from the survey results (see Box 1). Half the unemployed black people live in the rural areas, half of them are below 30 years old, 70 percent of them have never worked, and almost all have less than full secondary education (to standard 10). In contrast unemployment of skilled workers across all racial categories was found to be low and consistent with frictional unemployment. These findings are suggestive on a number of counts:

  • the fact that such a large percentage of the unemployed are young people with limited educational attainment who have never worked suggests a special problem at entry level into the workforce for unskilled workers. In particular, it indicates that the vast majority of young people are handicapped not only by the very limited skills they have to offer but alsoby inflexibilities in the price at which they can offer their labor services.

  • the fact that so many of the unemployed live in the rural areas suggests that there are special problems in the rural labor market that are impeding the employment of a substantial proportion of the rural labor force. As the wage-setting mechanisms in the rural labor market are relatively flexible, the problems are likely to extend beyond the functioning of the labor market.

  • the evidence that unemployment of skilled workers is relatively limited, and appears to be frictional, suggests that the markets for skilled labor clear. However, direct firm-level evidence from studies such as the Monitor Study indicates that ski11-intensive sectors—principally manufacturing—are uncompetitive, and hence fare poorly in export markets. The absence of structural unemployment of skilled labor would tend to rule out the obvious explanation, namely that these firms are uncompetitive because union pressures are inflating wages above a market clearing level. This suggests that the appropriate question is why do skilled labor markets clear at wage levels which render the employers of skilled labor internationally uncompetitive? Two factors present themselves: (i) constraints on the supply of skilled labor as a result of inadequate education and training, and (ii) protection from international competition, which enables domestic firms to survive in the domestic market with inflated cost structures, but which impedes them from competing abroad and therefore impedes their growth (see Chapter III).

South Africa: The Composition of Unemployment

The October Household Survey (OHS) of 1994 provides high-quality evidence of the composition and level of unemployment and is used as the official measure of unemployment. A household survey, rather than evidence from registered unemployed persons, is used for this purpose because few of the unemployed register. Field work for the survey was undertaken from the second week of September to end-October 1994. The 1995 results are not expected until mid-1996.

The survey defines the employed as those over 15 years old who, during the week prior to the survey, worked for five or more hours for a wage, profit, or family gain in cash or kind—a very comprehensive definition including many underemployed people and those engaged in informal sector activities. According to the so-called expanded definition, the labor force includes the unemployed who want work, even if they take no action to seek it. This definition is appropriate in South Africa—and is the ILO standard—because job scarcity rather than voluntary unemployment often accounts for nonjob search, but unemployment is also reported excluding these nonsearchers.

The survey has two biases: mining hostels were underenumerated, because security risks prevented full access by enumerators, as were the many new “informal settlements” outside main towns that have developed since 1991. These cancel out: the first exaggerates unemployment while the second understates it, to roughly the same degree. The unemployment rates by age are staff estimates based on data on the age structure of the labor force from the 1991 census.

Key Results

Open unemployment amounted to 32 percent of the labor force, some 4.6 million people in October 1994. Unemployment of skilled workers is low and consistent with frictional unemployment. Most of the unemployed (4 million) were black people, among whom unemployment was more than 40 percent (see Chart 4). Half of these live in rural areas.

Chart 4
Chart 4

South Africa: COMPOSITION OF UNEMPLOYMENT OF BLACK PEOPLE, 1994

Citation: IMF Staff Country Reports 1996, 064; 10.5089/9781451840926.002.A001

Source: October Household Survey 1994; and staff estimates.1/ Including those wanting work but not actively seeking it.2/ Excluding those not actively seeking work.

Half of the black people unemployed were below 30 years old, almost all had less than full secondary education (to Standard 10), almost 70 percent had never worked, and a similar proportion had been unemployed in excess of a year. In only two regions—Gauteng and the Free State—were unemployment rates among young black people (less than 25 years old) less than 50 percent, and black unemployment rates decline steeply with age across the country. There is substantial regional variation in unemployment, even among those more than 25 years old, and unemployment rates are higher for women than for men.

High youth unemployment, and its long average duration, may account for the crime rate. It also may explain how the long-term unemployed survive in the absence of official benefits, since these unemployed are disproportionately young and are generally supported by their families.

The OHS not only illustrates the sheer scale of the unemployment problem, and consequently the need for decisive action to address it, but also suggests that the roots of the problem are multifaceted and will need to be addressed at a number of levels If a coherent strategy to address the unemployment problem is to succeed.

2. The public finances

a. Recent developments

Central government finances, which deteriorated in 1992/93, improved significantly in 1993/94 and only gradually thereafter. 1/ The deficit rose from 4.1 percent of GDP in 1991/92 to 7.9 percent of GDP in 1992/93, before declining to 6 percent in 1993/94 and to 5.7 percent in 1994/95 and to 5.5 percent in 1995/96 (Appendix Table 11). 2/ The 1996/97 budget targets a further decline to 5.1 percent of GDP.

Revenue (excluding extraordinary revenue) varied by little more than 1 percentage point of GDP between 1991/92 and 1995/96, reaching 25.4 percent of GDP in 1995/96 (Chart 5 and Appendix Tables 12 and 13). Total income tax collections were fairly steady throughout the period at about 13.5 percent of GDP, as corporate tax receipts drifted downward from 4.4 percent of GDP in 1991/92 to 3.5 percent in 1995/96, personal income taxes rose from 9.4 percent of GDP in 1991/92 to 10.2 percent in 1995/96. The drop in corporate tax receipts was virtually the result of a decline in tax collections from nonmining companies. Both a prolonged recession and cuts in the corporate tax rate from 48 percent to 40 percent in 1993/94 and to 35 percent in 1994/95 contributed to this outturn. The tax cuts were only partly offset by the introduction of the secondary tax on companies (STC, a tax on distributed dividends); the initial rate of the STC was set at 15 percent in 1993/94 and subsequently raised in 1994/95 to 25 percent. In contrast to corporate tax performance, individual income tax collections rose largely because of inflation-induced bracket creep.

Chart 5
Chart 5

South Africa: GOVERNMENT FINANCES, 1989/90–1996/97 1/

Citation: IMF Staff Country Reports 1996, 064; 10.5089/9781451840926.002.A001

Sources: Dept. of Finance; SARB; and fund staff estimates.1/ Fiscal year ending March 31. Data for 1995/16 is priliminary; and budgetary figures are given for 1996/97. All data is in percent of GDP.2/ Control government expenditure, excluding extraordinary transfers to capitalize the civil service pension funds and the gold and foreign exchange stabilization fund.3/ Central government only: excludes extraordinary capital revenue.4/ includes secondary tax on corporations.5/ Data for 1995/96 comes from the 1995/96 budget.

As regards indirect taxes, the replacement of the general sales tax with the VAT at a rate of 10 percent in September 1991 caused a decline in revenue from 5.9 percent of GDP in 1991/92 to 5 percent in 1992/93; however, this decline was more than reversed when the VAT rate was raised to 14 percent in 1993/94, and collections reached 6.5 percent of GDP. VAT revenue remained around this level through 1995/96. Excise duty revenue (including the fuel tax) held basically steady throughout the period 1991/92–1995/96, despite the strong increase in consumption in 1995/96. The weak performance in 1995/96 is likely to have reflected a rise in evasion. 1/ Customs duty revenue (excluding import surcharges which were eliminated over the period 1994/95–1995/96) was flat between 1991/92 and 1994/95, as the effect of growing imports was offset by lower tariffs, but rose 27 percent in 1995/96 in line with the sharp rise in imports.

Central government expenditure rose by 3.5 percentage points of GDP between 1991/92 and 1992/93, but fell by more than a percentage point to around 31 percent of GDP in 1993/94 and remained at that level in the following two years (Appendix Table 11).

The decline in expenditure of general government since 1992/93 was concentrated in the wage bill and in subsidies to business, and occurred despite higher interest outlays and a rise in capital expenditure (Appendix Table 14).

Between 1991/92 and 1994/95, general government (national and provincial governments) expenditure on protection services was kept virtually stable at about 6 percent of GDP. 2/ Spending on social services was boosted by over 1.5 percentage points of GDP between 1991/92 and 1992/93 and thereafter remained roughly constant as a proportion of GDP. In contrast, spending on economic services was reduced by 1.3 percentage points of GDP between 1991/92 and 1994/95 (Appendix Tables 15 and 16). General government spending in 1995/96 is estimated to have remained at about its 1994/95 level of 32.5 percent of GDP. 3/

The increase in capital spending in 1995/96 reflects in part an improved delivery rate in expenditure under the Reconstruction and Development Program (RDP). The RDP fund is designed to allow rapid mobilization of resources for special initiatives to redress inherited inequities. The fund is financed by an equivalent reduction of planned allocations to spending departments and is to increase by R 2.5 billion in each budget through 1998/99. In 1994/95 the turnover of funds was quite slow and it is estimated that more than half of the funds were rolled over into 1995/96. While 1995/96 saw a further rollover of funds (of R 1–2 billion) out of the R 5 billion (or 1 percent of GDP), the rate of expenditure take-up increased substantially, and outlays under the RDP were estimated at 0.6–0.8 percent of GDP in 1995/96.

The Central Government’s debt-to-GDP ratio, which stood at 37.2 percent at the end of 1990/91, rose to 55.3 percent at the end of 1995/96. Part of the increase in debt reflects transactions that were not included in above-the-line deficits. 1/ These transactions, as identified from financing data compiled by the Reserve Bank (Appendix Table 17), are: (a) the losses associated with the provision of forward cover for foreign borrowing by the Reserve Bank on behalf of the government; 2/ (b) transfers to cover the actuarial underfunding of state pension funds which totaled R 10.3 billion between 1991/92 and 1993/94; 3/ (c) government securities issued at coupon rates below market interest rates that result in a discount on government paper. As debt statistics are compiled at book values, the practice of discounting amplifies the stock of outstanding debt; and (d) the assumption of debts of the former homelands, which resulted from overdraft facilities and were guaranteed by the Central Government and amounted to R 13 billion by the end of 1995 (Appendix Table 18).

b. 1996/97 budget

On March 13, 1996, the budget for fiscal year 1996/97 was presented to Parliament. The budget envisages a decline in the overall deficit from 5.5 percent of GDP in 1995/96 to 5.1 percent, 4/ To meet this target, the budget includes a combination of higher revenue and lower expenditure. Revenue (excluding extraordinary revenue) is projected to rise slightly from 25.4 percent of GDP to 25.5 percent, while outlays are projected to decline from 31.2 percent of GDP to 30.9 percent. As capital outlays are budgeted to decline somewhat, government dissaving (including extraordinary receipts) is projected to decline from 2.9 percent of GDP in 1995/96 to 2.7 percent in 1996/97.

Financing of the deficit is to be done almost wholly through the issue of government securities in the domestic market. The Government intends to continue to issue debt at a discount, as well as zero-coupon instruments. The net issue of securities resulting from the budget should lead to a slight decline in the overall government debt-to-GDP ratio from 55.3 percent in 1995/96 to 54.9 percent in 1996/97; however, this does not reflect potential off-budget increases in debt owing to the further assumption of the debt balances of the former homelands.

The main measures on the revenue side include: a temporary 17 percent tax on the monthly gross interest and net rental income of retirement funds (estimated yield 0.5 percent of GDP); tax administration improvements as a result of improved cross-checking capabilities and tighter enforcement of rules barring tax avoidance schemes, owing to the merger of the Inland and Customs Revenue Services to form the South African Revenue Service, that are projected to yield 0.3 percent of GDP (equivalent to a 1 percent increase in revenue from income and value-added taxes); hikes in specific excise taxes, stamp duties, and the fuel levy that are projected to yield an additional 0.2 percent of GDP. The VAT rate was maintained at 14 percent, exemptions for fee-based financial services (effective October lf 1996) and gambling were removed; the net yield will be small, however, as the broadening of the VAT base was done concurrent with the elimination of the financial services levy.

Income tax regulations were changed to correct for past bracket creep and are expected to yield a revenue loss of 0.4 percent of GDP. In addition, the minimum taxable income threshold was raised, the number of tax brackets was lowered from 10 to 8, and the maximum tax bracket was increased from R 80,000 to R 100,000 (with an unchanged 45 percent marginal tax). The secondary tax on companies was halved to 12.5 percent, effectively reducing corporate income tax rate from 48 to 42 percent, but no revenue loss is expected because this tax has been increasingly avoided through the payment of dividends in scrips. The corporate income tax rate was maintained at 35 percent. Other measures that cut tax rates include the halving to 0.5 percent of the marketable securities tax and the stamp duty on securities that are estimated to yield a loss of revenue of 0.2 percent of GDP.

The revenue projection excludes dividend payments from state enterprises that last year amounted to 0.1 percent of GDP, but the authorities intend to establish a formal dividend policy with respect to the state enterprises to replace the current ad hoc approach. The budget also includes strategic oil stockpile sales of 0.3 percent of GDP, compared with 0.2 percent of GDP last year.

On the expenditure side, the wage bill is expected to rise 13.2 percent reflecting wage increases and costs associated with voluntary retirement packages in accordance with the civil service reform established in March 1996 (see below). Interest payments are expected to rise to more than 6 percent of GDP, compared with 5.8 percent in 1995/96. Capital expenditure is projected to decline marginally in 1996/97 from 2.6 percent of GDP in 1995/96 to 2.4 percent of GDP. Real expenditure increases are planned in education and police services, and that on health is to remain in line with the 1995/96 outturn. Despite a cut in direct funding in the 1996/97 budget, nominal housing outlays could rise by up to 24 percent, if the carryover of funds from previous allocations and new allocations of RDP grants is used. In contrast, real expenditure cuts are planned in defense and export subsidy programs. Defense spending is projected to decline to less than 2 percent of GDP in 1996/97, compared with just under 3 percent of GDP in 1995/96. The 1996/97 budget cuts led to cancellation of almost all arms acquisition programs and a 50 percent cut in the Special Defense Account (arms production subsidy).

On March 8, 1996 an agreement was reached within the Chamber of Public Service Bargaining Council on a three-year adjustment package. The agreement addresses only one element of a civil service reform—namely, the restructuring of salary scales and grades and the identification of funds for increased salaries. Agreements remain to be finalized on downsizing and a voluntary severance package, and on a restructuring of pension benefits. The agreement of March 8 calls for additional funds for salary improvements of R 7.4 billion, as contained in the 1996/97 budget, and R 6.5 billion in both 1997/98 and 1998/99. Furthermore, the agreement allows for budgetary savings from downsizing to fund additional salary hikes of the order of R 1.1 billion in 1996/97 and R 4.8 billion in both 1997/98 and 1998/99. These increases imply that the wage bill will rise 13.2 percent in 1996/97, 10.1 percent in 1997/98, and 9.2 percent in 1998/99. Assuming a continuation of nominal GDP growth at present rates over this period, the wage bill would remain around its 1995/96 level of 11.3 percent of GDP in 1996/97 and 1997/98 before declining slightly in 1998/99 to 11.1 percent of GDP.

With respect to downsizing, the intention is to reduce staff positions by 300,000 (out of 1.2 million public sector employees) over three years. Regarding pension benefits, the terms of reference for an agreement on reform is shaped around early retirement, enhancing resignation benefits, the transfer of accrued interests, dormant member benefits, and final salary definition.

c. Poverty alleviation and social programs

Poverty alleviation, mainly directed at the black population, is the most pressing problem facing South Africa. The Department of Welfare is undertaking a five-year plan that will combine public and private financing options to alleviate poverty and end racial and gender discrimination in the provision of social services. The social welfare delivery system will be restructured, with less emphasis on specialized services, and with a focus on community development. At present, nongovernmental agencies do the bulk of the delivery of welfare services, but these agencies lack sufficient resources to do the necessary work. Also, plans are being drawn up to eliminate the substantial waste and fraud in the social security system. The objective is to set up a National Social Grants Registry, first by concentrating on new registrants and then moving to the private and civil service pension funds to complete the Registry. The ultimate aim is to move to an AFIS system (fingerprint system) to reduce fraud.

Also, there is an imbalance within social services provision where 61 percent of the beneficiaries are the elderly, 23 percent disabled, and 16 percent children and families. Moreover, programs for the elderly are quite generous (R 11,000–22,000 per person per annum). Social security assistance (old-age and veterans’ pensions, disability grants, child and family maintenance grants, foster-parent grants, and relief aid) made up 88 percent of the 1995/96 budget for social services, while welfare assistance (elderly care, child and family welfare, probation services, drug rehabilitation, community centers, and population development) and capital expenditure amounted to 8 and 4 percent, respectively.

The bias toward social security in large part reflects that parity in social grants among the races as required by the new constitution has been implemented; however, there is not yet parity in maintenance grants. At present, maintenance grant payouts cover relatively few eligible black people. If all eligible black people were to apply, the cost could rise by R 15 billion (3 percent of GDP).

Progress in implementing programs in each of the critical social sectors—health, education, and housing—has been slow. The housing program aimed at eventually benefitting up to 300,000 families a year (consisting of a onetime subsidy scheme and mortgage indemnities against political risk to facilitate private sector financing) is barely underway. Progress in health is difficult to judge at this stage. The Government introduced free health care for pregnant women and for children under six years, but the health strategy remains to be fully developed. Education reform is a national imperative, but progress will depend, among other things, on decisions about sharing the various areas of responsibility between national and provincial levels of government.

d. Fiscal policy reform

In December 1995 the Smith Commission published its recommendations for improving the efficiency and equity of the present system of retirement arrangements. The Committee’s reform proposals aim at promoting saving, lowering the burden on the public sector finances, and improving the coverage for poor and informal sectors. The major recommendations include periodic means and eligibility testing to ensure that the state old-age pension is being properly targeted to the poorest sectors; raising the effective retirement age of women (currently at 60 years) by paying a higher pension for those who delay retirement; establishing open funds to allow for small enterprise and informal sector worker participation; allowing pension fund portability; and reducing penalties for the early withdrawal of assets. The Commission calls for modifying public sector pension plans to bring them in line with those in the private sector. At present, the replacement ratio is equal to 1/42 of the final salary for each year of service in the public sector, compared with a ratio of 1/48 of the average of the last two years of salary in the private sector; public sector lump-sum gratuities are more generous than in the private sector; and retrenchment benefits in the public sector are 5 times the annual salary, compared with a factor of 1.5 in the private sector (for those with more than 10 years experience). To promote labor mobility, the Commission recommends that civil servants leaving voluntarily be offered the option to transfer to a private fund the full actuarial interest of their accrued pension rights. Finally, the Commission suggests that new state employees be enrolled in a defined contribution scheme, allowing the current defined benefit system to contract over time.

In the area of relations between the various levels of government, Parliament is considering legislation (Provincial Governments Borrowing Act) to define the borrowing rights of provincial governments, and the Financial and Fiscal Commission (FFC) is formulating recommendations for the new constitution regarding revenue sharing and expenditure responsibilities among national, provincial, and local levels of government. Regarding the Provincial Borrowing Bill, the latest draft would forbid provinces from borrowing to finance current expenditure (with the exception of bridge financing). Borrowing for capital expenditure must meet the approval of the Loan Coordinating Committee (LCC) which the Minister of Finance chairs. Moreover, a province’s borrowing (including borrowing through provincial enterprises or development corporations) would be capped by a formula that would limit annual gross interest payments (including all forms of finance charges and deferred interest) to less than a given percentage of current revenue. Also, national guarantees on provincial borrowing will require a national Exchequer Act.

The FFC is looking into how resources should be shared between the central and the provincial governments and among the provinces, given the interim constitutional requirements that the provinces receive an equitable share of the personal income tax, VAT, national fuel levy, and national transfer taxes collected within their borders, and that the provision of health, education, housing, and welfare services be in the domain of the provinces. Further recommendations are to be made on the allocation of resources between provincial and local governments. The FFC calls for a freeze in real terms on resources for the national government for 3 years, with all remaining resources going to the provinces (based on the assumption that the demand for services under provincial authority will grow with the population), while many services provided at the national level (e.g., defense) will not. With respect to the division of resources among provinces, the FFC calls for the allocation of resources to be based on provincial populations (with greater weights for rural residents) and on estimated education and primary health needs within each province. To avoid harsh adjustment costs, the formula would be phased in over 5 years.

In June 1994, an independent tax commission was appointed (the Katz Commission) to conduct a review of selected aspects of South Africa’s tax structure and, in particular, to provide recommendations for tax changes. To date, the Commission has made three reports in these matters (November 1994, June 1995, and November 1995), with a fourth report to be issued in 1996. 1/

As regards the personal income tax, recommendations to eliminate the discriminatory tax treatment based on gender and marital status and child rebates were implemented in the 1995/96 budget. The Commission has also called for reducing the number of brackets from 10 to 5, instituting a flat rate of 9 percent on annual taxable income up to R 30,000 and maintaining the maximum marginal rate of 45 percent on incomes above R 150,000. The fourth interim report is to make proposals regarding base broadening through limiting or removing deductions and exemptions, indexation of tax brackets, and the taxation of fringe benefits.

With respect to corporate taxation, the Commission recommended that the secondary tax on companies (STC) be retained for now but at a reduced rate; this was implemented in the 1996/97 budget. Also, the Commission has called for the eventual replacement of the STC by a full or partial imputation system and the implementation of a presumptive tax on company gross assets.

Regarding VAT reform, the Commission has called for a new study to assess whether the base can be broadened by narrowing zero ratings and eliminating exemptions, and whether there is scope for a rate hike. The recommendation that the VAT be applied to all fee-based financial services was adopted in the 1996/97 budget.

The third interim report called for the taxation of retirement income. both as it accrues and upon withdrawal. The Commission supports the equal tax treatment of discretionary and contractual saving and proposes to bias the taxation of retirement income toward encouraging annuities and discouraging lump-sum withdrawals (the Commission’s views are that retirees spend the resources from lump-sum withdrawals too fast and, disproportionately, end up in their later years on public rolls). Finally, the Commission calls for equal tax treatment of public and private pension funds.

The Commission has identified considerable scope for strengthening tax administration. The Government is presently moving forward on several proposals including the modernization of computer facilities, improved tax assessment and audit procedures, enhancing taxpayer education, and endowing the revenue service with more flexibility in respect of employment and wage policy.

e. Restructuring of State assets

The Government is in the early stages of formulating a program of State asset restructuring that would include, but not be limited to, privatization. The program is aimed at imparting competitiveness in firms, promoting human resource development, widening share ownership, and stimulating entrepreneurship within the black community. Full implementation could take 5–6 years, but some enterprises are on a fast track for reform.

3. Monetary developments and policies

The prospect of rising inflation reemerged during 1994, after several years of falling, rates—both the 12-month consumer price index, and the measures of underlying inflation, which adjust for special factors such as tax changes and volatile elements in the index—began to rise (see Section 1 above). The primary source of the renewed pressures was the strength of domestic demand. Those prospects were reflected in rising market yields for both short- and long-term securities (Chart 6).

Chart 6
Chart 6

South Africa: MONETARY INDICATORS AND INTEREST RATES, 1990–96

Citation: IMF Staff Country Reports 1996, 064; 10.5089/9781451840926.002.A001

Sources: South African Reserve Bank: and IMF, International financial Statistics.1/ Trend notes and coin In circulation outside the banking system.

The monetary and credit aggregates reflected these developments. The 12-month growth rate of M3, which was 7 percent in December 1993, had risen to 15.7 percent in December 1994, well in excess of the upper guideline range of 9 percent for 1994. The trend growth in narrow money, in particular notes and coin in circulation outside the banking system, also accelerated from less than 10 percent at end-1993 to some 16 percent at end-1994. 1/ Over the same period, the 12-month growth rate of bank credit to the private sector rose from 9.7 percent to 17 percent, with demand for bank credit by households (notably mortgage finance) and corporates (to fund investment and inventory accumulation) rising equiproportionately.

In light of these developments—as well as the need to support the liberalization of foreign exchange controls on nonresidents, to respond to the fallout from the Mexican crisis of December 1994, and to strengthen sentiment towards the rand—a number of steps were taken to tighten monetary policy from mid-1994 onwards:

  • the bank rate was increased in three steps from 12 percent in September 1994 to 15 percent in June 1995 (see Chart 6);

  • ambitious guidelines were set for the growth in M3 in 1995—6 to 10 percent—in order to signal the authorities’ commitment to combatting the inflationary pressures;

  • these were supplemented by bank-by-bank guidelines on the growth of credit to the private sector of 10 percent for 1995;

  • the minimum cash reserve requirement on nonreserve liabilities was raised from 1 to 2 percent in February 1995.

This monetary policy stance was one of the factors underlying an improvement in investor sentiment towards the rand that occurred during 1995. But the speed and strength of the turnaround in sentiment that occurred complicated the monetary objectives of the authorities. On the one hand, it increased downward pressure on inflation through a strengthened currency; on the other, it further compromised external competitiveness. In recognition of the inherent conflict between these twin policy goals, the authorities stemmed the upward pressure on the rand exchange rate by reducing the net forward open position of the South African Reserve Bank. But to the extent that this was accomplished by an increase in net international reserves (which rose from some R 1 billion in mid-1994 to over R 15 billion by end-1995), this represented an injection of domestic liquidity and thus complicated monetary management.

A number of steps were taken to sterilize the monetary consequences of the inflow arising from the accumulation of international reserves. These included sales of government securities held by the SARB—holdings of which fell from some R 9 billion in late 1994 to a little under R 5 billion by end-1995—as well as an increase in government deposits held with the SARB from R 3.9 billion in July 1995 to R 7.9 billion at end-1995. The impact of these steps on market rates was muted somewhat because the banks’ holdings of paper eligible for rediscount at the SARB rose considerably through 1995, from some R 15 billion in mid-1994 to R 22 billion by end-1995, diminishing their need to adjust their deposit and lending rates despite the increased rediscounting with the SARB.

Despite these difficulties, the thrust of the policy was maintained, but its impact on the broader monetary aggregates and on credit expansion became apparent only by mid-1995. The 12-month growth rate of M3 peaked at a little under 17 percent in June 1995, and fell to 15.1 percent by end-December 1995. The 12-month rate of growth of credit to the private sector also peaked in June 1995, at 19.5 percent, and fell to 17.5 percent at end-December 1995. In both cases, the quarter on quarter seasonally adjusted growth rates also peaked in June 1995, but the subsequent decline has been more marked for M3 than for credit to the private sector. Nevertheless, the slowdown in the growth of both aggregates has perhaps been surprisingly limited given the increases in interest rates after mid-1994, even allowing for the long lags involved. By end-1995, both the guidelines for M3 and those for bank credit to the private sector had been exceeded by large margins.

Trend 12-month growth in notes and coin in circulation outside the banking system fell earlier than that of M3 or that of credit to the private sector. Thus, it may have responded more rapidly to the increase in interest rates than either of these other aggregates, and may have constituted an early indication of the fall in the underlying consumer prices index that occurred later in the year. 1/ However, the trend in this narrow aggregate began to accelerate again towards end-1995, recording a 12-month growth rate of a little under 15 percent in December 1995.

The rapid growth of the monetary and credit aggregates through 1995 occurred against a backdrop of high real interest rates—deflated by past inflation—and sharp deceleration in both the consumer prices inflation and in underlying inflation towards year-end. Markets responded favorably to these developments as inflation expectations implicit in long yield differentials with foreign financial assets fell from some 10 percent in early 1995 to some 8 percent by the end of the year.

From mid-February 1996, sentiment was unsettled by a number of rumors in the market, particularly concerning policy on exchange control liberalization (Chapter II). Markets’ expectations of inflation as implicit in interest rate differentials increased somewhat notwithstanding a further increase in the bank rate to 16 percent in late April 1996. However, since the bulk of the adjustment to the change in market sentiment occurred through the depreciation of the rand, the direct short-run impact on domestic money market conditions was not substantial.

4. Land reform

Land reform efforts include a land restitution scheme as well as a land redistribution program. The issue of restitution for those dispossessed of their land under apartheid is being addressed by the Lands Court. No cases have yet been adjudicated, but 6,000 claims have been lodged. Calculations of the compensation liability—to be carried by the Government—are not yet available.

The land redistribution program is a market-based program, essentially increasing access to the market for the poorest. The plan includes a flat-rate grant of R 15,000 per household (which, if taken, eliminates the household from eligibility for a similar housing subsidy). To augment the grant element, the Strauss Commission is preparing recommendations to revamp rural financing. As concerns commercial farming areas, the Labor Tenants Bill is now being discussed in Parliament. The bill seeks to protect the rights of existing tenants and provides them the right to buy the land they live on “for fair value”, through a negotiated agreement with the existing owner. In addition, land initiatives are being prepared for the development of urban housing that would be eligible under the housing subsidy scheme. Gauteng province has already identified 5 suitable areas.

5. The external sector

The external current account balance turned from a surplus of 1.5 percent of GDP in 1993 to a deficit—the first since 1984—of 0.5 percent in 1994. This shift largely reflected an increase in imports of 16.2 percent in volume terms as economic activity accelerated, and export growth lagged behind (Appendix Tables 23–26). A substantial increase was registered in the imports of capital goods, mainly machinery and electrical equipment, chemical products, textiles, and transport goods, as the investment gained momentum in the latter part of the year. The imports of intermediate and consumer goods grew more moderately. The strengthening of the rand in the second half of the year may have also contributed to the rapid import growth.

The volume of non-gold exports expanded at about 4 percent during 1994. Gold exports contracted by 6.2 percent in U.S. dollar terms, notwithstanding an increase in the average price of gold from US$360 in 1993 to US$384 in 1994, due to a sharp decline in production. The services and transfers balance improved by 0.3 percent of GDP as large increases in tourism receipts, interest earnings, and dividends and profits from abroad offset higher freight and other transportation costs and a decline in private transfers (Appendix Table 27).

The current account deficit widened further in 1995 to 2.6 percent of GDP, notwithstanding an increase in the volume of non-gold exports by almost 15 percent. The volume of imports grew by 17 percent, reflecting the continued rapid growth in aggregate demand and progress in the liberalization of trade (see Chapter 3). Nonetheless, the pace of import growth on a quarter by quarter basis moderated through 1995, and import volumes fell in the fourth quarter. As in 1994, the growth of imports was especially pronounced in machinery and electrical equipment, vehicle and transport equipment, and mineral products, suggesting that investment continued to be the main factor behind the rapid import growth.

The expansion of nongold exports in the second half of 1994 continued into the first quarter in 1995 despite weak growth in agricultural exports due to poor weather conditions, but moderated over the subsequent three quarters. The moderation may have reflected domestic capacity constraints and the real appreciation of the rand, from the second quarter of 1995 onwards. Net gold exports remained relatively depressed in 1995 declining by a further 13 percent in U.S. dollar terms as production difficulties continued and international prices remained stable. The deficit on the services account widened by about 0.3 percent of GDP, primarily due to higher payments on freight and merchandise insurance on imports and interest payments on sharply rising foreign debt. These higher payments were partly offset by a further increase in tourist receipts.

The capital account turned around in mid-1994, following the election of the Government of National Unity, registering a surplus for the first time since 1984. Total flows in 1994 amounted to US$1.5 billion (notwithstanding “unrecorded” outflows in the first half of the year of US$0.9 billion) compared to a deficit of US$4.6 billion in 1993. The inflows reflected growing confidence in the South African economy and the rand, with the abatement in political uncertainty and the strengthening of economic performance (Appendix Table 28). 1/ A substantial portion of the flows was short-term, with the major recipient being the banking sector as banks took advantage of the renewed access and favorable cost of borrowing abroad. The other short-term flows mainly comprised trade finance, mirroring the rapid growth of imports.

Long-term flows in 1994 were dominated by the public sector with the successful placement of a global bond issue equivalent to US$750 million in December 1994 and some net borrowing by public corporations. The global bond issue followed, and was facilitated by, the grading of South Africa’s sovereign debt by Moody’s in October 1994 as investment grade. The Nippon Investor Service also gave this debt an investment grade rating, but Standard and Poor’s rated it below investment grade although with a positive outlook. Other long-term inflows financed capital imports of several large investment projects and net purchases of securities and equity on the Johannesburg Stock Exchange.

Notwithstanding the general slowdown in inflows to emerging markets in the months following the currency crisis in Mexico, the capital account continued to strengthen through 1995, and net capital inflows increased to US$6 billion. The flows were more long-term in nature and more concentrated in the private sector: private long-term inflows rose from US$218 million in 1994 to US$2 billion in 1995. This increase reflected several factors: a substantial jump in the participation of nonresidents in the securities and equities markets following the abolition of the financial rand in March 1995; a large use of syndicated bank borrowing by South African commercial banks and corporations; a large number of issues of Euro commercial paper by banks; and placement abroad of equity and convertible bond issues by corporations. The public sector continued to import capital at about the same pace as in 1994, mainly in the form of a US$346 million government bond placement in the Japanese Samurai market in May 1995, and borrowing by parastatals through further placements in the Samurai market and the contracting of syndicated bank loans.

Developments in early 1996 have been mixed. The Government successfully placed a £ 100 million bond issue with a 10-year maturity in late January, with a spread of 190 basis points above the equivalent British government bond. Also, capital inflows appeared to have continued at a fairly rapid pace through January and the first half of February.

In line with the rapid increase of capital inflows, South Africa’s foreign debt (net of rand-denominated debt) increased from US$16.7 billion in 1993 to US$18.6 billion in 1994 and to US$20.7 billion by end-June 1995 (this compares with US$23.7 billion at end-1985, the year in which the debt standstill was declared) (Appendix Table 29). Within the total, public sector debt declined from US$9.2 billion at end-1993 to US$8.2 billion by mid-June 1995, while private debt surged from US$7.5 billion to US$12.4 billion over the same period. The term structure has improved substantially with the share of short-term debt in total debt declining from 51 percent at end-1993 to about 41 percent by end-June 1995. The rand denominated debt held by nonresidents is estimated to have increased by US$0.4 billion through 1994, to US$9.2 billion (more recent data are not available).

The surge in capital inflows in the latter half of 1994 and through 1995 was more than sufficient to finance the current account deficit and supported a substantial increase in the country’s net foreign reserves. 1/ During this period the SARB fully repaid all its reserve-related external liabilities (US$2.6 billion) (Appendix Table 30). The reserve position of the SARB began to improve in the third quarter of 1994, after a loss of reserves of US$2.4 billion in 1993, and further decline in the first half of 1994 such that the net reserves of the SARB were negative through the second and beginning of the third quarter in 1994. However, with the strengthening in the capital account, the SARB had accumulated net reserves of US$0.9 billion by end-1994 and a further US$2.5 billion in 1995 to a total of US$3.5 billion (R 13 billion). The reserve position weakened in the first quarter of 1996 in line with the SARB’s intervention to maintain orderly market conditions following the attacks on the rand beginning in mid-February. By end-March, net reserves declined to US$2.9 billion (R 11.2 billion).

The large inflow of capital in 1995, which supported the stability of the rand through most of 1995 (see below), together with the general strengthening of sentiment about South Africa’s prospects, facilitated the SARB decision to substantially reduce its role in the forward market. The SARB abolished the requirements for exporters to obtain forward cover, limited its participation in short-term cover to financial transactions, and began to progressively reduce the subsidy on short-term borrowing. Nevertheless, the SARB continued to be active in contracts with maturities longer than 12 months. As a result, the net oversold short-term position of the SARB declined by US$5.7 billion between March and November 1995, and the total net open forward position fell to US$6.8 billion by mid-February 1996. However, as a result of the support provided by the SARB to the rand, the net open forward position rose to US$8.2 billion at end-February.

There was significant progress in the relaxation of capital controls on both residents and nonresidents in 1995 and early 1996, of which the most notable was the elimination of the financial rand on March 13, 1995. The authorities had identified specific conditions necessary for abolition to proceed, namely the successful return to international bond markets, the narrowing of the financial rand discount to below 10 percent, a decrease in financial rand deposits held in the banking system, and a comfortable reserve position. The first two of these conditions were met: as noted above, the global bond was successfully issued in December 1994; and the discount on the financial rand narrowed to below 10 percent in the three weeks leading to its dismantling and was as low as 3.6 per cent on the actual day. However, financial rand deposits remained broadly constant and the level of international reserves, while strengthening significantly beginning mid-1994, remained relatively modest, covering less than a month of imports. Nonetheless, the abolition of the financial rand proceeded smoothly with no disturbance to the exchange rate.

Capital controls on residents were partially relaxed in mid-July with the announcement that insurance companies, pension funds, and unit trusts would be allowed to undertake foreign investments by way of swap arrangements with foreign investors. These transactions permitted South African institutional investors to diversify their portfolio abroad without loss of foreign exchange reserves. By March 1996, transactions equivalent to R 11 billion were approved. Further relaxation of controls was also signaled with the permission by these institutional investors to take up 10 percent of the Sterling bond issue in late January 1996.

The nominal effective exchange rate depreciated by 10 percent in 1994 and a further 10 percent by May 1995, leading to a cumulative real depreciation of 10 percent from December 1993 (Appendix Table 31 and Chart 7). The rand remained stable in U.S. dollar terms through mid-February 1996, appreciating in real effective terms by 8 percent. At that time, prompted by unfounded rumors about the President’s health and an imminent capital liberalization for residents, the rand came under attack. Spurred by further concerns about the President’s health, the expectation of a wholesale removal of capital controls on residents, and uncertainty regarding economic policy following the resignation of the Minister of Finance, the rand declined from R 3.64 per U.S. dollar in mid-February to R 4.43 per U.S. dollar by April 26, 1996.

Chart 7
Chart 7

South Africa: EXCHANGE RATES, 1985–95

(Indices January 1985 = 100)

Citation: IMF Staff Country Reports 1996, 064; 10.5089/9781451840926.002.A001

Source: IMF, International Financial Statistics.1/ Based on relative consumer prices using the Commercial Rand exchange rate.
1/

Labor market issues are discussed further in “South Africa—Selected Economic Issues,” IMF Staff Country Report No. 95/21, March 1995.

1/

Investment in a number of large mineral-beneficiation projects, including Columbus (stainless steel), Alusaf (aluminum), Namakwa Sands (titanium), and Saldhana Steel, was eligible for incentives provided in Section 37e of the Income Tax Act. The incentives are provided in the form of an accelerated depreciation allowance which can be used against profits unrelated to the project or transferred to other corporations. Projects were given a two-year implementation period from the date the incentive was authorized. The section 37e scheme was terminated in 1993.

2/

General government plus four official business enterprises (Community Development Fund, Government Motor Transport Trading, Government Printing Works, National Housing Fund).

1/

The decline in productivity has been attributed to a combination of an increase in the number of public holidays and labor unrest in the mines. Gold mines sought to maintain milling volumes despite a decline in the volume of ore mined, hence the decline in the average grade of ore milled.

2/

On February 23, 1996, Russia and De Beers (a South African concern) signed a memorandum of understanding committing the two sides to a three-year marketing agreement. The agreement should limit the volume of diamond sales outside of the Central Selling Organization.

1/

The fiscal year begins April 1. The 1994/95 budget introduced a major change in methodology regarding the treatment of the former homelands (the TVBC states), which also led to revisions of historical statistics on central government revenue, expenditure, and overall balances. Tax revenue previously diverted to the former homelands is now included in the revenue data of the new National Revenue Account and the expenditure which that revenue financed now appears as a transfer to a lower tier of government. Moreover, homeland expenditure previously financed by overdraft facilities now appear as a transfer from the central government budget.

2/

These data include extraordinary revenue, mainly proceeds from sales of the strategic oil reserves. Data excluding these receipts are reported in Appendix Table 11).

1/

The revenue services have experienced a shortage in staff in recent years following implementation in 1994 of a voluntary retirement program.

2/

Defense expenditure has fallen by over 1 percentage point of GDP since the beginning of the decade to under 3 percent of GDP by 1994/95, but much of these savings has been diverted to internal protection services, mainly the police.

3/

No breakdown is available for 1995/96 on the composition of the functional classification of expenditure.

1/

Over the period March 1991 to March 1996, the debt of Central Government increased by just under R 180 billion (including debts incurred by the former homelands). Of this increase, about R 26.2 billion represented the effect of below-the-line (off-budget) transactions.

2/

Following the realization of losses, the Government regularizes its position with the Reserve Bank by issuing zero coupon bonds. This transfer is shown below the line in the fiscal accounts as adding to the Government’s borrowing requirement, but it does not appear above the line in the fiscal accounts. The transfer has the effect of reducing the balance in the Gold and Foreign Exchange Contingency Reserve Account, which had increased with the realization of the losses, and therefore does not affect the stock of government debt because this stock is inclusive of the balance in that account (Appendix Table 18).

3/

As of March 31, 1996, actuarial underfunding of state pension funds is estimated at 30 percent of contingent government liabilities (excluding those of the Reserve Bank), roughly 7 percent of GDP in 1995/96.

4/

At the time the budget was presented, the outturn for 1995/96 was provisionally estimated at 6 percent of GDP. These data include extraordinary receipts. Data excluding these receipts are reported in Appendix Table 11.

1/

For a description of the current tax system, see Annex I.

1/

The growth rate of the trend corrects for the high volatility in the monthly data in the series for notes and coin in circulation outside the banking system.

1/

The leading indicator properties of this aggregate are discussed in Chapter VI.

1/

See Chapter II for a detailed discussion of capital flows.

1/

Net foreign reserves include the CCFF purchase from the Fund in December 1993 as a liability.

South Africa: Selected Economic Issues
Author: International Monetary Fund
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    South Africa: EXPENDITURE ON GDP, 1990–95

    (Seasonally adjusted, at 1990 prices)

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    South Africa: CONSUMER AND PRODUCTION PRICES, 1990–1995

    (End period)

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    South Africa: COMPETITIVENESS AND EMPLOYMENT, 1971–95

    (Seasonally adjusted, at 1990 prices)

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    South Africa: COMPOSITION OF UNEMPLOYMENT OF BLACK PEOPLE, 1994

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    South Africa: GOVERNMENT FINANCES, 1989/90–1996/97 1/

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    South Africa: MONETARY INDICATORS AND INTEREST RATES, 1990–96

  • View in gallery

    South Africa: EXCHANGE RATES, 1985–95

    (Indices January 1985 = 100)