Front Matter Page
© 2007 International Monetary Fund
August 2007
IMF Country Report No. 07/274
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the2007 Article IV consultation with South Africa, the following documents have been released and are included in this package:
The staff report for the 2007 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on May 22, 2007, with the officials of South Africa on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 11, 2007. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
A staff statement of July 25, 2007 updating information on recent developments.
A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its July 25, 2007 discussions of the staff report that concluded the Article IV consultation.
A statement by the Executive Director for South Africa.
The document listed below has been or will be separately released.
Selected Issues Paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
International Monetary Fund • Publication Services
700 19th Street, N.W. • Washington, D.C. 20431
Telephone: (202) 623-7430 • Telefax: (202) 623-7201
E-mail: publications@imf.org • Internet: http://www.imf.org
Price: $18.00 a copy
International Monetary Fund
Washington, D.C.
Front Matter Page
INTERNATIONAL MONETARY FUND
SOUTH AFRICA
Staff Report for the 2007 Article IV Consultation
Prepared by the Staff Representatives for the 2007 Consultation with South Africa
Approved by Michael Nowak and Matthew Fisher
July 11, 2007
The 2007 Article IV consultation discussions were held in Pretoria and Cape Town during May 9-22, 2007. The mission met with the Minister of Finance, the Governor of the South African Reserve Bank, senior officials, and representatives from the private sector and the academic community.
The staff team comprised Messrs. Lizondo (head), Cuevas, and Gueorguiev (all AFR), Vacher (MCM), and Ms. Nkusu (PDR). Messrs. Nolan and Burgess, senior and deputy resident representatives in Pretoria, respectively, participated in the mission. Mr. Aboobaker, Senior Advisor to the Executive Director for South Africa, also took part in the discussions.
At the time of the 2006 Article IV consultation, Executive Directors commended the authorities for their well-designed macroeconomic policies and structural reforms. They also noted that high unemployment and poverty remained serious challenges. Directors supported the authorities’ strategy to deal with these problems through policies aimed at raising economic growth while maintaining a stable macroeconomic environment.
Economic data for South Africa are generally of good quality and are provided to the Fund and the public in a timely manner. South Africa subscribes to the SDDS and publishes all data on the reserves template.
Relations with the Fund, relations with the World Bank Group, and statistical issues are presented in an informational annex to this report.
Contents
Glossary
Executive Summary
I. Recent Economic and Policy Developments
II. Policy Discussions
A. Outlook and Risks
B. Preserving Macroeconomic and Financial Stability
C. Achieving Higher Growth
D. Regional Spillovers
E. Equity Issues
F. Other Issues
III. Staff Appraisal
Tables
1. Selected Economic and Financial Indicators, 2003-08
2. National Government Main Budget, 2003/04-2009/10
3. Nonfinancial Public Sector Operations, 2003/4-2009/10
4. Balance of Payments, 2005-12
5. Monetary Survey, 2002-06
6. Indicators of External Vulnerability, 2002-07
7. Financial Soundness Indicators, 2002-07
8. Social and Demographic Indicators
9. Millennium Development Goals, 1990-2005
Figures
1. Real Sector Developments
2. Money, Price, and Interest Rates
3. External Sector Developments
4. Fiscal Developments
5. Exchange Rates, Asset Prices, and Spreads
Boxes
1. Summary of Previous Consultation Discussions
2. Assessing the Risks from South Africa’s Current Account Deficit
3. Estimates of the Equilibrium Exchange Rate
4. South Africa and Southern Africa
Appendix
I. Debt Sustainability and Medium-Term Scenario
Glossary
ARV |
Anti-retroviral drugs |
ASGISA |
Accelerated and Shared Growth Initiative for South Afric |
BEE |
(Broad Based) Black Economic Empowerment |
BLNS |
Botswana, Lesotho, Namibia, and Swaziland |
CGER |
Consultative Group on Exchange Rate Issues |
CMA |
Common Monetary Area |
CPI |
Consumer Price Index |
CPIX |
CPI excluding the interest on mortgage loans |
EMEs |
Emerging Market Economies |
EPA |
Economic Partnership Agreement |
EU |
European Union |
FSAP |
Financial Sector Assessment Program |
IMD |
International Institute for Management Development |
PPP |
Public-Private Partnership |
REER |
Real Effective Exchange Rate |
ROSC |
Report on the Observance of Standards and Codes |
SACU |
Southern African Customs Union |
SADC |
Southern African Development Community |
SARB |
South African Reserve Bank |
SDDS |
Special Data Dissemination Standard |
SMEs |
Small-and-medium-sized enterprises |
SOEs |
State-owned enterprises |
TDCA |
Trade Development and Cooperation Agreement |
TFP |
Total Factor Productivity |
WEF |
World Economic Forum |
Executive Summary
Background
South Africa’s recent economic performance has been strong. Real GDP growth has been robust, employment has risen, the fiscal position has strengthened further, and the country has continued to bolster its international reserves. Strong domestic demand, however, led to a widening of the external current account deficit, which was financed by portfolio inflows. Also, inflation pressures intensified, leading to a recent breach of the inflation target band.
The economic outlook is largely positive, with short-term risks arising mainly from a possible worsening of the external environment. Unemployment and poverty remain major challenges.
Policy discussions
Staff supported the authorities’ overall strategy, which seeks to spur growth and reduce unemployment and poverty while preserving macroeconomic stability.
Staff agreed with the Reserve Bank that the inflation risks were on the upside, and considered that a tightening of monetary policy could be needed. In the event, the policy interest rate was raised in June, following the breach of the band with April inflation data.
The authorities remain committed to the flexible exchange rate regime, intervening only to gradually build up reserves, a policy supported by staff. Staff also supported the ongoing relaxation of capital controls, and favored reducing administrative compliance costs.
Staff agreed with the thrust of the government fiscal plans, including boosting investment in infrastructure and selected social programs, but favored maintaining a neutral fiscal stance in the next few years, which would imply a moderately lower rate of expenditure growth than currently planned. The government is developing a major social security reform.
The banking system is sound and well regulated. The authorities are well aware of the risks arising from rapid credit growth, and staff suggested steps to further enhance the monitoring framework. There is progress in improving access to banking services by the poor.
Staff supported the efforts to identify and address constraints on growth under the Accelerated and Shared Growth Initiative for South Africa. Although the volatility of the rand has been identified as a possible constraint, there was agreement that the current flexible exchange rate system should be maintained. Competitiveness concerns would continue to be addressed by measures to raise productivity and reduce costs.
Staff supported efforts to increase employment, and favored the identification and revision of labor market regulations and practices that limit job creation. Staff also recommended further trade liberalization and simplification of the trade regime. South Africa’s strong economic performance in recent years has benefited the wider region.
Staff supported the official initiatives to address wide income and wealth disparities.
Front Matter Page
INTERNATIONAL MONETARY FUND
SOUTH AFRICA
Staff Report for the 2007 Article IV Consultation—Informational Annex
Prepared by the Staff Representatives for the
2007 Consultation with South Africa
Approved by Michael Nowak and Matthew Fisher
July 11, 2007
Relations with the Fund. Describes financial and technical assistance by the IMF and provides information on the safeguards assessment and exchange system. South Africa has no outstanding purchases and loans from the Fund.
Relations with the World Bank. Describes the World Bank Group’s strategy and portfolio.
Statistical Issues. Assesses the quality of statistical data. Economic data for South Africa are generally of good quality and are provided to the Fund and the public in a timely manner. South Africa subscribes to the SDDS and publishes all data on the reserves template.
Contents
I. South Africa: Relations with the Fund
II. South Africa: Relations with the World Bank
III. South Africa: Statistical Issues
Front Matter Page
Public Information Notice (PIN) No. 07/94
FOR IMMEDIATE RELEASE
August 6, 2007
International Monetary Fund
700 19th Street, NW
Washington, D. C. 20431 USA