This Selected Issues paper highlights that cautious monetary and fiscal polices of South Africa during 1997 resulted in a return of financial investor confidence and capital inflows during 1997 and through April 1998. These policies helped the South African economy emerge successfully from the exchange market pressures of 1996 and weather the contagion from the East Asian crisis in the second half of 1997. Throughout 1997 and up until May 1998, inflation and market interest rates fell considerably, net international reserves increased, and the net open forward position of the Reserve Bank was reduced sharply.


This Selected Issues paper highlights that cautious monetary and fiscal polices of South Africa during 1997 resulted in a return of financial investor confidence and capital inflows during 1997 and through April 1998. These policies helped the South African economy emerge successfully from the exchange market pressures of 1996 and weather the contagion from the East Asian crisis in the second half of 1997. Throughout 1997 and up until May 1998, inflation and market interest rates fell considerably, net international reserves increased, and the net open forward position of the Reserve Bank was reduced sharply.

I. Recent Economic Developments

A. Introduction

1. Cautious monetary and fiscal polices during 1997 resulted in a return of financial investor confidence and capital inflows during 1997 and through April 1998. These policies helped the South African economy emerge successfully from the exchange market pressures of 1996 and weather the contagion from the East Asian crisis in the second half of 1997. Throughout 1997 and up until May 1998, inflation and market interest rates fell considerably, net international reserves increased and the net open forward position (NOFP) of the Reserve Bank was reduced sharply (Figure 1). However, renewed turbulence in emerging markets has recently severely affected South Africa. Despite increases in interest rates, pressures intensified, and the authorities intervened heavily in the foreign exchange markets.

Figure 1.
Figure 1.

South Africa: Economic Indicators

Citation: IMF Staff Country Reports 1998, 096; 10.5089/9781451840940.002.A001

Sources: South African Reserve Bank; and Fund staff estimates

2. Following relatively rapid growth in 1995 and early 1996, the economy moved to a lower rate of growth in 1997 and thus far in 1998, while formal employment in the private nonfarm sector continued to decline. Moreover, little progress has been made in implementing the structural reforms announced in the Growth, Employment and Redistribution (GEAR) strategy aimed at accelerating job creation and ultimately reducing open unemployment, which is disproportionately concentrated among the young and unskilled.

B. Real Sector Developments

3. Economic activity slowed during 1997 intensifying the ongoing structural decline in formal sector employment. Weaker aggregate demand and beneficial developments in certain exogenous cost-push factors contributed to a dampening of inflationary pressures despite strong wage growth An increase in general government dissaving, together with a continued decline in private saving, more than offset a slowdown in domestic investment, and thus increased somewhat the economy’s reliance on foreign saving.

4. Real GDP growth slowed from 3.2 percent in 1996 to 1.7 percent in 1997. The slowdown was particularly marked in the second half of the year, as real GDP growth fell to an annualized rate of 0.9 percent, compared with 3.3 percent in the second half of 1996. The sluggish economic activity continued in the first quarter of 1998 as real GDP grew by 0.7 percent (seasonally adjusted annual rate) over the previous quarter. With population growth estimated at 2 percent, real GDP per capita declined slightly in 1997, the first such drop since 1993. Real GDP at factor cost increased by 1.7 percent in 1997 compared with 3.1 percent in 1996.

5. The main source of growth in 1997 was the manufacturing sector, which grew by 3.3 percent and was responsible for just under half of the growth in output for the year. However, after growing at an annualized rate of close to 7 percent during the first half of the year, manufacturing output declined during the second half of the year at an annualized rate of almost 1 percent. The contrast in the performance between the first and second halves of the year may have been attributable in part to developments in the external sector, including the termination of the export incentive program, the economic crisis in East Asia, and movements in the real effective exchange rate (see below, in Section VII).1 The other important contributors to growth were the financial services sector, reflecting continued high activity in the financial markets, and the electricity, water and gas sector, which benefitted from increased demand for electricity in neighboring countries and the expansion of electricity and water availability to the less developed regions of the country.

6. Output in the mining sector grew by 1.2 percent in 1997, after declining for three consecutive years. New measures to boost productivity in the gold mines, strong export demand for coal, and higher world prices for platinum were the main reasons for the turnaround in the mining sector. In contrast, agriculture output declined by 1 percent in 1997, after having grown by 29 percent in 1996 as a result of exceptional climatic conditions. Excluding agriculture, real GDP at factor cost grew by 1.8 percent, the same growth rate as in 1996.

7. Growth in real domestic demand decelerated from 2.7 percent in 1996 to 1.4 percent in 1997, reflecting a significant slowdown in private consumption and a major reduction in inventories. The slowdown in demand occurred despite an increase of 7.1 percent in real general government consumption, following a rise of 6.0 percent in 1996. The growth in private consumption expenditure slowed from 3.9 percent in 1996 to 2 percent in 1997 as real disposable income grew by just 0.7 percent in 1997 (and by only 0.1 percent between the fourth quarter of 1996 and the fourth quarter of 1997), owing mainly to continued declines in employment and increased personal income tax collections. The deceleration in private consumption was across-the-board, but was especially marked in durable goods, where consumption declined throughout the year (most notably in transport equipment and furniture) following very strong growth in the fourth quarter of 1996.

8. As has been the case since 1994, fixed investment grew faster in real terms than real GDP in 1997 but at less than half the rate of growth of the previous year (3.5 percent compared with 7.8 percent in 1996). Investment spending on nonresidential buildings and other construction continued to grow at a strong pace in 1997, up by 9.6 percent for the year; in contrast, spending on machinery and equipment grew by 2.4 percent, compared with an average annual growth rate of 14.1 percent during 1994-96. Residential investment grew by only 0.3 percent, prolonging a slump that began in 1993.

9. The slowdown in fixed investment occurred in both the private and public sectors: private investment, which comprises almost three-quarters of total fixed investment, grew by 3.1 percent in 1997 compared with 6.1 percent the previous year. Public investment, comprising both the general government and government-owned enterprises, grew by 4.6 percent in 1997 compared with 12.7 percent the previous year. In terms of the sectoral distribution of investment spending, real investment continued to be strong in the manufacturing sector, growing by 6.2 percent in 1997, reflecting the introduction of tax incentives2. However, there were real declines in investment in the agriculture and utility (electricity, water and gas) sectors following very strong growth in 1996.

10. There was a large reduction in inventories in 1997 (R3.1 billion, or 0.3 percent of GDP) as the general slowdown in final domestic demand (consumption plus fixed investment) and the high level of interest rates encouraged manufacturers as well as wholesalers and retailers to economize on inventories. The decumulation of inventories was responsible for reducing the growth rate of real GDP by 2 percentage points.

11. In 1997, net exports contributed 0.3 percentage point to the overall real GDP growth rate compared with 0.5 percentage point in 1996 and three consecutive years of negative contributions during 1993-1995. Growth in both exports and imports slowed markedly in 1997, but the former grew faster than the latter for the second consecutive year.

12. Gross national saving continued its downward trend, falling from 16.9 percent of GDP in 1996 to 15.2 percent of GDP in 1997. Thus, although domestic investment declined from 18.2 percent of GDP in 1996 to 16.6 percent in 1997, there was an increase in the reliance on foreign saving, as seen in the worsening of the current account deficit from 1.3 percent of GDP in 1996 to 1.5 percent of GDP in 1997. With private consumption rising faster than disposable income, personal saving as a percent of disposable income fell to 0.9 percent, its lowest level in many years. Corporate saving also declined. In agriculture, mining, and resource-based manufacturing sectors, the decline was largely attributable to weak income growth associated with a fall in output (in agriculture) and lower international commodity prices. In manufacturing, operating surpluses also were adversely affected by input costs rising generally faster than producer prices. Overall, private saving declined from 19.1 percent of GDP in 1996 to 17.8 percent in 1997, while general government dissaving increased from 2.3 percent of GDP to 2.7 percent.

13. Despite the growth in real GDP in 1997, the unemployment rate is unlikely to have declined from its 1996 level of 32 percent (October Household Survey estimate). Nonagricultural employment in the formal sector declined by 130,000 positions (or 2.4 percent between December 1996 and December 1997), with public sector employment falling by 1.6 percent and private sector employment dropping by 2.9 percent. The fall in formal employment in the private sector continued a pattern of substitution of capital for labor that has been underway since 1990 and which is attributable in part to the increase in the price of labor relative to capital. After growing at roughly the same rate between 1985 and 1990, wages in the formal private sector grew almost twice as fast as the price of investment goods between 1990 and 1997 (Figure 2). Apart from the private services (including financial, hotel and transport sectors) and commerce sectors, which increased employment during 1997 by 1.1 percent and 0.6 percent, respectively, all the other nongovernment sectors shed workers, including mining and manufacturing, which reduced employment by 6.8 percent and 5.2 percent, respectively.

Figure 2.
Figure 2.

South Africa: Relative Price of Labor with respect to Capital 1990 = 100

Citation: IMF Staff Country Reports 1998, 096; 10.5089/9781451840940.002.A001

Source: South African Reserve Bank, Quarterly Bulletin

14. In December 1997, the parliament passed the Basic Conditions of Employment Act, which established basic workplace standards. These standards mainly relate to the duration of the work week (reduced from 46 to 45 hours, with the objective of progressively reducing it to 40 hours), overtime pay (increased from 1⅓ to 1½ times regular wages), maternity leave (minimum of 4 months), annual leave (three weeks and six weeks paid sick leave every 36 months), minimum working age (of 15 years, or if the work is inappropriate to a child of that age, 18 years), and severance pay and other employee rights at the time of dismissal. The act allows for certain departures from these provisions through collective bargaining, provided that “core rights” are not infringed.3

15. Nominal wages grew by 10.6 percent in 1997 compared with 11.2 percent in 1996. Wage increases in the private sector, which averaged 9.5 percent, were somewhat lower than in the public sector, where wage increases averaged 12.1 percent. In this context, real wages grew by 2.7 percent in 1997, compared with 1.3 percent in 1996. The acceleration of real wages in an environment of declining employment most likely reflects an inflation rate that was much lower than had been expected at the time of the wage negotiations. On the other hand, the growth in unit labor costs decelerated, increasing by 6.8 percent in 1997 compared with 9.2 percent in 1996. The slowdown in the rate of growth of unit labor costs was attributable to a faster pace in average labor productivity growth, from 1.9 percent in 1996 to 3.6 percent in 1997, reflecting to a significant extent the substitution of capital for labor.

16. Inflation, as measured by the consumer price index, declined from 9.4 percent during the 12-month period ended December 1996 to 6 percent by December 1997, and further to 5.0 percent during the 12-month period ended May 1998. The sharp decline in inflation was aided by one-off effects from slower increases in food prices in the second half of the year and a drop in mortgage costs following the reduction of the Bank rate in October 1997 and March 1998. Excluding these effects, which have a weight of about 45 percent in the overall index, underlying inflation declined from 9.3 percent during the 12 month period ended December 1996 to 7.3 percent by December 1997, before increasing slightly to 7.4 percent in April 1998. The moderation in underlying inflation was attributable to tighter financial policies, a 10 percent nominal effective appreciation of the rand in the first half of 1997, the above-mentioned slowdown in the growth of unit labor costs, and a considerable slowdown in imported inflation.

C. Developments in Public Finance

17. The national government met its fiscal target for the 1997/98 fiscal year by reducing its fiscal deficit by over 1 percentage point of GDP. However, fiscal consolidation at the general government level was not as great, as the finances of the provinces and local authorities deteriorated. The government presented a 1998/99 budget that projected a further decline in the deficit and included a number of tax changes. Also, for the first time, the government presented a multi-year spending framework

Developments in 1997/98

18. The fiscal deficit of the national government declined from 5.2 percent of GDP in 1996/97 to 4 percent of GDP in 1997/98, in line with the budget target (Figure 3). Revenue is estimated to have exceeded the budget target by R1.5 billion despite lower-than-projected growth in GDP.4 As a result, ordinary revenue increased from 26.4 percent of GDP in 1996/97 to 26.6 percent of GDP in 1997/98 (compared with a budget target of 26 percent of GDP). Significant improvements in tax administration, particularly in the area of personal income tax (PIT) and including increased collection of tax arrears, were responsible for the better-than-projected revenue performance. These improvements more than offset a shortfall in collections (relative to the budget projection) from income tax on gold mines because of weaker-than-expected gold prices, from VAT because of sluggish growth in private consumption, and from customs duties partly because of tax evasion and partly because the budget had not taken into account the impact of the tariff reductions of 1996.

Figure 3.
Figure 3.

South Africa: Government Finances, 1990/91-1998/99 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 1998, 096; 10.5089/9781451840940.002.A001

Sources: Deptartment of Finance; South African Reserve Bank; and Fund staff estimates.1/ Fiscal year ending March 31. Data for 1996/97 and 1997/98 are preliminary; budget data for 1998/99.2/ Excludes extraordinary transfers.3/ Excludes extraordinary revenue such as sales of strategic stocks of oil and privatization receipts.4/ Includes stamp duties and fees.5/ Total expenditure by national and provincial governments, including stocks of rollover funds; budget data for 1996/97 - 1998/99.6/ Data before 1992/93 not available; budget data for 1996/97-98/99.

19. Total expenditure exceeded budget projections by R1.0 billion mainly because of extraordinary transfers of R2.1 billion to the provinces at the end of the fiscal year to help them offset overruns emanating primarily in their education and welfare budgets.5 Nevertheless, in terms of GDP, total spending by the national government fell from 31.6 percent in 1996/97 to 30.6 percent in 1997/98 (compared with a budget target of 30 percent of GDP).

Consolidated General Government Finances

(In percent of GDP)

article image
Sources: Department of Finance; Reserve Bank; and Fund staff estimates.

Staff estimates, based on net financing to the provinces and local authorities.

20. As shown in the table above, the fiscal deficit of the general government is estimated to have declined from 5.9 percent of GDP in 1996/97 to 5.2 percent of GDP in 1997/98. The lower reduction in this deficit than that recorded at the national government level reflected a deterioration in the financial situation of the provinces and local authorities.

21. Expenditure overruns at the provincial level amounted to R6 billion, or 1 percent of GDP. Yet they might have been larger were it not for spending adjustments made during the fiscal year as task teams led by the Department of Expenditure and Finance conducted frequent and intense interactions with provincial treasuries to assist them in identifying areas of adjustment. Apart from the structural problems such as poor financial management systems and personnel, the deterioration in the provincial finances was attributable mainly to two factors:

(i) The 1997/98 budgets were based on 1996/97 budgets, instead of actual spending in 1996/97, which was characterized by significantly larger-than-projected increases in payroll spending, particularly through increases in employment and salaries for teachers and health personnel In this context, provinces were given unfunded mandates, i.e., national government departments set standards, which the provinces were responsible for observing, but did not provide adequate funding. The main example of this was in education, where the national government established national teacher-pupil ratios, which set off a wave of teacher Wrings and caused large overruns in provincial education budgets. The 1998/99 budget relaxed these standards, without compromising the government’s medium-term social objectives (see below).

(ii) Certain provinces may have intentionally underbudgeted in key areas such as education, health and welfare, anticipating that the national government would accommodate the resulting overruns.

22. The worsening of the finances of the local authorities was attributable to poor financial management systems and increases in personnel and administrative expenditures. The local authorities also have an ongoing problem of unrealistic budgeting, which arises from revenue projections that either do not sufficiently take into account the high level of nonpayment for services (water, electricity, sewerage, etc.) or do not provide for an intensified effort to strengthen collections.

The 1998/99 budget

23. The 1998/99 budget for the national government targets an overall deficit (excluding extraordinary revenues) of 3.5 percent of GDP, reflecting the authorities’ continued commitment to fiscal consolidation envisaged in GEAR. Revenue is projected to decline slightly to 26.4 percent of GDP, while expenditure is budgeted to decline by 0.7 percentage point of GDP to 29.9 percent of GDP. Domestic bond issues will finance the bulk of the deficit, leaving a customary small amount to be financed externally.

24. Total revenue in 1998/99 is projected to increase by 9 percent, mainly because of the impact of tax measures and planned improvements in tax and customs administration (see box below). Personal income tax collections are projected to rise by 6.2 percent in nominal terms, but to decline as a percent of GDP, as a result of measures to limit the bracket creep that are estimated to reduce revenue from this source by R3.7 billion. This revenue decline is expected to be more than offset by higher revenue resulting from more efficient collection of all taxes, increases in the fuel levy and other excise duties, and an increase in the tax on retirement funds. (Revenue measures are explained in more detail below.)

Improvements in Tax and Customs Administration

The South African Revenue Authority (SARS) obtained administrative autonomy with the passage of the SARS Act in October 1997. Under the arrangement, SARS has considerably increased its flexibility in managing its resources, while remaining accountable to the Minister of Finance. With the help of technical assistance from abroad it has embarked on a significant transformation process with goals and objectives of the organization driven by performance, including a provision for incentive bonuses for workers. As part of the transformation process it has issued a Client Charter which sets out the rights (such as fair and impartial treatment by SARS) and obligations (such as honesty and prompt and full payment of taxes) of taxpayers.

On October 1,1997, SARS launched an extensive coordinated campaign to broaden the tax base through registering those persons, businesses and employers outside the tax net. Activities have included information gathering, cross-checking tax information, and business to business inspection using 1,500 SARS personnel. As a result of this effort, it was able to evaluate 162,792 entities of which more than 30 percent were liable for, but in default of, registration for tax purposes. In order to improve tax compliance the government proposes to give the Commissioner of SARS powers to publish the names of tax defaulters who have been convicted of an offence in terms of tax laws that he administers. In a major effort to reduce smuggling across borders, 96 designated posts of entry were cut to 19 of which 9 are currently staffed by customs officials and the remainder are expected to be operational by mid-July 1998.

25. On the expenditure side, the wage bill is projected to rise by 6.3 percent in nominal terms, but to decline in relation to GDP from 12.8 percent in 1997/98 to 12.4 percent in 1998/99. This reflects an increase in wages that is Rl .5 billion lower than envisaged in the 3-year Civil Service Conditions of Service Agreement.6 Capital expenditure and transfers to provinces are budgeted to fall in real terms.

26. The budgeted transfers to the provinces for 1998/99 reflect a more realistic projection of provincial spending in education, health, and welfare. Moreover, several measures have been taken to monitor and control provincial expenditure in order to prevent a recurrence of the problems of last year. These measures include placing all provinces and national departments on the same centralized personnel system; the planned passage of the Treasury Control Bill later this year, which will improve financial management; setting standards for financial reporting and accountability; and conditioning certain transfers to provinces on their designing credible budgets and taking steps to improve collection of own revenue.

Tax changes in 1998/99

27. The 1998/99 budget introduced a number of tax changes, including taxation of personal income and fringe benefits, taxation of retirement funds, and customs and excise duties. Consistent with the recommendations of the Third Interim Report of the Katz Commission regarding personal income taxation, and following up on changes that were implemented at the time of the 1997/98 budget, the tax schedule was revised to (i) eliminate bracket creep; (ii) increase the standard deduction from R3,215 to R3,515; (iii) raise the deduction for persons over 65 years from R2,500 to R2,660; (iv) reduce the marginal rate from 41 percent to 39 percent for individuals with taxable income between R46,000 and R60,000; (v) increase the level of income to which the maximum rate of 45 percent applies from R100,000 to R120,000; and (vi) lower the number of income tax brackets from 7 to 6 (see table below).

28. Three changes to the tax treatment of fringe benefits were introduced in order to reduce distortions. First, the laws governing the taxation of housing benefits provided by employers were modified: originally announced at the time of the 1997/98 budget and intended to minimize tax avoidance, the laws were modified to eliminate possible adverse effects on lower income groups. Specifically, the law reaffirmed that the value of the accommodation for tax purposes would be equal to the cost to the employer except in cases where (a) it was customary for an employer in the industry concerned to provide free or subsidized housing to its employees; or (b) it was necessary for the particular employer to provide free or subsidized housing for the employees to properly perform their duties. These modifications are scheduled to become effective on March 1, 1999 and thus would have no revenue impact in 1998/99. Second, employers’ contributions to their employees’ medical insurance funds that exceeded 66 percent of the total contributions were made subject to tax as an employee fringe benefit effective April 1, 1998. Third, the taxable portion of the transportation allowance paid to employees in order to compensate them for the use of their private cars on official or company business was raised from 40 percent to 50 percent of the allowance.

29. The tax rate applicable to retirement funds on their gross interest income and net rental income (as well as dividend income from real estate investment trusts) was increased from 17 percent to 25 percent effective March 1, 1998; and, regarding the taxation of trusts, a new rule governing the tax treatment of losses was introduced, and the tax rates on income vesting in trusts were raised effective March 1, 1998.

South Africa: Summary of Effects of Tax Proposals; 1998/99

(In millions of rand)

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Source: Department of Finance, Budget Review.

30. A number of specific excise duties were raised: the tax on gasoline and diesel (the fuel levy) was raised by 10 cents a liter effective April 1, 1998; the duties on beer and grain alcoholic beverages were raised by 6 percent, in line with inflation, while the increase in the duties on wines was somewhat higher (between 14 percent and 20 percent, depending on the type of wine); the duties on tobacco products were raised by 29 percent, in line with the policy recommendation of the health authorities.

31. Continuing a process that began at the time of the 1997/98 budget, a number of ad valorem excise rates—on such items as cosmetics, photographic equipment, audio and video electronic equipment and motorcycles, were lowered from 15 percent to 10 percent, after having been reduced from as high as 37½ percent to 15 percent at the time of the 1997/98 budget. In addition, a new list of items were made subject to the 10 percent tax, including air conditioners, cell phones, yachts and other water sports equipment, so that the overall revenue effect is expected to be neutral.

32. In order to curb serious VAT evasion through false declaration of exports to neighboring countries, especially of cigarettes and liquor, traders from these countries will no longer be able to purchase these products free of VAT in South Africa or obtain a VAT refund at a land border post. The zero-rating for these products will now only apply when South African sellers consign or deliver goods to purchasers outside the country. To further improve tax collection, the government also proposed that prior to the approval of any overseas investment by residents, an investor must have a tax clearance certificate.

33. The authorities have decided to impose a one-off charge (at a rate of 2.5 percent) on the windfall gain that will accrue to policyholders of two large insurance companies when they demutualize, possibly in the upcoming eighteen months. The revenues, which will be off-budget, are earmarked for a fund to support youth employment and training.

The medium-term expenditure framework (MTEF) and social expenditures7

34. The MTEF—which sets out three-year spending plans for the national and provincial governments, and aims at ensuring that budgets reflect the government’s social and economic priorities—is one of the most important reforms of the budgetary process introduced by the government. It will help to improve the allocation of resources to priority areas and encourage more efficient planning and management of budgetary resources, by providing a framework within which policy proposals can be assessed, roll-overs reduced, and transparency in government outlays enhanced. The MTEF is a critical tool for implementing and coordinating the new intergovernmental financial system which is prescribed by the Constitution, whereby each level of government is responsible for drawing up a budget reflecting its priorities but is constrained by overall consolidated budgetary resources.

35. The MTEF identifies several priority areas of government spending for the three-year period. These include efforts to improve financial management and enhance the capacity of provincial education departments; promote the transformation of education, health and welfare services in the provinces; and support labor-based poverty alleviation programs. Priority was also given to children’s needs, including free health care for pregnant women and for children under six years of age, a primary school nutrition program expected to reach 4.9 million children, and a child-support grant aimed at refocussing social security in favor of poor children.

36. In education, the single largest component of government spending, the MTEF envisages spending remaining constant in real terms in the last two years after increasing by 16 percent (in nominal terms) in 1998/99. Emphasis will be placed on supporting tertiary education, where demand has been rising at a fast pace.

37. In health, after a 25 percent increase in 1998/99 (compared with the 1997/98 budget projection), spending is expected to increase in line with inflation for the remainder of the MTEF period. The delivery of primary health care—under the principle of equal access of quality services throughout the country—is the main priority in national health policy. The government’s goal is to increase the average number of publicly-provided primary health care consultations from 1.8 visits per person in 1992/93 to 2.8 by the year 2000. Given resource constraints, reprioritizing spending in favor of primary care implies a shift of resources within and between provinces and from tertiary health care hospitals to district services.

38. Spending on welfare and social security is expected to remain constant in real terms over the MTEF period. The welfare and social security system comprises statutory grants for specific entitlement programs and welfare services. Social assistance and welfare services will focus on the transformation of the child and youth care system, including services catering for abused and neglected children, probation services, and community-based care for children with disabilities. A grant of R100 per child per month subject to means testing replaced one of R430 per month for parents and R135 per child per month for up to two children under 18 years. The new program—expected to benefit 3 million children—will, however, cost the government more than twice the previous one because of its wider coverage. The Department of Welfare has also launched a new program for support of income-generating projects aimed at women and youth, and drawing on funds from poverty alleviation programs.

D. Monetary Developments and Policies

39. Monetary developments in 1997 and early 1998 were characterized by volatile and strong growth in narrow and broad money aggregates. This was reflected in robust credit expansion and a substantial accumulation of foreign assets—the latter owing to a surge in foreign capital inflows.

Money and credit

40. A noticeable slowdown in the growth rate of broad money (M3) toward the end of 1996 continued during the first half of 1997 (the 12-month growth rate fell from 13.6 percent in December 1996 to 12.7 percent by June 1997), but this pattern has reversed since then, and the 12-month growth rate increased to 17.2 percent by December 1997 and further to 17.5 percent by April 1998 (Figure 4). This rate of growth in M3 compares with the informal guideline range of 6-10 percent set by the South African Reserve Bank (SARB), and implied a further slowdown in income velocity, as inflation fell during the year. The rapid growth in M3 was reflected in a large rise in savings and time deposits, as real interest rates increased following the slowdown in inflation; a strong increase in check and transmission deposits by companies, as they increasingly made use of new cash management services supplied by banks; a dramatic rise in turnover in the equity and bond markets during 1997,8 which raised demand for transaction balances; and a sharp increase in (short-term) deposits in the fourth quarter of 1997, as investors in the equity and bond markets shifted from long-term bonds and equity to more liquid investments following the crisis in Asia.

Figure 4.
Figure 4.

South Africa: Monetary Indicators and Interest Rates, 1992-98

(Annual percentage change)

Citation: IMF Staff Country Reports 1998, 096; 10.5089/9781451840940.002.A001

Sources: South African Reserve Bank, Quarterly Bulletin

41. The counterpart to the nearly R55 billion rise in broad money in 1997 was increases in the net domestic assets of the banking system of R48 billion and in the net foreign assets of R6 billion. Most of the rise in the former was due to robust growth in credit extension to the private sector, which increased by 14.5 percent in 1997 and 15 percent in the 12 months to April 1998 (down from 16.1 percent in 1996), approximately evenly distributed between households and companies. As a consequence of this rapid growth, credit to the private sector as a proportion of GDP increased for the fourth consecutive year, from 63 percent in 1996 to 67 percent in 1997. The expansion in private sector credit during 1997 and early 1998 can be attributed to a number of factors, including household borrowing to smooth private consumption, as real disposable income stagnated;9 strong demand for working capital by the corporate sector; increased borrowing by businesses in a period of (perceived) temporary slack in demand; a switching of trade financing from foreign to domestic sources, as a result of exchange rate uncertainties; a sharp increase in credit to local authorities;10 and increased demand for speculative investments in financial assets. Offsetting factors were a slowdown in the growth of mortgage advances from 16.9 percent in 1996 to 11.5 percent in 1997, in part reflecting higher risks perceived by banks, but also owing to less demand as growth in disposable income remained sluggish and real interest rates increased. Similarly, there was a substantial deceleration in credit extension in the form of instalment sales and leasing finance, owing to slower household expenditure on durable goods.

42. Following the disturbances in the foreign exchange markets in 1996, financial investor confidence returned in early 1997 and strong capital inflows resumed. These capital inflows resulted in some monetization of the economy as the net foreign asset position of the consolidated banking system increased by R9 billion between December 1996 and March 1998, mainly reflecting a strong increase in net international reserves of the SARB (see Section IE).

Interest rates and liquidity

43. The level and structure of interest rates were also affected by developments in the foreign exchange market. During 1996, the SARB raised the bank rate (the Reserve Bank’s accommodation rate for overnight loans to the banks, see below) from 15 percent to 17 percent in two steps of one percentage point, as a response to the pressures in the foreign exchange markets. The bank rate was kept at this relatively high level through the first three quarters of 1997, reflecting concerns about the strong growth in credit and money aggregates. However, as the foreign exchange market stabilized and inflation decelerated, the SARB cut the bank rate to 16 percent in October 1997, and when the new monetary arrangement was introduced in early March 1998 (see below), it initially set the repo rate—which replaced the bank rate—at 15 percent (see Figure 4).

44. Even though the bank rate was kept at 17 percent during the first nine months of 1997, money market conditions eased during the second and third quarter of the year. This was reflected in a decline in the “money market shortage” (the amount of overnight accommodation extended to banks by the SARB at the bank rate) from R10.5 billion at end-March 1997 to 6.5 billion at end-September. However, following contagion effects from the turbulence in Asia’s financial markets in the fourth quarter of 1997, the money market shortage rose to R10.2 billion at end-December. The tightening of market conditions and a lack of securities qualifying as collateral for the “regular” accommodation window forced the banks to borrow from the Reserve Bank’s “second-tier” window, which carried a penalty rate of 75 basis points above the bank rate.

45. The yield on long-term government bonds and short-term treasury bills declined throughout 1997 and the first quarter of 1998, reflecting expectations of lower inflation, a relatively stable nominal exchange rate development, and reductions in the bank rate. The yield on the benchmark R150 government bond (maturing in 2005–2007) fell by about 350 basis points between January 1997 and April 1998 to 12.4 percent, and tender rates on 3-months treasury bills fell by about 330 basis points over the same period to 12.9 percent. This general downward movement in market interest rates was temporarily interrupted on two occasions: in March 1997 when uncertainties regarding the budget proposal emerged, including concerns about the impact of an expected partial relaxation of exchange controls on residents; and in late October and early November 1997, when contagion from the Asian crisis spread to the South African financial markets.

46. On March 9, 1998, the Reserve Bank changed its operational procedures for providing banks with short-term liquidity: a repurchase auction system was introduced whereby banks tender on a daily basis for liquidity that is determined by the Reserve Bank. The objective of the new repo system is to enhance the flexibility and responsiveness of money market interest rates to liquidity conditions. In the system that prevailed until March 9, the SARB accommodated banks’ liquidity needs virtually automatically at the prevailing bank rate, provided that the banks had sufficient eligible securities.11 In the new system, the repo rate is determined in daily auctions of short-term liquidity. In addition to the allocation of liquidity through the repo auctions, banks have access to a marginal lending facility (MLF) at which they can borrow liquidity overnight at a penalty rate. Eligible securities for entering into repurchase transactions with the SARB consist of Treasury bills, Land Bank bills, Reserve Bank bills, and government bonds irrespective of their maturity.

47. To facilitate the transition to the new system, the repo rate was initially fixed at 15 percent for a test period of about two weeks, while the interest rate at the marginal lending facility was kept at the previously prevailing bank rate (16 percent). After this initial test period, the repo rate was allowed to be determined in daily repo auctions, and it slowly started to drift downward, reaching 14.8 percent on May 11. To further stimulate activity in the interbank market and discourage banks from extensive use of the MLF, on May 20, the SARB increased the MLF rate to 3 percentage points above the previous day’s repo rate.

48. With the introduction of the repo-based system, the regulations for cash reserve requirements were simplified. Effective April 23, 1998, the cash reserve requirement was changed to 2½ percent of banks’ total liabilities on which no interest is paid, from the previous system where requirements were 2 percent on total liabilities, on which no interest was paid, plus 1 percent on short-term liabilities, on which interest was paid. In addition, to provide banks with greater flexibility in their liquidity management, banks were allowed to meet their cash reserve requirements on the basis of an average amount calculated over each monthly maintenance period, rather than on a daily basis.

Recent pressures in foreign exchange markets

49. As mentioned above, contagion effects from the financial turmoil in East Asia in October 1997 led to pressures in South Africa’s financial and foreign exchange markets. The authorities responded by letting market interest rates rise, while limiting intervention in the foreign exchange markets, and allowing the rand to depreciate. Between October 20 and end-November, long-term government bond yields increased by about 50 basis points, share prices declined by about 13 percent, and the rand depreciated by 3½ percent. However, the financial markets recovered in the following months, and by end-April 1998, share prices were 15 percent higher and bond yields were 130 basis points lower than their respective values prior to the onset of the pressures.

50. However, turbulence in emerging markets escalated in May and June 1998, and, following rumors that the SARB would sharply devalue the rand in mid-May, South Africa experienced renewed strong pressures in the foreign exchange and financial markets. The authorities responded initially by reducing the supply of liquidity relative to the banks’ needs at the daily repo auctions forcing banks to access the MLF; as a result, the repo rate and the effective cost of borrowing increased gradually (Figure 5). On May 26, as the pressures intensified, the authorities raised the repo rate to a fixed level of 18 percent but subsequently lowered it in two steps to 17 percent on June 12. Although the interest rate of the MLF was raised in two steps to 15 percentage points above the repo rate on June 2, the impact of this sharp increase was dampened as the SARB increased the supply of liquidity through the repo window, largely sterilizing the exchange outflows.

Figure 5.
Figure 5.

South Africa: Financial Market Indicators, 1995-98

Citation: IMF Staff Country Reports 1998, 096; 10.5089/9781451840940.002.A001

Sources: South African Reserve Bank; Reuters

South Africa: Interest Rates and Liquidity, May–June 1998

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Marginal lending facility.

51. As pressures continued, the SARB again allowed the repo rate to be determined in daily auctions on June 19 and further raised the interest rate of the MLF to 20 percent above the repo rate. The repo rate increased to 24 percent on June 22, as the SARB allotted less liquidity than demanded in the daily auction, before it declined to 18.3 percent on June 26. Throughout the period of pressures, the SARB also intervened heavily in the foreign exchange markets, and the net open forward position of the Reserve Bank rose by US$5.1 billion during May 1998 (see Section I.E). Between end-April and June 26, as a consequence of the turmoil, the rand depreciated by 17.1 percent to R5.92 per U.S. dollar, the yield on the R150 government bond increased by 200 basis points to 14.7 percent, and share prices declined by 16.5 percent.

E. The Balance of Payments

52. The external current account deficit of L5 percent of GDP in 1997 was little changed from that recorded in 1996 (1.3 percent of GDP) > although non-oil export volume growth decelerated significantly in 1997 compared with the previous two years. Favorable financial investor confidence in 1997 and until May 1998 led to an increase in international reserves and a decline in the NOFP. However, renewed pressures since May and large-scale intervention by the Reserve Bank resulted in the NOFP increasing from US$12.8 billion at end April to US$17.9 billion at end May.

53. The external current account deficit was 1.5 percent of GDP in 1997, compared with 1.3 percent of GDP in 1996. However, as a share of GDP, the deficit narrowed to an annualized rate of 1 percent in the first half of 1997 driven by a surge in nongold exports, before widening to 1.9 percent in the second half as nongold exports slowed, gold prices continued to weaken, and imports strengthened.

54. The merchandise trade balance, while remaining in surplus, narrowed as a share of GDP in 1997 as growth in both exports and imports slowed considerably from the high rates recorded in 1996. This slowdown reflected an easing in volume growth, as the terms of trade were little changed.12 The slow growth in merchandise exports was concentrated in nongold export volumes, as gold volumes rose for the first time since 1992. The volume of nongold exports increased by 4.5 percent in 1997, which represents a significant slowdown from the growth rates recorded in 1995 and 1996 (of almost 16 percent a year on average), Moreover, this slowdown in annual rates of increase masks the fact that nongold export volumes grew by an average of only 0.1 percent a quarter in the five quarters to December 1997.13 This slowdown in export growth may reflect a combination of factors: (i) the rand appreciated considerably in real effective terms in the first half of 1997;14 (ii) the economy may have reached the end of an upward structural shift in the level of exports (and imports) resulting from the elimination of trade sanctions in 1994; (iii) the General Export Incentive Scheme (GEIS) was terminated in July 1997;15 and (iv) the crisis in East Asia is likely to have dampened exports to those countries in the second half of 1997.

55. The value of gold exports in U.S. dollar terms continued to decline in 1997. The drop in the gold price—from an average of US$388 an ounce in 1996 to US$331 an ounce in 199716—was only partly reflected in domestic currency earnings by exporters due to some hedging operations and the depreciation of the rand against the U.S. dollar. Indeed, export unit values fell by 7.3 percent in domestic currency terms compared with a 15 percent fall in the spot price. The trend decline in gold export volumes was interrupted in 1997, as a reduction in inventories helped increase export volume by 5½ percent.17

56. The easing in import growth in 1997 relative to 1996 reflected a slowing in import volumes as prices rose in domestic currency terms at a rate broadly similar to that in the previous year. While import volume growth slowed, owing to the effects of both a deceleration in domestic economic activity and the convergence to a higher normal level of imports, the import penetration ratio, i.e., the share of merchandise imports in gross domestic expenditure, increased from 26.7 percent in 1996 to 27.6 percent in 1997. Import prices in domestic currency terms rose by 6 percent in 1997, after a 7 percent increase in 1996, as the impact of a further depreciation of the rand and rising foreign wholesale prices offset most of the impact of lower world oil prices.

57. The deficit on the services account widened further, although it fell slightly as a share of GDP in 1997. While service receipts grew by 19.1 percent and payments rose by 12.7 percent, the much higher level of debits than credits meant that the value of the deficit continued to widen. Tourism and investment income made the largest contributions to the increase in service credits while payments of investment income, owing in part to the relaxation of exchange controls on South African residents investing abroad, and South African tourism abroad, made the major contributions to the growth in service debits. The rise in investment income payments and receipts reflects the large increase in inward investment in the bond and equity markets, through outright purchases and asset swaps (see below).

58. After rapid growth in capital inflows in 1995, the financial crisis of 1996 saw net capital inflows fall sharply, with a net outflow of short-term capital, as the rand came under repeated speculative pressure. However, having weathered these disturbances, South Africa saw a resumption of strong capital inflows in 1997, as mentioned above. Total inflows reached US$4.4 billion (up from US$0.5 billion in 1996), with long-term inflows rising from US$1.7 billion to US$6.6 billion, although short-term flows remained negative as the nonbank private sector reduced its short-term indebtedness.

59. The net inflow of long-term capital reflected both strong public and private inflows. The public sector inflows included two successful foreign currency offerings by the authorities in June 1997—a 20-year, US$500 million “Yankee” issue and a 7-year, ¥ 40 billion “Samurai” issue. Public corporations were also active, with Eskom, Transnet, and the Development Bank of Southern Africa undertaking eurorand issues in 1997. Eskom completed a further eurorand issue in January 1998. During 1997, foreigners were net purchasers of R26 billion of stocks on the Johannesburg Stock Exchange and R15 billion of bonds on the South African Bond Exchange, for total purchases of around R41 billion. Approved asset swaps continued to increase in 1997, reaching around $8.8 billion, although actual outflows amounted to only around $4.2 billion. The total use of the asset swap mechanism since its inception has been significantly below the amount potentially available to be swapped, suggesting that the existing limits remain nonbinding. As discussed in Section I.F, these ceilings were raised further in 1997.

60. There was a sharp increase in the volume of activity in the Eurorand market during 1997 and until early 1998. In a typical Eurorand transaction, an international entity (for example, the World Bank or the Government of Sweden) with high credit rating issues rand-denominated paper and swaps the rand obtained for dollars. The counterparties to this swap arrangement (usually an international bank or financing house), which have acquired the rand liability, will seek to hedge this liability by buying rand-denominated assets (for example, long-dated South African government bonds), which leads to a capital inflow into South Africa.18 Between September 1995 (when the Eurorand market came into being) and October 1997, cash investments in Eurorand totaled R28.8 billion, of which over 70 percent were in the first 10 months of 1997.19

61. Capital inflows remained strong in 1998 until the exchange market pressures in May: thus, nonresident purchases of equities and bonds increased by R35.7 billion in the first four months of 1998, but by only R2 billion between May and June 19. The impact of the experience market pressures was especially severe in the bond market which experienced sizable outflows, while in the equity market the inflows declined but remained positive.

South Africa: Nonresidents’ Net Purchase of Bonds and Equities

(In millions of rand)

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Through June 19.

62. Long-term foreign direct investment increased from around US$600 million in 1996 to an estimated $2 billion in 1997; however, most of the increase was related to the sale of a 30 percent stake in the telecommunications company, Telkom, to a foreign consortium in the second quarter, which raised around $1.25 billion.

63. Gross official gold and foreign exchange reserves rose substantially in 1997, reaching US$5.9 billion at end-December 1997 compared with US$2.2 billion a year earlier. Reserves continued to increase in early 1998, reaching US$6.5 billion at end-April. As reserve liabilities remained relatively stable, net official reserves rose from US$1.3 billion at end-December 1996 to US$3,4 billion at end-December 1997 (equivalent to 10 weeks of imports), and then to US$4.4 billion at end-April 1998.20 However, as a result of heavy intervention in the foreign exchange market, net official reserves fell to US$2.8 billion at end-May, while gross reserves remained at US$6.4 billion, as the SARB drew down its credit lines (thereby boosting reserve-related liabilities).

64. The SARB used the strong improvement in investor confidence in early 1998 to help reduce the NOFP. By end-April 1998 the NOFP had fallen to $12.8 billion, implying an oversold forward position—obligations to deliver foreign exchange in excess of rights to receive foreign exchange—of $17.5 billion.21 However, in response to pressure in the exchange markets in May, the authorities intervened heavily in the forward market, and by the end of the month, the NOFP had increased to US$17.9 billion, and the oversold forward book had risen to US$21 billion.

65. Because of the composition of capital inflows in the first half of 1997, South Africa’s external foreign currency external debt fell slightly from US$23.6 billion (20 percent of GDP) in December 1996 to US$23.4 billion (18 percent of GDP) in June 1997. The most recent data available on rand-denominated foreign debt relate to end-1996, at which time total external debt was estimated at $32.9 billion, or 26.1 per cent of GDP (see Section VIII).

F. Capital Control Liberalization

66. South Africa has followed a strategy of progressively easing exchange controls since 1994, reflecting the government’s commitment to the eventual abolition of all controls on capital transactions and has made considerable progress in this regard in recent years.22 With the abolition of the financial rand mechanism in 1995, all exchange controls on nonresidents were eliminated. They are able to purchase shares, bonds and other assets without restriction and to repatriate dividends, interest receipts and current and capital profits, as well as the original investment capital, from South Africa at will. Nonresidents are also free to hold rand accounts in the banking system. The major remaining constraint on nonresidents relates to the amount that nonresident-controlled organizations may borrow domestically, although this too has been relaxed. In March 1998, the authorities raised the threshold from which the restriction would apply from 50 percent to 75 percent of nonresident ownership.

67. Exchange controls on residents have been considerably relaxed. Rather than allowing complete liberalization of a particular type of current or capital transaction while others remained prohibited, the authorities have pursued a strategy of allowing an increasing array of transactions, with each subject to a quantitative cap. These caps have been progressively raised over time, to the point where many have become nonbinding and, in some cases, abolished.

68. There are no controls on the transfer of funds arising from the import or export of goods and services.23 Some minor restrictions remain on the current transactions of individuals although the March 1998 budget increased the allowance for individuals traveling abroad to R100,000 per calendar year for adults, up from R80,000 (R30,000 and R20,000, respectively, for children under 12 years of age). The need to pre-register before using a credit card while overseas was abolished, and the budget foreshadowed that additional administrative reforms affecting current transactions would be announced in the near future.

69. While restrictions remain on capital transactions by resident corporations, institutional investors and private individuals, these too have been subject to progressive easing. Until this year, authorized dealers in foreign exchange were restricted to holding daily balances of no more than $1.5 billion in foreign exchange. Although this limit was removed in January 1998, prudential restrictions prevent the banks from having a net open foreign exposure exceeding 15 percent of net qualifying capital and reserves.

70. Since July 13, 1995, resident insurance companies, pension funds, and unit trusts have been permitted to apply to the South African Reserve Bank to invest in foreign assets via swap arrangements with nonresidents. These limits were initially set at 5 percent of total assets but were subsequently increased to 10 percent of total assets in June 1996 in the context of the GEAR. At that time, these institutions were granted permission to transfer abroad in 1996 up to 3 percent of the net inflow of funds received in 1995, subject to the 10 percent limit on total holdings of foreign assets. The 1997/98 budget permitted a further transfer, in 1997, of 3 percent of the inflow of funds in 1996, broadened the definition of institutions that may undertake asset swaps and increased the flexibility in the definition of the 10 percent limit of assets. The 1998/99 budget continued this process and raised the limit on asset swaps to 15 percent of total assets, while allowing 5 percent of the previous year’s net inflow of funds to be invested abroad in 1998.24 An additional 10 percent of the net inflow of funds may be invested in securities listed on SADC member stock exchanges, subject to the overall limit on foreign assets of 15 percent of total assets.

71. The 1998/99 budget also further relaxed restrictions governing direct investment abroad by residents, including currency transfers abroad. Corporates can now invest abroad R50 million per project—approved by the exchange control department—and up to R250 million per project in member countries of the Southern African Development Community25 (previously R30 million and R50 million, respectively). Firms will also be allowed to list on the Johannesburg Stock Exchange to raise capital for projects within the SADC region, subject to these investment limits. The limit on investments abroad by private individuals—which had been set at R200,000 per person effective July 1, 1997—was also raised to R400,000 per person in March 1998.

72. Limits on the value of goods that can be exported by emigrants upon their departure from South Africa were also raised. Previously, emigrants were subject to a limit of Rl00,000 for household and personal effects, and a similar limit on the value of motor vehicles. The distinction between the two categories has now been abolished and the limits replaced by a combined cap of R1 million. However, restrictions on former emigrants’ “blocked” funds—estimated at about R10 billion or US$2 billion—remain unchanged.

G. Trade Policy Developments

73. Considerable progress has been made in rationalizing the external trade regime in the last few years. According to data compiled by the Industrial Development Corporation (IDC) (Table 1), South Africa reduced the number of tariff lines from 7,163 in 1994 to 6,638 in 1997; at the same time, the simple average tariff was reduced from 21.2 percent in 1994 to 17.9 percent in 1996 and to 14.4 percent in 1997, while the import-weighted average tariff declined from 14.4 percent to 9.9 percent and 9.2 percent. Reductions in the average tariff (in absolute terms) were similar for all categories of goods. The share of imports entering at zero duty increased from about 41 percent in 1994 to about 56 percent in 1997. Tariff rationalization also involved a reduction in the maximum rate, which was reduced from 924 percent in 1994 to 72 percent in 1997. Notwithstanding these changes, which generally reduced the complexity of tariffs and the average level of protection, the tariff rationalization process during 1996 and 1997 involved increases in tariffs on agricultural products, vegetable oils, sugar, textiles and clothing, footwear, and motor vehicle products and a reduction in the share of goods entering at duty free rates. In 1996 and 1997, South Africa imposed final antidumping duties on 17 products affecting imports from 32 countries. As of end-1996, 35 final antidumping duties were in force.

Table 1.

South Africa: Tariff Reform, 1994-97

(in percent unless otherwise indicated)

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Source: Industrial Development Corporation

74. There has also been significant liberalization in the agricultural sector. The number of marketing boards had been reduced from 22 in 1992 to 14 in June 1997; as of January 1998, all the marketing boards were abolished. As a result, all remaining restrictions on the import and export of agricultural products have in principle been eliminated, although these products will continue to be subject to sanitary and phytosanitary regulations.

75. Negotiations on the free trade agreement (FTA) with the European Union (EU) have acquired renewed momentum. The EU’s current offer envisages the elimination of tariffs on about 89 percent of its imports from South Africa over a three-year period, of which 96 percent (85 percent of total imports) would be liberalized upon entry into force of the FTA. 78 percent of the EU’s imports from South Africa were already duty free in 1994. The EU’s offer excluded from the FTA agricultural products that accounted for about 48 percent of South Africa’s agricultural exports. In turn, South Africa’s offer would eliminate its tariffs on about 81 percent of its imports from the EU over a 12-year transition period.26 South Africa was contemplating special protocols to exempt, or extend, the transition period for certain agricultural products (to avoid exposing them to subsidized agricultural exports from the EU) and other sensitive manufacturing sectors under the FTA.27

76. In accordance with the 1996 Trade Protocol of the Southern African Development Community (SADC), South Africa intends to eliminate its tariffs on intra-SADC trade faster (over a five-year period) than other countries (following an eight-year period, as stipulated in the SADC Trade Protocol). However, the authorities also intend to give certain sensitive sectors, including textiles and clothing, footwear, and automobiles, special treatment, exempting them from the FTA or delaying their liberalization. Negotiations are expected to commence among SADC members to determine the phasing of the tariff liberalization and the treatment of these sensitive sectors.

77. Negotiations are ongoing on changes to the revenue sharing formula under the Southern African Customs Union (SACU).28 SACU members have been dissatisfied with the existing arrangements. For countries other than South Africa (Botswana, Lesotho, Namibia, and Swaziland (BLNS countries)), there has been a loss of fiscal discretion because South Africa sets the common tariff and the excise tax for SACU as a whole; in addition, import duties designed to protect South African producers have the effect of raising prices for all SACU members. Certain guidelines for a possible new revenue sharing formula (RSF) have been agreed. These include: the customs pool should not include excise duties; the RSF should not place a fiscal burden on any member; all members’ shares should be calculated and there should be no residual calculations; calculations should be based on verifiable data; any major change in the RSF would need to be accompanied by a transitional arrangement; and there should be a built-in review mechanism of 5 years. Agreement on the RSF is linked to the institutional arrangements for the new tariff-setting process. The BLNS countries are seeking a greater role in this process in order to address the loss of fiscal discretion under the existing arrangements. In addition, they are seeking an additional share of the revenue to compensate them for the loss of such discretion and for the price-raising effect that they experience.


The real effective depreciation of the rand in 1996 bolstered the competitiveness of South African manufactured goods and stimulated production in the first half of 1997; but the real appreciation of the currency in the first half of 1997 had the opposite effect on manufacturing output in the second half of the year.


Two tax incentive schemes geared at promoting the manufacturing sector were introduced in 1996: an accelerated depreciation allowance for new investments; and income tax holidays for firms undertaking new investments and satisfying location, labor absorption and industrial policy criteria (see SM/97/162 for details).


In response to private sector concerns, the implementation of certain aspects of this act is awaiting a specially commissioned report to assess its impact on small and medium-sized companies.


The numbers quoted in this section exclude extraordinary revenue, such as sales of oil stocks and privatization receipts, and extraordinary expenditure, such as transfers to the government pension fund or the Contingency Reserve Fund of the South African Reserve Bank (see Section VI).


Two provinces, Kwazulu-Natal and Eastern Cape received a total of R1.5 billion on condition that they put in place measures to help contain expenditure. A key problem facing these provinces is the absorption of a large number of employees of the administrations of the former TBVC states and self-governing territories.


The CSCSA, which became effective in July 1996, extends over three years and covers the civil service wage grid, the combined wage bill of the national and provincial governments, employment policies, and the pension fund. The minimum wage was increased, wage scales compressed, and the wage bill set to rise by R6.5 billion for each of the three years, while savings from the “right sizing” program were to be applied to increase wage rates. The reduction in the wage bill referred to above was justified on the grounds of lower inflation and is being challenged by the civil service unions.


Data in this section refer to the consolidated spending of the national and provisional governments.


Turnover in the secondary bond market increased by 41 percent in 1997, from an aggregate amount of R3,023 billion in 1996 to R4,269 billion in 1997. Similarly, turnover in the secondary share market rose by 77 percent, from R1 17 billion in 1996 to R207 billion in 1997.


As a result, household indebtedness increased from 66 percent of disposable income in 1996 to 68 percent in 1997. However, this increase also reflected the extension of banking services to low-income households which earlier did not have access to formal credit facilities.


Credit to local governments has been recorded as private sector credit, but starting in mid-1998, the SARB will publish separate series for credit to the private sector and to local governments.


Eligible securities consisted of t-bills, Land Bank bills, Reserve Bank bills, and government bonds with outstanding maturities of up to 91 days. In the event the banks needed additional liquidity, they could borrow from the SARB at the bank rate plus a penalty margin (75 basis points during 1997), using as collateral the above-mentioned instruments but with outstanding maturities of more than 91 days but less than 3 years.


The aggregate terms of trade for goods (i.e., including gold) and nonfactor services fell by 1.4 percent in 1997, while the terms of trade excluding gold rose by 1 percent.


Data on export volumes by broad industry sectors are unavailable, but over this period export values have grown in mining and manufacturing and fallen in agriculture and other sectors.


Developments in indicators of competitiveness are discussed in more detail in Section VII.


The ending of the GEIS also appears to have played a part in the volatility of nongold exports in 1997, with a surge in exports immediately preceding the ending of the scheme followed by a fall immediately thereafter.


Average daily fixing price in the London market.


Production was 495 tons in 1997, down only slightly from 497 tons in 1996.


Although eurorand issues should typically lead to net capital inflows, this need not always be the case; for example, if the counterparty that acquires the rand liability from the issuer buys rand-denominated assets as part of an arrangement with a South African institution that invests in foreign assets (as permitted under the reserve Bank’s foreign exchange regulations relating to asset swaps), then there need not be a capital inflow.


The actual book value of Eurorand investments between September 1995 and October 1997 was about R126 billion. The difference between the book value and actual cash investments is accounted for by long-dated zero-coupon bonds.


Net official reserves include liabilities to the IMF.


South Africa has also met repurchase obligations of SDR 307 million to the IMF under the Contingency and Compensatory Financing Facility during 1997 and SDR 77 million in the first quarter of 1998. The remaining obligations under this facility fall due over the course of 1998 and involve a principal amount of a further 230 million SDRs.


SM/97/162 contains a discussion of South Africa’s history with exchange controls.


Although the foreign currency proceeds of exports must be repatriated to South Africa within 180 days.


In some instances, domestic prudential regulations have supplanted these limits as the binding constraint on investment abroad by residents.


Other than Namibia, Swaziland, and Lesotho where funds are already free of restriction.


In addition to the scope and timing of tariff liberalization, agreement is outstanding in a number of areas, including antidumping, safeguards, competition policy, intellectual property, and government procurement.


These protocols would cover red meat, dairy, grains, sugar, automobiles and components, textiles and clothing, TV assembly, and chemicals.


The current formula is described in detail in the 1996 Selected Economic Issues Paper (SM/96/109, Section IV, Appendix II).

South Africa: Selected Issues
Author: International Monetary Fund