Statement by Peter Ngumbullu, Executive Director for South Africa and John Mafararikwa, Senior Advisor to Executive Director

South Africa showed strong macroeconomic performance owing to its sound policies, which aimed at raising economic growth and reducing poverty, within a stable macroeconomic, social, and political environment. Executive Directors commended the strong economic performance, sustainable fiscal policies, and sound debt management that helped to reduce public debt. They appreciated the authorities' efforts on addressing major economic and social challenges while preserving macroeconomic stability. They agreed that the flexible exchange-rate system and sound financial system has helped the country to sustain economic growth.


South Africa showed strong macroeconomic performance owing to its sound policies, which aimed at raising economic growth and reducing poverty, within a stable macroeconomic, social, and political environment. Executive Directors commended the strong economic performance, sustainable fiscal policies, and sound debt management that helped to reduce public debt. They appreciated the authorities' efforts on addressing major economic and social challenges while preserving macroeconomic stability. They agreed that the flexible exchange-rate system and sound financial system has helped the country to sustain economic growth.


The South African authorities have continued with implementation of sound macroeconomic and social policies, aimed at raising economic growth and reducing poverty, within a stable macroeconomic, social and political environment. The results are encouraging. The country’s economic fundamentals have strengthened significantly and South Africa is making a major contribution in boosting Africa’s ongoing economic strength, through its approach to macroeconomic policies, the growing trade links with the rest of the continent, contribution of South African Banks in African countries and its gradual capital account liberalization which is translating into sizable portfolio investment in Africa. Major strides have been made in addressing the significant social needs, including providing assistance to those affected by the HIV/AIDS pandemic. South Africa has demonstrated leadership in addressing difficult reforms such as reducing wide racial inequalities in income, wealth and land redistribution and their experience shows that doing so within the context of a growing economy is fundamental, complemented by skilful social and political management.

As an emerging market economy and regionally systemic country, the South African economy is not immune to global developments and challenges, as recent events have shown. They are fully aware of the need to adjust their policies to carefully manage the risks associated with possible further deterioration of the external environment, especially disorderly unwinding of global imbalances and the ongoing tightening of global liquidity conditions, in order to achieve their main objective of maintaining robust real economic growth. However, they are also aware of the limits of policy adjustments to a harsh external environment and look forward to progress being made in multilateral consultations on global imbalances. The South African Authorities are addressing the challenges that face the country in a comprehensive way and have unveiled a new framework, the Accelerated and Shared Growth Initiative of South Africa (ASGISA), which focuses on improvement of the growth path of the economy over the medium- to long-term. In this context, the authorities express their appreciation of the exchange of views with the staff during their missions and for well-written and balanced reports.

Growth performance

The South African economy continued its robust performance and real GDP grew by 4.9 percent in 2005. The low interest rate environment and rising incomes from buoyant housing and stock prices contributed to strong growth in domestic demand, with private consumption and investment spending increasing substantially. Public sector investments also increased in areas that are growth enhancing. Reflecting the strong growth, employment grew by a healthy 5.7 percent in the year to September 2005. The authorities consider that their prudent macroeconomic policies, complemented by ongoing deepening of structural reforms in the economy, including measures aimed at addressing wealth and social inequalities are contributing to raising potential GDP. They remain optimistic that growth will remain strong in 2006.

Fiscal policy and debt management

The fiscal performance of the South African authorities continued to be an anchor of the overall sustainability of the macroeconomic framework, and was again underpinned by robust revenue collections, and disciplined expenditure and debt management. The non-financial public sector registered a significant turnaround, posting a surplus of 0.7 percent of GDP in fiscal year 2005/06 compared to a deficit of 1.8 percent in the previous year. In fiscal year 2005/06 the first public-sector surplus ever was recorded. Revenue collections exceeded the original budget estimate by a considerable margin during this period, reflecting strong economic growth, improved tax administration and the benefits of structural reforms in the tax system. The most buoyant increases in tax revenue were registered by taxes on international trade and transactions, reflecting the rising import volumes stemming from the buoyant domestic expenditure and relative strength of the rand. Taxes on property as well as corporate income tax collections also rose briskly. On the other hand, expenditure by the national government in 2005/06 came very close to the original budgetary provision. While most categories of expenditure grew at a somewhat stronger rate than originally budgeted, interest paid on national government debt fell short of the originally budgeted projection.

Strong economic performance, sustainable fiscal policies and sound debt management contributed to continuous decline in the public debt for the past ten consecutive years. Total loan debt as a ratio of gross domestic product decreased from 35.3 percent at the end of March 2005 to 33.8 percent at the end of March 2006, while the share of external debt decreased from 13.8 percent to 12.6 percent during the same period.

Monetary policy and exchange rate developments

The South African authorities have continued to implement monetary policy within the inflation targeting framework with a firm commitment to ensure price stability, within the target range of 3-6 percent. Since September 2003, and during the past year, the inflation rate was again firmly controlled within the adopted target range. During its last meeting, the Reserve Bank of South Africa expressed concern about the inflation outlook in the short-term, stemming from high domestic demand and high oil prices and decided to increase the repo rate by 50 basis points from 7 to 7.5 percent. The central bank reiterated that it would continue to monitor economic developments and all the relevant risks which might have a bearing on the continued attainment of the inflation target. Regarding inflation targeting, the authorities are satisfied with the current framework which has gained confidence of market participants. They are focusing on further strengthening of institutional capacity in research and analytical skills before contemplating any possible modifications to the framework. Moreover, the economy is still undergoing fundamental reforms that have long-term implications on potential GDP. In this regard, a process has been initiated, involving peer review of its macroeconomic and forecasting model by international and local academics and broadening the information provided in the Monetary Policy Committee’s statements.

While the South African currency has remained relatively stable over the last few years, recent global developments in the international financial and commodity markets have started to put pressure on the currency, and the re-rating of emerging market risks contributed to the depreciation of the rand, though it has strengthened lately. Several other emerging market countries also experienced some degree of weakening of their currencies. As stated in the staff report, the widening of interest spreads on international bonds remained well contained in the case of South Africa.

Balance of payments developments

The external current account recorded a deficit during 2005, reflecting strong domestic demand and the strength of the rand. The deficit on the current account was more than offset by the surplus on the financial account, which widened in the first quarter of 2006 as non-residents stepped up investment in South Africa. Net financial inflows to the value of R33.4 billion were recorded in the first quarter of 2006, compared to a net inflow of R22.8 billion in the fourth quarter of 2005. The inflow of portfolio investment capital during the first half of 2006 also benefited from an international bond issue of US$750 million. As a result of the inflows of capital, the overall balance of payments continued to record a surplus during the period under review. This was the tenth consecutive quarterly overall balance of payments surplus recorded since 2003. The authorities continue to make gradual but steady progress in removing capital controls, contributing to increase FDI to other countries particularly in Africa. Consistent with its policy of accumulating reserves when conditions are favorable, South Africa continued to accumulate international reserves during 2005/06. The country’s gross international reserves increased to 3.6 months import cover. Also, South Africa’s reserves-to-short term debt ratio is much higher than other emerging market economies, which will help to foster exchange rate stability and reduce vulnerabilities to external shocks.

Trade Policy

Since the 1990s, South Africa’s trade regime has been liberalized significantly through simplification of the trade regime, wider use of ad valorem duties, reduction of tariff peaks and reduction in the weighted average tariff. In considering the pace of further trade liberalization, the authorities are disappointed by the lack of progress in the Doha round. Nevertheless, they are pursuing preferential trade arrangements within the region, EU, US, Asia and South America. In pursuing these negotiations, the authorities are mindful of the implication on countries in the region, particularly within the SACU group, including the possibility of region-wide pressures on government finances.

Financial sector developments

South Africa’s financial system remains sound and measures are being taken to continue enhancing regulation and oversight. Major banks have developed sophisticated risk management systems and regulation and supervision have been strengthened. The authorities are fully aware and are monitoring the risks associated with fast growing credit to household. They are looking forward to the envisaged FSAP update. South African banks are also major players in the region and in Africa as a whole and the authorities are stepping up cooperation with host countries. Regional initiatives are at an advanced stage in harmonizing legal and regulatory frameworks for supervision within the SADC grouping. Cooperation in these areas will also be strengthened with other African countries where South African banks operate.

Developments in the labor market

Reflecting the strong performance of the domestic economy, formal non-agricultural employment increased meaningfully over the period of March 2005 to March 2006. The number of employed persons in the formal non-agricultural sector increased by 312,000; an increase of 4.5 per cent over the year to March 2006. Employment gains were fairly widespread throughout the economy and both the private and public sectors expanded their employment during the period. Notwithstanding these gains, the authorities are aware that the level of unemployment in the country remains high. They have adopted the ASGISA framework to raise the growth potential of the economy over the medium- to long-term, with a view to particularly reducing unemployment and poverty. It is important to observe that the main causes of high unemployment in South Africa date back to the apartheid era, and these problems cannot simply be addressed by changing labor laws, but should be spearheaded by skillful political and social management of the reforms. It is therefore important that any framework, as is the case with ASGISA, enjoys widespread support among the key role players in the South African society, including government, the private sector, organized labor, and the non-governmental organizations.

Addressing social inequalities

The authorities are consolidating programs aimed at addressing racial inequalities in the distribution of wealth, land, ownership of business and employment opportunities. The authorities’ Black Economic Empowerment (BEE) program is being implemented in a transparent manner, through various schemes with clear indicators and with cooperation from the private sector. Regarding land reform, the guiding principle has been willing-buyer/willing-seller. The experience so far points to the need for fine-tuning this policy with a view to accelerating land redistribution in a manner that is grounded in well defined legal principles, maintains confidence and mindful of the impact on agricultural output.

The Accelerated and Shared Growth Initiative for South Africa (ASGISA)

The core objective of the South African authorities is to halve poverty and unemployment by 2014, which requires maintenance of macroeconomic stability and a growth rate in excess of 5 per cent. Thus, the government has set a two-phase target. The first phase covers the period 2005-09, during which the government envisages an annual growth rate that averages 4.5 per cent or higher. It is worth noting that the South African economy has been, and is still undergoing fundamental structural transformation which translates into growth accelerations. This provides evidence that the growth potential of the economy is higher. Therefore, in the second phase, between 2010 and 2014, average GDP growth rate is expected to accelerate to at least 6 per cent. In developing this vision for accelerated and shared growth, government adopted a strategy for identifying and addressing “binding constraints” on achieving its growth objectives. The binding constraints include: (i) minimizing excess volatility in the exchange rate; (ii) addressing inadequate infrastructure and logistical bottlenecks to satisfy the needs of a rapidly growing economy by investing 20 percent of GDP for the next three years, mostly on power generation, power distribution, rail transport, harbours and an oil pipeline as well as housing and social institutions and provincial projects in mining, agriculture and other sectors; (iii) removing barriers to entry and competition; (iv) improving the regulatory environment; (v) addressing capacity limitations within government and improve absorption capacity; (vi) adopting sectoral investment strategies and increased support for SMEs; and (iv) addressing the shortage of skills.

Addressing skills shortage and education initiatives

The current growth acceleration is exposing the shortage of suitably skilled labor. The South African government plans to address these issues via medium-term educational interventions. Apart from interventions to address the skills challenge in the educational sphere, measures include the development of an Employment Services System (to close the information gap between potential employers and employees), and phase 2 of the National Skills Development Strategy. A new institution, the Joint Initiative for Priority Skills Acquisition (JIPSA) has been established to address the skills shortage. This is a structure led by a Committee of key ministers, business leaders, trade unionists, education and training providers, and other experts. The focus of the group will be to identify urgent skills needs, and provide effective solutions, such as special training programmes, bringing back retirees or South Africans and Africans working out of Africa, and drawing in new immigrants where necessary. It may also include mentoring and overseas placement of trainees to fast track their development. In addition, the government is also engaged in the development of a scarce skills database based directly on the expected needs of the over 100 individual projects included in ASGISA. Other key skills projects include the deployment of experienced professionals and managers to local governments to improve project development, implementation and maintenance capabilities.

Efforts to address HIV/AIDS and other diseases

The South African authorities embrace the significance of a healthy population and work force for sustained economic growth and development. They have intensified their campaign to reduce the incidence of HIV/AIDS, as well as other communicable diseases. Government’s comprehensive HIV/AIDS management programme is firmly grounded and aligned to all of its development interventions, focusing on priority areas such as prevention, treatment, support services, development of health facilities, legal and human rights commitments, research, monitoring and surveillance. Currently, the National Comprehensive Plan for the Management, Care and Treatment guides the design and implementation of HIV/AIDS programmes and compares favourably with the best programmes globally. Expenditure on HIV/AIDS has increased substantially over the past five years; the number of patients under treatment has tripled and coverage is expected to be universal with the complementary efforts of the private sector.

Concluding remarks

The South African authorities have entered the second decade of democracy with the same commitment as during the first decade; to design and implement prudent macroeconomic policies aimed at improving the standards of living of all South Africans. The progress made thus far is commendable, and well-documented in the annual staff reports by the IMF. The authorities foresee an ongoing positive relationship with the IMF in the period ahead, particularly at a time when the IMF is reviewing its role and interaction with member countries. As in the past, the authorities will communicate their intention to have the staff report published at a later stage.