The external current account in South Africa has strengthened significantly in 1999, mainly owing to a large decline in imports. Compared with a deficit of about 1.5 percent of GDP in recent years, it is close to balance during the first three quarters of 1999. A resumption of investor confidence has led to an increase in international reserves and facilitated a decline in the net open forward position (NOFP). The external current account deficit has declined to 0.2 percent of GDP during the first three quarters of 1999.


The external current account in South Africa has strengthened significantly in 1999, mainly owing to a large decline in imports. Compared with a deficit of about 1.5 percent of GDP in recent years, it is close to balance during the first three quarters of 1999. A resumption of investor confidence has led to an increase in international reserves and facilitated a decline in the net open forward position (NOFP). The external current account deficit has declined to 0.2 percent of GDP during the first three quarters of 1999.

I. Recent Economic Developments 1

A. Real Sector

1. Economic activity has progressively strengthened since the fourth quarter of 1998, while monetary conditions gradually have eased and business and consumer confidence have strengthened. Nevertheless, labor market conditions have deteriorated, with a continuation of the trend decline in formal employment. Inflation pressures have been contained, despite the effects of the depreciation of the rand and higher world fuel prices.

2. Real GDP growth slowed from 1.7 percent in 1997 to 0.6 percent in 1998 (Figure 1).2 A slowdown in economic activity that had been underway since mid-1997 was exacerbated in the second half of 1998 by the turbulence in financial and exchange markets during the second and third quarters and a sharp, policy-induced increase in interest rates as part of an effort to restore calm to the markets. As a consequence, the interest-sensitive sectors of the economy suffered the most; real durable consumption declined by 6 percent, real private sector fixed investment fell by 3 percent, and there was a reduction of inventories equivalent to 0.5 percent of GDP. Real gross domestic expenditure would have been considerably weaker but for the substantial investment programs undertaken by the public enterprises, especially South African Airways and the telecommunications company, Telkom. As a group, fixed investment spending by the public enterprises rose 51 percent in 1998, which more than accounted for the entire growth in real gross domestic expenditure.

Figure 1.
Figure 1.

South Africa: Selected Economic Indicators

Citation: IMF Staff Country Reports 2000, 042; 10.5089/9781451840957.002.A001

Sources: South African Reserve bank, and Ministry of finance1/ Fiscal year beginning April 1

3. Improved market conditions since the fourth quarter of 1998 allowed the authorities to substantially reduce interest rates over the course of 1999. These factors contributed to a progressive strengthening of economic activity during the year, and the expansion in real GDP reached 3.1 percent (on a seasonally adjusted annualized basis) in the third quarter of 1999. The recovery in economic activity was spurred mainly by net exports, which contributed 1.6 percentage points of the overall growth in real GDP for the first three quarters of the year, and thus more than offset the negative contributions of private fixed investment (including public enterprises) and government consumption and investment. The strong performance of net exports reflected the negative effect on the demand for imports of the cyclically weak domestic demand, the depreciation of the rand, and the completion of the (import-intensive) capital expenditure program of the public enterprises.

4. Private consumption grew slightly less than real GDP on account of the weak demand for durables, but nevertheless strengthened during the year, helped by rising consumer confidence, the decline in bank lending rates, and an improvement in household balance sheets following the demutualization of Old Mutual in May 1999. Real government consumption declined in 1998 and again during 1999, as the fiscal consolidation effort spread to the provinces and, to a lesser extent, to the local authorities. Business confidence indices were up substantially in the second half of the year and the growth in real private fixed investment turned positive in the third quarter of 1999 in all sectors except for mining and construction. Inventories, which had declined since the beginning of 1997, also began to grow in 1999 and contributed about half of a percentage point to the growth rate of real GDP in the first three quarters of 1999. The build up of industrial and commercial inventories still has considerable room; as a percent of nonagricultural GDP they were around 13 percent in the third quarter of 1999, compared with a recent peak of 17 percent three years earlier.

The Revision of the National Income Accounts

South Africa’s national accounts underwent a major revision in 1999: the System of National Accounts 1993 (1993 SNA) was introduced, the base year for the national accounts estimates at constant prices was changed from 1990 to 1995, new areas of economic activity were uncovered, and information from new data sources were incorporated.

The level of the revised GDP at current prices is approximately 11 to 14 percent higher than the previous GDP estimates for the period 1993 to 1998, as presented in the table below. Approximately R12 billion (2.5% of the previous GDP) of the revision is the result of definitional changes in the 1993 SNA. The rest is due to new activity and new data sources that have resulted in improved estimates of existing activity, notably research reports on selected aspects of production by universities and parastatals, the SARB and Statistics South Africa. Because the revision to investment was relatively less than that of GDP (correspondingly, private consumption was revised relatively more than overall GDP), the revised average ratio of domestic investment to GDP for the 1993-97 period is about 0.7 percentage points of GDP lower. Also, because there was no revision to the public accounts, the fiscal numbers in terms of GDP, were also lowered.

Gross domestic product at current prices according to the previous and revised estimates

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The revised average annual real GDP growth rate for 1994-1998 is 2.7%, Y2 percentage point higher than the previous estimate.

Annual growth in the gross domestic product at constant prices according to the previous and revised estimates

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5. On the output side, in 1998, robust growth in the transport and communication sector and the financial services sector, of just over 8 percent and 3 percent, respectively, offset declines in all other sectors, such as manufacturing (3 percent), agriculture (2 percent), and mining (about 1 percent). Manufacturing output had been declining since the second half of 1997, and the situation worsened in 1998 as a result of slowdowns in both domestic and external demand and a sharp increase in workdays lost to on account of strikes. In agriculture, production was down mainly on account of lower production of field crops, while mining continued to suffer from weak global demand for commodities.

6. The subsequent recovery in output was broadbased, with all sectors, except for mining and construction, showing positive growth since the second quarter of 1999. The transport and communication, financial services, and agriculture sectors were particularly strong, and, for the first three quarters of the year, were up 7.5 percent, 2.8 percent and 0.7 percent, respectively, compared with the corresponding period in 1998. As was the case in 1998, the robust growth of the transport and communication sector was driven by the extension of telephone lines to previously underserviced areas, and the growth of cellular networks and internet activity. Growth in the financial services sector reflected a rebound in the real estate market, while in agriculture, growth was driven mainly by increased output in the livestock and horticultural areas. Despite the rebound in global gold prices in the second half of 1999, gold output continued to decline. Mining output was further hurt by a decline in coal production, where high domestic cost structures and global oversupply resulted in a loss of global market share.

7. Gross national saving declined slightly to just over 14 percent of GDP in 1998, its lowest level in recent history, despite a decline in dissaving of the general government of about 1 percentage point of GDP to under 2 percent in 1998. As gross investment was also relatively unchanged at 16 percent of GDP, the recourse to foreign saving was largely unchanged at under 2 percent of GDP from 1997 to 1998. The small decline in gross national saving was attributable mainly to corporate saving, which dropped by 1 percentage point of GDP to just over 15 percent of GDP. The net operating surplus of the corporate sector was flat in nominal terms, as profits were squeezed by the slowdown in economic activity. Although nominal net interest payments declined for the first time since 1994, this was not enough to offset significant increases in dividend and tax payments. Household saving fell from 1 percent of GDP in 1997 to half of a percent in 1998, mainly as a result of the negative effect on disposable incomes of the large increase in mortgage and consumer interest rates in the context of a high level of household debt. Although continuing fiscal consolidation at the national level contributed to the decline in government dissaving, there was a substantial turnaround in the finances of the provinces, from a deficit of 0.9 percent of GDP in 1997/98 to a surplus of 0.4 percent in 1998/99, which proved to be the main factor in the improved saving performance of the general government.

8. Labor market conditions continued to deteriorate in 1998 and 1999. In 1998, employment in the formal nonagricultural sector declined by almost 200,000 persons, or almost 4 percent; and was down a further 2 percent for the year ended September 1999.3 As such, it is likely that the overall unemployment rate increased from the 37 percent level reached in October 1997.4 In the private sector, two distinct trends have been apparent during the 1990s. In the traded goods sector (mining and manufacturing), employment has been on a downward trend since 1991, and there has been a substantial substitution of labor for capital, reflecting a marked increase in the price of labor relative to capital. In addition, there has been a marked trend toward the “informalization” of the work force. According to the October Household Survey, overall employment fell by 9 percent between 1995 and 1997, with a decline of 22 percent in formal sector employment partly offset by an increase of 22 percent in informal sector employment.

9. In 1998, according to Statistics South Africa, formal employment in mining and manufacturing declined by 16 percent and 4 percent, respectively, while for the year ended September 1999, employment in these two sectors was down a further 9 percent and 3 percent, respectively. Employment in the financial services sector also declined in 1998 for the first time in the decade—mainly because of the adverse effects of the large rise in interest rates on the real estate sector; this weakness continued into 1999. On the other hand, formal employment has generally been increasing in the other service sectors; in the trade sectors (including wholesale and retail trade, and hotel and accommodation) employment grew by over 4 percent in 1998 and over 8 percent in the year ended September 1999.

10. Employment in the general government declined by 1.1 percent in 1998 and by 1.7 percent in the year ended September 1999, as governments attempted to reduce their payrolls in an effort to lower fiscal imbalances and reallocate resources to nonwage spending priorities. In 1998, the decline took place mostly in the extra-budgetary institutions (e.g., universities and technikons), where employment fell by almost 10 percent. In the national government and local authorities, employment declined by 1 percent and 3 percent, respectively, while in the provinces, it increased by under 1 percent. Since the beginning of the 1999/2000 fiscal year, employment levels have fallen in all levels of general government, except for the extrabudgetary authorities.

11. Remuneration per worker increased by 15 percent in 1998, up from almost 11 percent in 1997.5 These numbers (reported by Statistics South Africa) far exceed the estimates of wage growth of other, albeit non-scientific surveys, which indicate a downward trend in the growth rate of nominal wages, consistent with the decline in inflation.6 Growth in nominal remuneration per worker was highest in the private sector (17 percent in 1998 compared with 10 percent in 1997), while the growth was more moderate in the public sector (12 percent in 1998 compared with 11 percent in 1997). In the first half of 1999, these rates fell significantly; in the private sector, nominal remuneration per worker grew at an annualized rate of 8 percent, compared with 11 percent in the second half of 1998, while in the public sector, it grew by 3 percent in the first half of 1999, compared with 5 percent in the second half of 1998.

12. Unit labor costs in the formal nonagricultural sector rose by 10 percent in 1998, compared with 6 percent a year earlier, reflecting the large increase in remuneration per worker and a more modest 5 percent increase in labor productivity. The increase in unit labor costs was significantly greater than the almost 8 percent increase in the nonagricultural GDP deflator, thereby accounting for the flat net operating surplus of the corporate sector mentioned above. In 1999, the annual rate of growth of unit laborosts moderated, falling to 5 percent in the second quarter. At the same time, output prices rose by over 7 percent, pointing to a possible rebound in corporate operating surpluses.

13. The annual inflation rate, as measured by the increase in the consumer price index, rose from 6 percent at December 1997 to 9 percent in December 1998, before falling to 2 percent in December 1999 (Figure 2). The increase during 1998 reflected the large increase in interest rates, which in turn sparked a marked rise in the mortgage cost component of the CPI, but also to the pass-through of the depreciation of rand (see below) and the rise in unit labor costs. In 1999, inflation fell to its lowest level in over 30 years, despite a big increase in the price of petroleum products, as the previous year’s increase in interest rates was completely unwound. Core inflation, which excludes the effect of changes in mortgage costs, fell to around 8 percent in late 1997 and has remained at about that level since then. Producer price inflation was essentially unchanged at 4 percent in 1998, reflecting the weak pace of economic activity. Producer price inflation rose to 7.4 percent in 1999, spurred mainly by the increase in prices of petroleum products.

Figure 2.
Figure 2.

South Africa: Inflation Indicators, 1994-99

(Annual percent change)

Citation: IMF Staff Country Reports 2000, 042; 10.5089/9781451840957.002.A001

Sources: Reserve Bank Quarterly Bulletin and statistics South Africa1/ Unit Labor Cost

B. Developments in Public Finance

14. There was a substantial improvement in the fiscal performance of the overall general government in 1998/99 (April to March), as the deficit of the national government was reduced considerably and the finances of the provinces showed a remarkable turnaround. The 1999/2000 Budget aimed to consolidate the improvement in the national government’s financial position and to reduce the corporate and personal tax burden. So far in 1999/2000, fiscal performance has been better than originally budgeted.

Developments in 1998/99

15. The fiscal deficit for the national government was 2.6 percent of GDP in 1998/99, down from 3.9 percent in 1997/98, and compared with a budget projection of 3.1 percent of GDP, as a result of larger-than-expected revenue collections.7 Revenue grew by almost 13 percent to 24.4 percent of GDP, compared with a growth rate of 9 percent envisaged in the budget; personal income taxes were 9 percent higher than the budget estimate and accounted for over 90 percent of the unanticipated revenue. The strength of personal income tax collection was due to efficiency gains in tax administration and the broadening of the tax base. The other revenue surprise was in corporate tax receipts from the mining companies; as a result of the depreciation of the rand and cost savings associated with the closure of mines, these receipts rose by almost 60 percent and accounted for about 10 percent of the unanticipated rise in revenue. However, overall corporate income tax receipts were just 2 percent greater than projected, reflecting lower revenue from the nonmining companies caused by the weaker economic activity. This factor also resulted in lower-than-projected indirect tax collections. However, value-added taxes were slightly greater than projected, and the authorities attributed this to more effective tax administration at border posts to curtail fraud.

16. Expenditure in 1998/99 was 27 percent of GDP, which was slightly higher than projected at the time of the budget, but still 0.3 percentage points of GDP lower than in 1997/98. The unanticipated pressure on spending came mainly from interest payments and additional transfers to provinces, as the wage bill and other current spending was in line with the budget.

17. As mentioned above, the fiscal position of the provincial governments moved from a deficit of 0.9 percent of GDP in 1997/98 to a surplus of 0.4 percent in 1998/99. Overall, expenditure increased by under 2 percent in nominal terms from 1997/98, but declined in terms of GDP, from 13.5 percent to 12.7 percent. A financial management improvement program—coordinated at the national government level—was established to monitor expenditure in each province on a monthly basis, appoint qualified personnel, train financial managers and improve reporting and oversight procedures. While transfers from the national government were raised to better cover certain outlays, provinces improved their management and control of expenditure and thus were able to curb unwanted expenditure. Several provinces also launched anti-fraud units.

18. In the Eastern Cape and Kwazulu-Natal, where the fiscal imbalances in 1997/98 were particularly serious (with deficits of 0.2 percent of GDP and 0.3 percent of GDP, respectively), the national government intervened directly in the fiscal management of these provinces.8 In exchange for additional funding at the end of 1997/98 (which was needed to partially repay various creditors, including bank overdrafts), the government imposed certain administrative reforms (e.g., procurement procedures, personnel management) and steps to contain expenditure. Both provinces subsequently recorded surpluses in 1998/99 and have programmed further surpluses in the next few years to allow them to pay off their remaining debts.

19. The fiscal deficit of the local governments was unchanged in 1998/99 at 0.1 percent of GDP.9 Although continuing to face financial challenges, the authorities report that local governments are beginning to stabilize their financial positions through improved expenditure management, greater efforts to collect own revenue, and programs initiated by the national and provincial governments. The provincial government officials responsible for local government have used the powers vested in them in terms of the Local Government Transition Act (1993) to instruct municipalities facing financial difficulties to take corrective action. One aspect of such action has been the establishment of the Management Support Program, which aims to build capacity and financial management systems in the municipalities to help them restore their financial viability. The national government has backed this project by providing funding.

20. Led by the strong improvement in the finances of the national government and provincial governments, the deficit of the consolidated general government fell from 5 percent of GDP in 1997/98 to 2.4 percent in 1998/99, with spending falling to its lowest level in 15 years as a percent of GDP (Figure 3, and Table 1). However, the overall borrowing requirement of the nonfinancial public sector rose from 4.4 percent to 4.8 percent, mainly because of the large losses incurred by the Reserve Bank in its forward market operations and an increase in the borrowing requirement of the nonfinancial public enterprises. The latter shifted from -0.3 percent of GDP in 1997/98 to 0.5 percent in 1998/99 because of the substantial increase in capital expenditures by the airline and telecommunications companies.

Figure 3.
Figure 3.

South Africa: Government Finances, 1990/91-1999/00 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2000, 042; 10.5089/9781451840957.002.A001

sources: Department of finance; South African Reserve Bank; and Fund staff estimates1/ Fiscal year ending March 31, Budged data for 1999/002/ 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.6/ Data before 1992/93 not available
Table 1.

Consolidated General Government Finances

(In percent of GDP)

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

Extrabudgetary institutions (e.g., universities, technikons) and social security funds.

Developments in 1999/2000

21. The 1999/2000 budget for the national government targeted a deficit of 3.1 percent of GDP. Revenue was projected to decline by 0.5 percent of GDP to 23.8 percent, mainly as a result of tax changes in the personal and corporate income taxes (see below), while expenditure was budgeted to decline by 0.4 percent of GDP to 26.9 percent, consistent with further wage restraint.

22. In October 1999, the national government announced a revised deficit target of 2.8 percent of GDP, on the basis of better-than-projected results for the first half of the fiscal year; revenue was over 8 percent higher in the first half of 1999/2000 than in the corresponding period in the previous year (compared with a budgeted increase of around 6 percent for the whole year) and expenditure was up by just under 7 percent (compared with a budgeted increase of about 6 percent). Government has been engaged in a pay dispute with the civil service; the dispute is currently in arbitration. In the first half of the fiscal year, the provinces had a balanced budget, while the nonfinancial public enterprises had a surplus of 0.2 percent of GDP (on an annualized basis).

23. The medium-term expenditure framework (MTEF) envisages a reduction in the budget deficit to 2.4 percent of GDP in 2002/03, with the overall tax burden declining further to 23.5 percent of GDP. After a substantial redistribution of expenditure since 1994, in which relative allocations to defense and general administration were reduced while those to social programs (education, health, and welfare) and the integrated justice sector (justice, police, and prisons) were raised, the MTEF will feature more balanced growth of the various functional categories over the 1999/2000-2002/03 period.

24. In the case of defense, however, the recently signed defense equipment procurement program would imply that the defense allocation rises from 7 percent of noninterest expenditure in 1998/1999 (equal to 1.4 percent of GDP) to over 8 percent in 2002/2003 (1.7 percent of GDP). The purchase agreement, which was signed with a number of European suppliers, and involves the purchase of helicopters, ships, submarines, and fighter airplanes, is expected to cost R 21-R 30 billion (constant 1999 prices) over 8-14 years (or about 0.3 percent of GDP per year). Suppliers have pledged investments in South Africa, which the authorities estimate would generate R 70 billion in economic benefits over an eleven-year period

Tax changes in 1999/2000

25. The 1999/2000 budget introduced a number of tax changes in the personal and corporate income tax areas, as well as new levies and adjusted excise duties (Table 2). For the personal income tax, the primary rebate was increased so as to raise the tax threshold by the projected rate of inflation; and the secondary rebate, which applies to persons 65 years old or greater, was also increased for the same reason. These changes prevented tax bracket creep and a consequent increase in effective tax rates but were estimated to imply a loss of potential revenue of R 3 billion. In addition, the brackets of the personal income were restructured so that marginal tax rates applicable to incomes in the range of R 46,000- R 70,000 were reduced from 39-43 percent to 30-40 percent. The loss of revenue associated with this change was estimated at R 1.9 billion.

Table 2.

Summary of effects of tax proposal, 1999/00

(In millions of rand)

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Sources: Department of finance, Budget review, 1999

26. The corporate tax rate was reduced from 35 percent to 30 percent to bring the South African rate more in line with international levels, and thus to make the country more attractive to investors.10 In addition, the tax on South African branches of foreign-owned companies was reduced from 40 percent to 35 percent and the rate applicable to company policy holder funds held by insurance companies was reduced from 35 percent to 30 percent. The estimated loss of revenue from these measures was R 2.5 billion. To reduce the distortions in the system and broaden the tax base, the budget eliminated the tax incentives pertaining to certain tax holiday schemes and the accelerated depreciation allowances for investments in manufacturing companies effective September 1999.

27. As has been the annual practice for many years, the budget included increases to specific excise duties in order to adjust for inflation. For tobacco products, the government has followed a policy over the past several years of raising excise duties by more than expected inflation. In the 1998/99 budget, excise taxes were increased so as to raise the ratio of tax to retail price from 45 percent in the case of cigarettes (or lower in the case of other products) to 50 percent. In the case of other products, particularly with respect to alcohol products, an attempt was made to move excises in line with international benchmarks, subject to revenue considerations.

28. The budget introduced a skills development levy on payrolls, at a rate of 0.5 percent beginning in 2000/01 and increasing to 1 percent in following years, in order to finance the skills development initiative envisaged in the Skills Development Act (see Section II for details). It also converted the existing surcharge on the price of electricity, which was being used to finance the electrification program for previously disadvantaged communities, into a dedicated electrification levy. The change would enhance the transparency of the program and its financing, but would not involve any change in the overall level of funding to the program (R 1.5 billion) or the price of electricity.

C. Monetary Developments and Policies

29. Following the turbulence in the foreign exchange and money markets in mid-1998, stability returned to these markets in the fourth quarter of 1998 and continued in 1999. Money and credit growth slowed markedly, and the South African Reserve Bank has allowed interest rates to decline substantially.

Money and credit

30. The turbulence in the foreign exchange markets in mid-1998—which was mainly related to the contagion from the Asian crisis—also affected liquidity conditions and the money markets in South Africa. The 12-month growth rate of broad money (M3) peaked at 19 percent in June 1998 (its highest level in the 1990s), and the growth rates in more narrow monetary aggregates were even higher (Figure 4). This development reflected, in part, a reduction in interest rates in early 1998, but also a shift in investor preferences from equity and bond markets to more liquid investments, as well as increased transactions demand for money as the turnover in the equity and bond markets rose sharply.11

Figure 4.
Figure 4.

South Africa: Monetary Indicators and Interest Rates, 1995-99

Monetary aggregates(12-month percentage change)

Citation: IMF Staff Country Reports 2000, 042; 10.5089/9781451840957.002.A001

Sources: South Africa Reserve Bank, Quarterly Bulletin

31. The South African Reserve Bank tightened monetary policy in mid-1998, and calm returned to the financial markets starting in the fourth quarter of 1998. In this context, money growth slowed; by the end of 1998, the 12-month growth rate in M3 was 15 percent, and by March 1999 it was below 10 percent. Since then, the growth rate has remained within the South African Reserve Bank’s (SARB) informal guideline range of 6-10 percent. The slowdown in growth in broad money can be explained by a reversal of earlier behavior on part of the investors, i.e., as expectations of a recovery in the bond and equity markets emerged, there was a shift away from depository type of investments with a relatively low return but low risk into investments in riskier assets. This decline in liquidity preference is consistent with an even sharper fall in the growth rate of more narrow monetary aggregates, such as Ml (see Figure 4). Other contributing factors to the slowdown in money growth in 1999 included lower inflation and inflation expectations, and the low levels of economic activity.

32. The counterpart to the R 33 billion increase in broad money in the 12-month period through September 1999 was increases in net domestic assets of the banking system of R 22 billion and in net foreign assets of R 11 billion. The increase in net domestic assets was mainly due to credit extension to the private sector, which grew by 11½ percent during this period (12-month rate). However, as with the growth in broad money, the rate of private sector credit expansion has fallen almost continuously since the end of 1998 (the 12-month growth rate was 8 percent by November 1999, compared with 17 percent by end-1998). In particular, credit extension to households increased by only 4 percent between September 1998 and September 1999, compared with 7½ percent a year earlier, mainly reflecting the high interest rates that prevailed after the turbulence in the financial markets and the generally weak economy. The most interest-sensitive components of credit extension, such as leasing finance and installment sales, were virtually flat during 1999 (see Figure 4). Also, mortgage loans grew by only 4 percent between November 1998 and November 1999, compared to 10 percent during 1998. The small expansion of mortgage loans not only reflected the high interest rates of early 1999, but was also the result of a new bank supervisory regulation, which prescribed an increase in the banks’ risk weighting of the portion of a new mortgage loan that exceeded 80 percent of the value of the property collateralised.12

33. One credit category that continued to show robust growth in 1999 was “other loans and advances,” although the growth in this form of credit also slowed (from a 12-month rate of 31 percent by December 1998 to 17 percent by November 1999). The major component of this type of credit was corporate sector lending, and reflected aspects such as additional borrowing by companies in distress to help them through a period of relatively slack demand, continued high activity in the financial market, and increased corporate restructuring. As a consequence of these developments, the share of credit to the corporate sector increased from 46 percent in September 1998 to 50 percent in September 1999.

Interest rates

34. Long-term bond yields continued their general downward trend in the first four months of 1998, in part reflecting non-residents’ strong demand for South African assets amid growing expectations of a further easing of monetary policy and further declines in inflation expectations. However, contagion effects from the Asian crisis led to a sharp reversal of this trend in May 1998, as investor sentiment changed dramatically and large- scale portfolio shifts took place.13 As a result, long-term interest rates rose by 540 basis points between end-April and end-September 1998 to about 18 percent, and the rand depreciated considerably. The authorities responded to the unsettled conditions by tightening monetary conditions, causing short-term interest rates to rise by 700 basis points to nearly 22 percent during the same period,14 and by intervening heavily in the foreign exchange markets in May and June. Thus, the yield curve shifted upwards and its slope became sharply negative.

35. The turbulence in the financial markets receded in the last few months of 1998, and the SARB started to cautiously allow for a reduction in short-term interest rates. Markets viewed the easing of monetary conditions as appropriate, as evidenced by some strengthening in the value of the rand, a return of capital inflow (albeit small), and a fall in long-term interest rates. The fall and flattening out of the yield curve continued in 1999, and the repo rate fell below its pre-crisis level by June. This trend was facilitated by more stable global conditions in emerging markets, as well as by lower inflation expectations and the maintenance of a prudent fiscal policy, which led to a favorable sentiment regarding the overall economic conditions in South Africa.

36. The downward movement in interest rates was temporarily halted in May 1999 owing to pre-election nervousness among investors and a falling gold price in the world markets. Following the election and a recovery in gold prices, the SARB continued to allow a reduction of the repo rate to 12 percent by November 24. The SARB kept the repo rate fixed at that level (due to Y2K concerns) until January 14, 2000, when it allowed it to drop by another 25 basis points to 11.75 percent. Long-term government bond yields fell by nearly 400 basis points between September 1998 and March 1999, but remained in the range of 14½ -15½ percent between March and November 1999, reflecting lingering concerns about the inflation outlook as core inflation remained at about 8 percent throughout most of 1999. Hence, although long-term interest rates fell somewhat toward the end of 1999 (the long-term yield was 13.3 percent as of January 14,2000), the yield curve obtained a positive slope during 1999.

Monetary policy procedures

37. The SARB changed its operational procedures for providing banks with short-term liquidity in March 1998; a repurchase auction system was introduced whereby banks tender on a daily basis for liquidity provided by the Reserve Bank.15 Some adjustments to the system have been made over the last year in order to smooth unintended fluctuations in liquidity and enhance interbank activity. Final clearing (“square-off’) auctions were introduced in April 1999, at which an oversupply or undersupply of liquidity is adjusted by an additional final clearing repo auction (or reverse repo auction in the case of oversupply). Such a clearing auction occurs at the discretion of the SARB and only if there is a “sizeable” and unintended over- or under-provision of liquidity. The SARB also introduced certain limits on the banks’ deposits in the Cash Reserve Contra Accounts (CRCA), which effectively limited the possibility for banks to use monthly averaging of required reserve holdings.

38. The SARB also used open market operations to affect liquidity conditions and thereby influencing the marginal impact of the repo auctions. In addition to buying and selling government bonds, the SARB started issuing short-term Reserve Bank debentures in September 1998. The maturity of the debentures is 28 days, and the outstanding stock was gradually increased in 1999 to R 5 billion by end-June. The main purpose for issuing the debentures was to withdraw liquidity from the market and increase the banks’ reliance on the repo auctions. The secondary market for the debentures has been limited. Out of Y2K concerns, the SARB injected liquidity in the market toward the end of 1999 by reducing the stock of SARB debentures to R 1 billion.

D. The Balance of Payments

39. The external current account strengthened significantly in 1999, mainly owing to a large decline in imports. Compared with a deficit of about 1 ‘6 percent of GDP in recent years, it was close to balance during the first three quarters of1999. A resumption of investor confidence led to an increase in international reserves and facilitated a decline in the NOFP.

The current account

40. The external current account deficit declined to 0.2 percent of GDP during the first three quarters of 1999, compared with about 1½ percent of GDP in each of the preceding four years. The lower deficit mainly reflected a sharp reduction (by 2 percentage points of GDP) in imports of goods and services.

41. Exports and imports shrank in the first three quarters of 1999. In U.S. dollar terms, exports of goods and services fell by 7 percent (year-on-year), following a 6 percent decline in 1998. Non-gold merchandise exports declined by 6 percent, gold exports by 16 percent, and services receipts by 6 percent. On the imports side, there was a large drop of 12 percent, following a 6 percent drop in 1998. Merchandise imports fell by 13 percent, while services payments declined by 6 percent. However, both exports and imports started to recover during 1999.

42. The slowdown in trade in 1999 partly reflected an easing in volumes: total exports (goods and services) declined by 2 percent (year-on-year) in the first three quarters of 1999 (compared with an increase of 2½ percent in 1998), while imports dropped by 8½ percent (after an increase of 2 percent in 1998). The slowdown in exports reflected weak production in the manufacturing and mining sectors and weak demand by trading partners, while the slowdown in imports partly reflected the slowdown in domestic demand, which fell by almost 1 percent (year-on-year) in the first three quarters of 1999, and in particular the steep decline in investment by public corporations—following the completion of the investments by the public enterprises (which had a high import content) in late 1998—and by the private business sector.

43. The deficit in the income balance, at 2 percent of GDP in the first three quarters of 1999—unchanged from 1998—reflected a significant decline in both income receipts and income payments. However, both income receipts and income payments strengthened during 1999. The deficit in the transfer balance, at almost 1 percent of GDP in the first three quarters of 1999, was slightly higher than in 1998.

The exchange rate and the terms of trade

44. The nominal effective exchange rate (INS measure) fell by about 9½ percent (year-on-year) in 1999, following a decline of about 14 percent in 1998. In real effective terms, the rand depreciated by about 5 percent in 1999, following a 9 percent fall in 1998. The depreciation took place entirely between April 1997 and September 1998. During this 17-month period, the exchange rate depreciated by 26 percent in nominal effective terms, with over half of the overall depreciation occurring in a single month—July 1998 (see Figure 5). Since September 1998, the exchange rate was relatively stable in nominal effective terms, appreciating slightly in real terms. The terms of trade fell by 1 percent (year-on-year) in the first three quarters of 1999 (following a marginal increase in 1998), due entirely to adverse developments in gold prices.16

Figure 5.
Figure 5.

Exchange Rate Developments, 1995-99

Citation: IMF Staff Country Reports 2000, 042; 10.5089/9781451840957.002.A001

Sources: South African reserve Bank; and IMF, Information Notice System

The capital account and the international investment position

45. Net capital inflows (including unrecorded transactions) amounted to more than US$2 billion during the first three quarters of 1999. This represented an increase of 140 percent (year-on-year), albeit from a low base. Inflows of direct investment increased by 39 percent, although they still remained at relatively low levels (US$1 billion during the first three quarters of 1999), after dropping sharply in 1998. Inflows of portfolio investment also increased significantly (partly caused by the activities of the government in international capital markets, including a number of foreign currency bond issues), while inflows of other investment (loans, trade finance arrangements, bank deposits, and other mostly short-term liabilities) declined to negative levels.

46. The balance of payments was in surplus during 1999, enabling an increase in gross official reserves by US$2 billion to US$7.4 billions, after declining by US$½ billion in 1998. More significantly, the Reserve Bank’s net open forward position was reduced by US$9½ billion in 1999 to US$13 billion by end-December, after increasing by more than US$6 billion in 1998 (mainly at the time of the exchange market pressures in May-June 1998).

47. The international investment position improved significantly in 1998, with net foreign liabilities decreasing by about US$8 billion to less than US$14 billion (10 percent of GDP) at end-1998. Foreign assets rose by US$10 billion, while foreign liabilities increased by only US$2 billion. Both assets and liabilities increased mainly on account of stronger portfolio investment.

48. External debt totaled almost US$39 billion (29 percent of GDP) at end-1998, a slight decrease from end-1997. Foreign currency denominated debt totaled US$25 billion, of which 57 percent was short-term (on a remaining maturity basis). Between end-1998 and end-June 1999, foreign currency denominated debt remained broadly unchanged at US$25 billion.

Capital control liberalization

49. 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; considerable progress in meeting this goal has been made in recent years.17 18 With the abolition of the financial rand mechanism in 1995, virtually all exchange controls on nonresidents were eliminated. Nonresidents are now 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. Nonresidents are also free to hold rand accounts in the banking system, but they are constrained on the amount they may borrow domestically. This constraint has been relaxed, however, and only organizations with more than 75 percent nonresident ownership are subject to limits on their domestic borrowing.

50. 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.

51. The limit on foreign exchange holdings by authorized dealers has been eliminated, although they continue to be subject to prudential regulations. There are no controls on the transfer of funds arising from the import or export of goods and services, although the foreign currency proceeds from exports must be repatriated to South Africa within 180 days. South African corporates are allowed to invest up to R 50 million abroad, except for investments in S ADC countries where the cap is R 250 million. Institutional investors in South Africa (insurance companies, pension funds, and unit trusts) are permitted to invest up to 15 percent of their assets in foreign securities via asset swap arrangements with nonresidents. Private individuals are allowed to invest up to R 500,000 offshore.

52. In the 1999 budget, the following changes to capital control regulations were announced.

  • Residents were permitted to make credit card purchases of imports (e.g., purchases via the Internet) of up to R 20,000 per transaction.

  • The annual limits for a single student were raised to R 120,000 for living expenses and R 35,000 for travel expenses, in addition to tuition and academic fees.

  • The travel allowance for single emigrants was raised to R120,000, together with a settling-in allowance of R 200,000


Prepared by Trevor Alleyne, Gunnar Jonsson, and Michael Sarel.


There was a substantial revision in the national income accounts for 1993-98. See Box 1 for details.


It appears that there is a discontinuity between pre-1998 and subsequent data. Beginning in the first quarter of 1998, basic data originate from the Survey of Total Employment and Earnings by Statistics South Africa, which replaced 17 discrete monthly or quarterly business surveys.


Data from the 1997 October Household Survey, which takes place annually and provides labor market data on both the formal and informal sectors.


The growth in remuneration per worker should not necessarily be interpreted as reflecting the growth rate of wages. The trends in these two series would be different to the extent that full-time and part-time employment differed (as was the case in this period) and the pattern of overtime pay varied over time.


For example, Andrew Levy and Associates, a South African consulting firm specializing in labor market and industrial relations issues, estimates that wage settlements in 1998 were below 9 percent in 1998, about 1 percent point lower than in 1997.


Privatization receipts Mid revenue from the sale of oil stocks (0.4 percent of GDP in 1998/99) and losses from foreign exchange operations and valuation changes of the Reserve Bank’s gold reserves (1.9 percent of GDP) are excluded from the budget deficit. The latter is included in the calculations for the consolidated public sector borrowing requirement (see below).


Under Section 100(1) of the Constitution, the national government is authorized to intervene in provinces in cases where a province cannot or does not fulfil an executive obligation in terms of either legislation or the Constitution. The Constitution bars provinces from incurring debt unless authorized by the Minister of Finance.


Whereas provinces rely on the transfers from the national budget for 96 percent of their revenue, local authorities are largely self-sufficient, raising most of their own revenue from property and other local taxes, levies, and user charges.


The overall corporate tax rate, which includes the standard rate and the 12.5 percent Secondary Tax on Companies, would fall to from 42.2 percent to 37.8 percent


Turnover in the secondary bond and equity markets together was on average R 403 billion a month in 1997. This more than doubled to R 1,001 billion a month during the turbulent second and third quarters of 1998. Turnover then fell back to on average R 834 billion a month during the first 10 months of 1999, as market conditions calmed down.


As interest rates have been reduced in 1999, there have been some indications of a revival in demand for mortgage advances. This demand might be further boosted with the introduction of new home-loan products in October 1999, which in some cases carry a borrowing cost that is more than 2 percentage points below the prime lending rate.


See South Africa—Selected Issues (SM/98/164) for a more detailed description of the turbulence in the financial markets in mid-1998.


The initial interest rate response was somewhat uneven, as the SARB and market participants were still learning how to manage and interpret the newly introduced repurchase system for providing liquidity to banks (see below).


See Section I in South Africa—Selected Issues (SM/98/164) for a description of the new procedure


Gold prices (London market, U.S. dollar terms) declined by 11 percent in 1998 (annual average rate) and by an additional 5 percent in 1999. However, following announcements by the Fund that it would conduct its gold sales off-market and by European central banks that they would limit gold sales and the lending of gold, gold prices rebounded strongly in October 1999, averaging a level that was 20 percent higher than during the third quarter of 1999 (the low point) and 5 percent higher than a year earlier.


South Africa formally accepted the obligations of Article VIII, Sections 2, 3, and 4 of the Fund’s Articles of Agreement as of 1973.


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

South Africa: Selected Issues
Author: International Monetary Fund