IMF Policy Paper: South Africa - Staff Report For The 2011 Article Iv Consultation

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Background

1. Since 1994, South Africa has become increasingly integrated into the global economy. This has allowed output growth to converge to the world average level and foreign savings have helped finance domestic investment beyond the country's low savings rate. But this integration has also exposed South Africa to global business cycles—most recently, the severe stress imparted by the global financial crisis and ensuing global downturn. Prudent countercyclical monetary and fiscal policies, together with a flexible exchange rate, have helped dampen the adverse effects of those global cycles; and sound financial supervision has guided financial institutions in managing the associated risks. And while transfer programs have lifted the most vulnerable from extreme poverty, progress in social indicators has lagged behind macroeconomic achievements. Unemployment and inequality have remained stubbornly high, and the recent recession has only exacerbated this further.

A02ufig01

South Africa: Growth, Relative Performance

(Percent per year, 3-year moving average)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Sources: WEO and IMF staff estimates.1/ Unless otherwise indicated and depending on data availability, South Africa's peer group in this report includesArgentina, Brazil,Chile, China,Colombia,Hungaty,India,Indonesia, Israel, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia, Thailand, Turkey, and Ukraine.

2. Against this backdrop, the government has developed an ambitious development strategy, the New Growth Path (NGP), whose objectives include:

  • the creation of five million jobs over the next 10 years by raising economic growth to 6-7 percent;

  • increasing domestic savings to reduce the economy's reliance on portfolio inflows; and

  • attenuating the deep cleavages that characterize the South African economy, particularly between big businesses and those in formal sector employment and smaller enterprises, the unemployed, and discouraged work seekers.

3. The 2011 Article IV discussions centered on the policies needed to move the country toward these strategic objectives. In the near term, this includes the policy refinements needed to ensure that the lopsided, private-consumption-led growth currently underway is more balanced. And for the medium term, on the reforms needed to raise potential growth. In particular, the consultation focused on the following issues and questions:

  • What is the fiscal deficit path that would balance the country's development objectives while rebuilding fiscal buffers?

  • How quickly does monetary policy tightening need to begin?

  • How should policies respond to a sustained period of capital inflows?

An Uneven Recovery

4. South Africa's recovery from the 2008-09 recession has been uneven and hesitant. The recovery has been largely led by private and public consumption growth, while export volumes and private investment have remained markedly below precrisis levels (unlike in most other large emerging markets). Moreover, quarterly growth rates (in seasonally adjusted annualized terms) have wavered between robust and more mediocre rates. Still, while lagging behind other large emerging markets in the business cycle, GDP is now above the precrisis peak, and although output remains below potential this gap is expected to close by early 2012 (Appendix I and Klein, 2011, a).

  • What measures are needed to sustain the financial sector's stability?

  • What are the reforms needed to make growth more labor intensive?

A02ufig02

From Recovery to Expansion

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Source: IMF’s World Economic Outlook.

5. Inflation has remained contained.

Headline inflation reached its lowest level since 2004 late in 2010 (3.2 percent y-o-y). Besides the negative output gap, the fall in inflation reflected currency appreciation and moderate domestic food prices. These developments offset the sharp increases in electricity tariffs and other administrative prices engineered to increase power generation capacity and improve public services. Inflation expectations, however, have declined more gradually and remain slightly below the upper limit of the 3 to 6 percent target range. And since early 2011, high food and fuel prices have increased headline inflation. Even though core inflation has seen some upward movement in recent months, it remains low.

A02ufig03

South Africa: Headline and Core Inflation

(Q/Q, SA, annualized)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Sources: Country authorities and Haver Analytics, Inc.
Figure 1.
Figure 1.

South Africa: Consumption Led Recovery

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

6. The still weak economic conditions and large real wage increases have stymied recovery in employment. During 2008-09 as the economy slumped into recession, South Africa lost close to 1 million jobs— proportionately, this is as many jobs as countries at the epicenter of the global financial crisis lost. And despite these poor labor market conditions and moderation in inflation, wage awards remained high (averaging some 8 percent) in 2010. In addition, over the last year hiring may have been discouraged by uncertainty about proposed changes in legislation governing temporary employment. The ratio of employment to the working-age population has declined from around 45 percent in 2008 to 40 percent in early 2011, implying that employment remains some 0.9 million (or 6V2 percent) below the precrisis level. Besides low employment opportunities, it also reflects a worrisome reduction in the participation rate.

A02ufig04

Employment, 2010

(In percent of working-age population)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Sources: WEO, WDI, and IMF staff calculations.

7. The current account balance strengthened significantly in 2010, mainly reflecting improvement in the terms of trade and reduced import demand. The current account deficit narrowed to 2% percent of GDP in 2010 from 4 percent of GDP in 2009. High export prices helped offset low export volumes, while weak investment demand limited import volumes. The composition of South African exports has shifted toward commodities from manufacturing products. And the geographic distribution is also changing with Asian markets gaining share at the expense of those in Europe. The increase in commodity trade and favorable commodity prices, have made China South Africa's main individual trading partner. Net portfolio flows funded most of the current account deficit.

A02ufig05

Current Account, Saving and Fixed Capital Formation

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Sources: SARB and STATS SA.

8. Fiscal policy has remained supportive relative to the precrisis structural position. In cyclically adjusted terms, the overall deficit of consolidated government swung from surplus in fiscal year 2007/08 to a deficit of 5% percent in 2009/10, and staff estimates the deficit at some 4 percent in 2010/11. This improvement owed to moderation in primary spending growth—from an average of some 9 percent between 2004/05 and 2009/10 to % percent in 2010/11—coupled with a modest recovery in tax revenues. Although the government's borrowing requirements remained large, they were easily met through the issuance of rand denominated bonds and bills at low interest rates against the backdrop of large capital inflows. The composition of fiscal spending has tilted more toward current spending, mainly reflecting above budgeted increases in wages.

9. Monetary policy provided additional stimulus, with a 150-basis-points cut in the policy rate in 2010. These cuts have brought the policy rate to 5.5 percent, its lowest level in more than 30 years. With inflation and inflation expectations on the rise since early 2011, the scope for further policy cuts is limited. In its communication to the market, the South African Reserve Bank (SARB) has clearly explained the cost-push nature of the recent rise in inflation, and its readiness to raise policy rates as needed to prevent second-round effects.

10. The external environment and domestic policy settings have resulted in real appreciation pressure. Reflecting the accommodative monetary stance in many advanced countries and the large domestic public sector borrowing requirement, capital inflows, particularly into the bond market over the last year were significant. And the ebb and flow of capital has contributed to the volatility of the rand. But exchange rate flexibility has likely also attenuated inflows by discouraging carry trades. More importantly still, it has helped insulate the real economy. The government also stepped up reserve accumulation (which increased from US$40 billion at end-December 2009 to US$50 billion at end May, 2011) and relaxed controls on capital outflows by residents (as part of a gradual shift from a system based on exchange controls to one based on prudential considerations) (Table 1).

Table 1.

South Africa: Selected Economic and Financial Indicators, 2008–16

article image
Sources: South African Reserve Bank; IMF, International Financial Statistics; and IMF staff projections.

Since January 2009, a reweighted and rebased CPI replaced the previously used CPIX (the consumer price index excluding the interest on mortgage loans) as the targeted measure of inflation.

At current prices; annual percent change.

In U.S. dollars; annual percent change.

End-of-period. 2010 estimate corresponds to change from December 2009 to September 2010.

Contribution (in percentage points) to the growth of broad money.

Calendar-year figures are based on National treasury’s historical data and staff’s projections starting 2011.

A02ufig06

Implied FX Volatility

(In percent)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Source: Datastream.

11. Having come through the recession in reasonable shape, the financial sector is now contending with a period of low credit demand and rising costs. Proactive bank supervision, low dependency on external funding, and conservative risk management have contributed to banks' resilience in recent years. Impaired advances to gross loans and advances have stabilized at under 6 percent of the loan portfolio, but have displayed unusual stickiness partly as a result of a slow debt workout process. The limited impact of the recession on impairments likely reflects the limited access to credit of low-skilled workers among whom most of the job losses were concentrated. Moreover,

Outlook And Risks

12. Staff expects the economy to expand by about 4 percent in 2011-12, underpinned by solid domestic demand. Private consumption growth should remain robust, supported by high real wages and the low interest rate environment. Private investment growth, too, should accelerate, with the pickup in overall activity and the lifting of the moratorium on the issuance and renewal of mining licenses. The import intensity of investment and, more broadly, growth, will likely cause the current account deficit to increase to 3% percent of GDP in 2011 and gradually further widen to about 5-6 percent over the medium term. The closing output gap and the ongoing cost-push pressure, together with the continued administrative price increases, will likely push headline inflation to the top end of the 3-6 percent target range later this year.

13. The main downside risks to this scenario are external. South Africa's close links to advanced economies, especially in the core euro area, exposes it to possible sluggishness in their recovery as monetary and fiscal stimuli are rolled back and to any fallout from the sovereign debt crisis in peripheral euro area countries. those who kept their jobs experienced a significant increase in their disposable income arising from high real wages. Growth in credit declined with the fall in private investment and as banks sought to increase liquidity. But more recently, credit growth has resumed at a moderate pace.

South Africa's exposure to developments in China, both as a direct trading partner and through its effect on commodity prices, has also increased. Cost-push pressure arising from global food and fuel prices may also result in higher inflation expectations and wage settlements given the backward-looking nature of these agreements. On the domestic side, high household debt may constrain consumption growth as interest rates become less supportive in the coming months.

Authorities' Views

14. The authorities have a similar view on the outlook and risks. Their baseline projections are that the output gap would be larger and that the pace of growth in the near term somewhat more moderate than staff's. They also emphasized the high degree of uncertainty surrounding these assessments. They agreed with staff that the main source of risk to the outlook is external. They expressed concern about the quality and sustainability of the global recovery. They see the recovery in advanced economies relying on the monetary and fiscal stimuli in place, and that these look set to be withdrawn before domestic demand has recovered sufficiently. They saw a case for more gradual fiscal adjustment in those advanced countries where borrowing costs remain low.

Managing The Upswing

A. Fiscal Policy

15. With public debt at manageable levels and little sign of domestic demand pressure, the authorities' fiscal plans call for fairly gradual fiscal consolidation. The consolidated government deficit would decline from 5% percent in 2011/12 to 3% percent in 2013/14. According to staff's estimates for potential output, the plan would leave the structural deficit at some 3% percent of GDP in 2013/14—five years after the trough of the recession. The 2011 budget envisages this policy would result in gross national government debt peaking at around 43 percent of GDP in 2013/14. This compares with a precrisis level of government debt at some 27 percent of GDP.

16. Although this path would not pose immediate risks to fiscal sustainability, staff felt that it could constrain fiscal space to deal with future shocks. Without straying too far from current policies, staff sees scope for fiscal policy to be more countercyclical in the outer years while avoiding contractionary impulse in 2011/12 when output is expected to remain below potential. Specifically, by adhering to previously stated intentions to keep real spending growth to 2 percent and ensuring that The authorities noted the spillover effects of monetary easing in the advanced economies, including their impact on global commodity prices and capital flows. tax revenues gradually recover to precrisis peaks, fiscal policy would become much more countercyclical than currently envisaged. Operationally, this would entail the following:

  • On the spending side, the government would need to maintain the nominal spending levels over the next 3 years as indicated in the 2011 budget review, and increase real spending by 2-3 percent annually thereafter.

  • On the revenue side, staff advocated ensuring that the revenue-to-GDP ratio increased by a % percentage point on average each year so it can approach the precrisis peak of some 29 percent of GDP by 2016/17.

  • Such policies would deliver a cyclically adjusted fiscal deficit that is 11% percentage points of GDP tighter than currently envisaged by 2013/14 and close to balance by 2016/17.

  • Just as important, it would contain debt at around 35 percent of GDP. This would rebuild some of the buffers that helped protect South Africa from the worst of the global crisis, while recognizing that addressing South Africa's many development needs justifies a moderate increase in the public debt ratio relative to the pre-crisis level.

A02ufig07

National Government Debt

(Percent of GDP)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Sources: South African National Treasury and IMF staff estimates.

17. Within the overall spending envelope, staff also saw a need to rebalance the composition of public spending to help support higher potential growth and enhance public service delivery. In recent years, the government wage bill has increased markedly— to 11% percent of GDP in 2010/11 from 9% percent of GDP in 2007/08. Thus, at its current level, the public sector wage bill is well above the average for other emerging markets in the G-20 (8% percent of GDP). Given the influence that the public sector wage agreement round seems to be having on private sector wage adjustments, staff also underscored the need for public sector wage increases to be kept to levels that can be justified by productivity improvements. Capital spending at the consolidated government level has increased only marginally—by just % percentage points of GDP to 2% percent of GDP over the last three years—and remains well below the levels that the country's overstretched infrastructure necessitate.

A02ufig08

Public Spending

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Sources: SARB and STATS SA.
Figure 3.
Figure 3.

South Africa: Well Managed Public Debt

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

18. Staff welcomed the explicit fiscal guidelines expected to inform fiscal policy formulation going forward. The 2011 Budget proposed that fiscal policy be guided by three principles: long-term public debt sustainability, countercyclicality, and intergenerational equity. These principles have been applied to the design and implementation of fiscal policy in South Africa since 1994. In the staff's view, they would also be consistent with a faster consolidation over the medium term than is implied in the trajectory for government deficits presented in the 2011 budget review.

Authorities' Views

19. The authorities affirmed their intention to ensure that fiscal policy is countercyclical during the upswing. With regard to the staff's proposals, they highlighted two concerns. First, the staff's growth outlook is a bit more bullish than theirs (particularly in the near term). This argues for a somewhat more gradual start to the fiscal consolidation process. Second, revenue buoyancy in the coming years may not be as high the staff presumes. Once private investment recovers, corporate tax collection could remain subdued as firms use depreciation allowances and write-off profits

B. Monetary Policy

21. The case for commencing the tightening cycle soon is finely balanced. Arguments in favor of an early start to the tightening cycle include the following:

against recent losses. More broadly, they felt that a debt-to-GDP ratio of 40 percent or lower would be reasonable for South Africa to maintain, given its development needs and ability to finance its deficit relatively easily in domestic currency and at long-term maturities.

20. The authorities also pointed to a number of reforms underway to enhance the effectiveness and efficiency of public spending. In particular, they noted that before public investment could be increased decisively, the absorption capacity of municipalities and provinces needed to be addressed. At the provincial level, increasing capital spending to budgeted amounts would require better planning for health, education, and housing infrastructure, improved risk management, and improved project management skills, among others. At the municipal level, it requires better financial management, more efficient supply-chain management, and improved capacity to meet requirements for conditional grants. The authorities saw scope for improving service delivery by reallocating savings from low-priority spending.

  • during the next 12 months, the output gap is set to close and there is a possibility that headline inflation will breach the top of the target range.

  • with inflation accelerating, an unchanged policy rate implies declining real interest rates and thus a strong impulse on activity 18 to 24 months from now given the lags with which monetary policy operates; and

  • inflation in South Africa tends to be persistent. Early monetary policy reaction may help to stabilize expectations before they start rising.

All the same, there are solid reasons for waiting for more signals before initiating the tightening cycle:

  • core inflation remains subdued at around 3% percent (in seasonally adjusted annualized terms) for the most recent three-month period. The increase in headline inflation largely reflects the surge in international food and fuel prices and is in any event likely to fall back within the target range sooner than when monetary policy would be able to influence it.

  • although overall growth prospects have improved, key economic indicators— employment, investment, and exports—are still well below precrisis levels.

  • the strength of the rand should continue to moderate inflationary pressure.

  • barring slippages, fiscal policy both in the near and medium term should be tighter than currently envisaged.

22. On balance, staff favored waiting for clear evidence of a more pronounced increase in core inflation or inflation expectations before raising the policy rate. An indicator that would tilt the decision in favor of starting the interest rate normalization cycle sooner would be development in wages. Particularly now that the output gap is closing, high wage increases could raise core inflation; it will be important to watch their evolution closely.

Authorities' Views

23. The authorities argued that the timing for the first hike was unclear given the prevailing uncertainty. They still perceived slack in the economy, and saw no evidence of demand pressure on inflation. Moreover, they were concerned about the global recovery and its implications for South Africa. They did not rule out the possibility of a disorderly adjustment in the medium term, particularly in Europe given its unresolved sovereign debt problems, which would likely have an adverse effect on economic activity in South Africa. They were concerned that under these circumstances an early tightening of monetary policy may prove premature. At the same time, oil and food price shocks are in progress, and thus the SARB must be on the lookout for signs of supply-side pressure spreading to the general price level.

Figure 4.
Figure 4.

South Africa: Inflation Targeting under Supply Shocks

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

C. Dealing with Capital Flows

24. Both direct and indirect measures point to competitiveness problems. On average, three quantitative approaches for gauging the strength of currencies relative to economic fundamentals point to the rand being overvalued by 10 to 15 percent—much the same as last year.1 And this competitiveness problem is borne out by the recent weak export performance. Notwithstanding the recovery in trading partner country import demand to precrisis levels, South Africa's exports in volume terms are estimated to remain around 15 percent below their precrisis peaks—in sharp contrast to the performance of most other emerging market economies. South Africa's share of global exports has stagnated since 2005, despite strong terms of trade gains, whereas other comparable countries have seen market share increases (Appendix II).

A02ufig09

Export Volumes and Trading Partner Demand

(Seasonally Adjusted levels, 2008 Q3 = 100)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Sources: SARB and IMF's World Economic Outlook.

25. And as one of the main recipients of portfolio flows over the last year, there is concern that these inflows exacerbate the competitiveness problem. The flows have waxed and waned: there were high inflows between July and November 2010, outflows through March 2011, and a new episode of inflows since then. In total, since end-December 2009 the country has received some R116 billion (US$17 billion) of flows.

26. Still, while they have certainly accentuated the rand's strength at times, the inflows are partly also responding to the country's need for foreign savings. In 2010, for example, net nonresident flows into the bond market are estimated at about US$7 billion, equivalent to roughly 40 percent of the government's financing need. Staff argued, as an asset price, the rand also tends to be influenced by commodity price developments or changing perceptions of risk in emerging markets (Appendix IV and Asonuma and Gray, 2011). Beyond capital account flows, the rand also responds to current account flows. Thus, the rand strengthened last December despite significant intervention and capital account outflows, most likely reflecting that month's trade surplus.

27. Moreover, the competitiveness problem also reflects recent sharp increases in the domestic cost of production. South Africa's manufacturing unit labor costs (ULC) have increased markedly in recent years; and the ULC real effective exchange rate suggests these costs, expressed in dollars and compared to those in trading partner countries, are now some 35 percent higher than they were in 2007-08. When one compares the rate of increase in prices and wages domestically between the tradable and nontradable sectors, increases in the latter have been much more pronounced. Beyond wages, production costs have also risen on account of rising utility tariff and other administrative price adjustments.

A02ufig10

Nominal and REER Unit Labor Costs in Manufacturing

(2005=100)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

28. Against this backdrop, there was extensive discussion on the pros and cons of the available measures to deal with sustained episodes of capital inflows:

  • Continued reserve accumulation. While accumulation has been stepped up considerably over the last year, the degree of intervention remains moderate relative to what comparable countries have been doing recently. And reserves are at the lower end of alternative measures of adequacy metrics (Figure 2).

Figure 2.
Figure 2.

South Africa: Stronger Current Account Balance

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

  • Altering the policy mix. This is not practicable in the very near term when the current broadly supportive stance is more appropriate. However, beyond the current fiscal year, smaller fiscal deficits at least along the lines suggested by staff should help restrain domestic demand and allow more room for monetary easing (Appendix V and Canales Kriljenko, 2011).

  • Capital Flow Measures. With limited scope for modifying the monetary and fiscal settings in the near term and the rand on the strong side of fundamentals, there is arguably a case for using either an unremunerated reserve requirement or a small tax on inflows to try to curtail inflows or at least change their composition. However, staff pointed to two significant drawbacks that this would pose. First, it likely would raise the government's financing costs. Second, even if this were to help engender nominal rand depreciation, absent wage restraint it is unlikely this would enhance competitiveness.

A02ufig11

Selected Economies: Acumulation and Level of International Reserves

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Sources: WEO and Haver Analytics, Inc.
Figure 5.
Figure 5.

South Africa: Easy Financial Conditions and Rising Asset Prices

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Authorities' Views

29. The authorities argued that a range of measures need to be used to deal with inflows and that this has very much been the approach followed over the last year. Reserve accumulation over the last year was significantly more than ever undertaken before and measures to restrict resident's ability to move funds abroad were eased as part of a strategy of gradually moving from administrative exchange controls to prudential measures for addressing crossborder risks. Going forward, further reserve accumulation would continue. But they stressed that reserves were adequate from a prudential perspective: cross-country comparisons focusing on reserves as a ratio to GDP were unfair to South Africa because the lion's share of external liabilities are denominated in local currency. In addition, accumulation entails considerable costs—according to staff estimates, around an interest-only cost of 0.18 percent of GDP for each US$10 billion increase in reserves. They also pointed to their intention to gradually alter the fiscal-monetary mix. The monetary authorities noted that providing fiscal policy is made sufficiently countercyclical and the wage restraint and better alignment between productivity and wages called for in the NGP takes place, there would be more scope for lower interest rates than would otherwise be the case. As for CFMs, the authorities agreed with staff that their effectiveness is questionable. Moreover, they stressed the need to take a close look at each country's circumstances in deciding on the adoption of CFMs. In South Africa, curtailing inflows while the country is also relying on them to finance domestic consumption and investment would be problematic.

Reforming Product And Labor Markets

30. Job creation dominates the economic and political agenda. The core objective of the New Growth Path (NGP), launched in November 2010, is the ambitious target of creating five million jobs and reducing the unemployment rate by 10 percentage points in the next decade. If successful, it would raise the employment to working-age population ratio to 50 percent.

31. Staff endorsed the focus on job creation, and stressed that reforming both product and labor markets would be key to raising potential growth and increasing the labor intensity of growth. There was broad agreement that meeting the jobs creation target would require either higher economic growth or more labor-intensive growth. Staff work suggests that with sustained economic growth of 6-7 percent, the % million jobs per year should be manageable even with current levels of job-intensity. But with growth rates of about 4 percent, which are more likely in the next few years, reforms to improve the labor intensity of growth are essential (Appendix III).

32. A more forceful approach to strengthen competition in product markets is called for to create new employment opportunities and increase the purchasing power of earnings. There is a high degree of concentration and limited competition in many of South Africa's goods and service markets (Aghion, 2008 and Klein, 2011, b). This reflects not only natural barriers to entry, but also regulatory entry barriers, and the legacy from past attempts at encouraging the emergence of national champions. OECD data suggest that product market regulation in South Africa is the fifth most onerous among the 39 advanced and developing countries for which the measure is calculated (OECD, 2010). Beyond the current industry-by-industry approach to addressing market conduct issues, staff made the case for more broad-based reforms to improve competition and competitiveness—such as further trade liberalization. More aggressive efforts to attract new entrants into key network industries like telecoms, rail and road haulage, and energy generation could also help improve efficiency and the cost of production.

A02ufig12

OECD's Product Market Regulation Index

(A higher number means more restrictive regulation)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Source: OECD.

33. Unemployment's complex roots should inform the efforts to increase labor intensity. South Africa's high level of unemployment reflects a host of structural factors, such as the geographic mismatch between population centers and economic activity created by apartheid, and the gap between real wages and the productivity of the unskilled, who bear the brunt of unemployment. While such cross-country comparisons are always difficult, it does seem that the wages in manufacturing and the ratio of the minimum wage to average output are comparatively high in South Africa (Appendix III and Zhan, 2011). In addition, wage revisions during the recession revealed a tendency of bargaining outcomes to prioritize wage growth over job growth. And indeed, in many of the sectors that experienced a sharp decline in employment, real wage growth outpaced productivity gains.2

A02ufig13

Real Wage, Productivity, and Employment, 2008Q4-2011Q1

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Source: Stats SA and IMF staff calculations.

34. Staff saw merit in the proposal in the NGP to moderate economy-wide wage growth. One way to operationalize this would be through an accord between government, employers and trade unions to limit real wage increases to 1 to 2 percent for the next several years. And if this is not feasible, an alternative approach is to introduce changes to the sector-wide wage bargaining system so that it takes more account of the limited ability of small and medium size enterprises to abide by the sector-wide wage agreements to which the more productive and deeper-pocketed large firms agree. Over time, other structural factors behind unemployment would need to be addressed.

35. To be sure, the view that high real wages have contributed to the country's unemployment problem is not universally accepted. In particular, trade unions point out that the labor share in national income has declined over time—from 50 percent of income in 1999 to around 43 percent in 2007. They argue that the recent partial reversal of this trend—on account of both real wage growth and the contraction of GDP in 2009—needs to be seen against this backdrop. And overall it implies that the lion's share of the returns to economy-wide productivity improvement has not accrued to workers. Staff however thinks that the declining labor share can be interpreted in different ways and that it is important to also look at a range of other indicators. In particular, the declining share of labor in total income could in part reflect a substitution in favor of capital induced by the increase in the relative cost of labor. Relatedly, it may indirectly also reflect the impact of the trend rise in commodity prices in the last decade that is accruing to sectors that have relatively low and declining labor intensity, including for technological reasons. And from a cross-country perspective, the decline in the labor share since 2000 is not unique to South Africa, and in sectors subject to international competition, such as manufacturing, the labor share in South Africa has actually increased markedly.

A02ufig14

South Africa's Labor Income Share

(Percent, 4 quarter moving average)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Source: Haver Analytics, Inc.
A02ufig15

Change in Labor Income Share since 2000

(In percentage points)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Sources: OECD, Stats SA, and IMF staff calculations.
Figure 6.
Figure 6.

South Africa: The Unemployment Challenge

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Authorities' Views

36. The authorities pointed to the many initiatives underway to raise potential growth, including in the labor and product markets.

They also argued that the cost of hastily designed structural reforms can be high. A lot of emphasis thus needs to be placed on ensuring that the reforms will deliver the desired results. Beyond careful design of reforms, there is often a need to build consensus around reforms and this too takes time. They pointed to the range of reforms currently underway. The competition commission is aggressively tackling anticompetitive practices in key industries. They however saw little scope for further trade liberalization, noting that the average tariff level at the moment is fairly low reflecting the aggressive liberalization that took place under the Uruguay Round, where South Africa participated as a developed country. The need to better align productivity and wage increases is also recognized, and is an objective outlined in the New Growth Path. Initiatives such as the youth wage subsidy outlined in the 2011 budget would help better align pay and productivity for new job market entrants. In addition, the budget also provides support for private initiatives with a strong job-creating component.

Maintaining Financial Stability

37. Macroprudential risks in South Africa are moderate. A large reversal in portfolio flows is likely to have small balance sheet effects, because firms, households, and financial institutions bear little exchange rate risk. The flexible exchange rate would pass part of the adjustment cost to foreign investors holding the mainly rand-denominated public debt. Public and external debt levels are relatively low and the public debt composition bears little exchange rate or maturity risk.

38. The financial system concentration and interconnectedness requires continuous vigilance. Areas of vulnerability include (i) the impaired advances on bank balance sheets, which while slowly declining as a share of loans, remain largely unchanged in nominal terms; (ii) the banks' traditional reliance on short-term funding from a relatively few large corporations; and (iii) some financial entities' direct and indirect exposure abroad.

39. Easy external financial conditions call for continued strong supervision of crossborder risks. South Africa's position in the cycle has not so far exposed the banking system to the risks associated with periods of easy external financial conditions. Still, with the external financial conditions set to remain easy for the next few years, it will be important for regulators to continue refining the tools in place to prevent excessive credit growth and risk taking.

40. Staff welcomed improvements in financial regulation and supervision. The authorities have implemented many FSAP/ROSC recommendations, started preparing for the eventual introduction of the Basel III capital and liquidity requirements, and expanded the perimeter of regulation, including initiatives in the insurance and credit rating sectors. The authorities have put in place a new framework for assessing solvency and management of insurance companies similar to Europe's Solvency II. The authorities have also set an interagency financial stability oversight committee that could in the future adjust prudential rules to contain cyclical systemic risk.

41. Staff strongly supported the authorities' intention to move toward a "twin peaks" regulatory and supervisory framework over the next few years. This initiative, which strives to concentrate prudential authority at one peak and market conduct authority at another, bodes well for further improving the consolidated supervision of financial groups. It also rightfully elevates the status of market conduct regulation and supervision given the high concentration and interconnectedness of the financial industry. Prudent management of the transition would be required to minimize regulatory uncertainty while keeping the focus on surveillance and risk management.

42. Staff suggested caution in further liberalizing controls on capital outflows from resident nonbank financial institutions. Banks have granted mortgage loans to customers with funds from corporates and nonbank financial institutions, whose ability to invest abroad has been gradually increased with the liberalization of controls. Although the authorities recognized the risk, in principle, they noted that the limits have not been binding because of a clear home bias. The ongoing implementation of Basel III liquidity requirements, which include a thorough review of incentives embedded in the legal and regulatory framework, taxation, and market practices, will mitigate the potential risks. Further steps in the gradual liberalization of controls on resident financial institutions will need to factor in the capacity of the financial system to manage crossborder risks.

Authorities' Views

43. The authorities agreed that the easy external financial conditions and the uncertainty about the strength of external demand warranted continued vigilance in the financial sector. They noted that South Africa closely follows best practices and standards on financial regulation, supervision and market conduct as set forth by international standard-setting bodies, such as the G-20 Forum, the Financial Stability Board, and the Basel Committee. They pointed out, however, that the ongoing significant change in these international standards and best practices has created some regulatory uncertainty and will take some time to incorporate fully. Nothwithstanding the recent strong performance of the financial sector, they stressed the need to avoid complacency and that they would remain focused on identifying and promptly addressed emerging vulnerabilities.

Figure 7.
Figure 7.

South Africa: Resilient Banking System

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Regional Issues

44. South Africa remains intent on furthering regional integration. Within the Southern African Development Community (SADC), the current priority is the consolidation of the free trade agreement through work on harmonizing standards and trade facilitation strategies. Beyond SADC, the authorities are taking an active role in the recently launched negotiations on a free-trade area covering the 26 member countries of SADC, EAC and COMESA, which is expected to take some three years to complete.

45. The Southern African Customs Union (SACU) should play a crucial role in further advancing regional integration. In the past year, three heads of state SACU summits have reenergized the group. Discussions are ongoing on strengthening the secretariat, establishing a framework for joint negotiations with third parties, and looking for opportunities to integrate value chains across borders.

46. The revenue sharing system has generated significant spillovers within SACU.

The shock from the recession to South African customs collections (a main element in the common revenue pool) has, after some technical delay, led to public revenue declines in Botswana, Namibia, Lesotho, and Swaziland. In Swaziland in particular, this has contributed to a fiscal crisis which is taking a heavy toll on the economy. While the Swaziland crisis may in turn generate some negative spillovers for South Africa, these are small given the difference in size between these countries. A reform of the revenue sharing formula is under discussion; but convergence on a new formula could take some time. Staff has recommended that new ways be identified to mitigate the volatility in transfers from the common revenue pool.

Staff Appraisal

47. Macroeconomic policies in place over the last decade have supported economic and financial stability. Countercyclical monetary and fiscal policies, together with exchange rate flexibility, have been effective in smoothing the cyclical fluctuations, while maintaining financial soundness. The buffers built during the 2003-08 upswing were used effectively to support domestic demand when the global financial crisis hit. And the flexible exchange rate regime has contributed to insulating the real economy from large swings in the terms of trade and indeed the ebb and flow of investor appetite towards South Africa.3

48. We expect the recovery to be sustained, but there are significant downside risks to this outlook. The recovery to date has been uneven, relying mainly on consumption growth supported by fiscal and monetary stimulus. In contrast, investment, employment, and exports remain well below their precrisis peaks. With the help of the current supportive policies and continued global recovery, growth rates of about 4 percent should be feasible this year and next. But this will require an element of good fortune. Domestically, it will be important for electricity capacity, in particular, to be managed effectively and expanded in a timely fashion to facilitate a recovery in investment. Externally, partner country demand needs to remain as robust as it has in recent months.

49. The high degree of uncertainty to the outlook, on balance, calls for delaying the start of tightening monetary policy. Headline inflation is set to increase in the coming months but this largely reflects the pass through of higher international food and fuel prices to the domestic market. Core measures continue to point the presence of significant slack in the economy and at this juncture offer better guidance for monetary policy. As in recent months, the SARB needs to continue monitoring closely available information for clear evidence of a pronounced increase in inflation expectations and/or wages before raising the policy rate. The government can also help influence this year's wage agreement round by limiting public sector wages increases to productivity gains.

50. The broadly neutral fiscal stance for this year is appropriate, but a tighter stance than currently envisaged would be important over the medium term. Three reasons for this. First, it would help contain public debt at around 35 percent of GDP—a level that would leave adequate fiscal room to maneuver in the event of new shocks. Second, this target can be achieved without a departure from current policies and without endangering the recovery—by ensuring that annual spending growth is limited to 2 percent in real terms with very gradual recovery to the precrisis tax-to-GDP ratio. Third, with deficit paths along these lines, there is scope for the rebalancing of the fiscal/monetary mix that the government is aiming at.

51. Weak export performance and loss of export market share signal persistent competitiveness problems. Staff assessment of the real exchange rate points to the rand being 10 to 15 percent overvalued in real terms. The low-interest rate environment in the advanced countries has certainly led to appreciation pressure. But the competiveness problems are as much due to rising labor and other domestic costs of production. Reforms to enhance the product and labor market flexibility will thus be critical to improve competitiveness.

52. And with competitiveness rather than overheating the main concern, CFMs are unlikely to help much. Rather, exchange rate flexibility and continued reserve accumulation in the near term, and a gradual recalibration in the fiscal-monetary policy mix over the medium term, constitute the most practical policy response to capital inflows in South Africa. There is in particular scope to significantly increase the pace of reserve accumulation in the near term. And although CFMs are an option, their drawbacks, including their implications for the financing cost of the government, will likely be nontrivial. Moreover, any benefits that CFMs provide are likely to be transitory. Lasting competitiveness gains can only stem from reforms that control the domestic cost of production.

53. With only modest economic growth rates on the cards in the near term and competitiveness a major problem, bold structural reforms are needed if South Africa is to fulfill its tremendous potential. In particular:

  • The labor market is clearly broken and failing the unemployed. This is evident from both the high structural level of unemployment that prevailed before the crisis and the excessive job shedding during the recent recession. While, there are a myriad of reasons behind the high level of unemployment, one factor that has certainly not helped in recent years is the high rates of real wage growth. And absent decisive steps to better align wages to productivity levels going forward, competitiveness is unlikely to improve and only a fraction of the 500,000 new jobs a year being targeted are likely to materialize. In this context, one measure that should be considered is endowing the wage bargaining framework with sufficient flexibility to exempt smaller firms.

  • Competition in product markets also needs to be enhanced considerably. Much more aggressive attempts to remove barriers to entry in key network industries are needed. Further, a systematic effort to identify and reduce unnecessary regulatory burdens facing firms would also enhance competition and entrepreneurship. By reducing the wide margins that firms in many industries and services currently enjoy, it should also be possible to strengthen the purchasing power of earnings.

54. South African banks seem to have weathered the stresses associated with the global financial crisis and the domestic recession well. Banks remain liquid and well capitalized, although a moderate level of impaired advances calls for continued vigilance. The envisaged "twin peaks" regulatory and supervisory framework should help strengthen financial institutions. It bodes well for further improving the consolidated supervision of financial groups. It also rightfully lifts the status of market conduct regulation and supervision given the high concentration and interconnectedness of the financial industry. Prudent management of the transition will be needed to minimize regulatory uncertainty.

55. Staff recommends that South Africa remains on the standard 12-month Article IV consultation cycle.

Table 2.

South Africa: Consolidated Government Operations, 2008/09–2013/141

(In percent of GDP unless otherwise noted)

article image
Sources: South African authorities; and Fund staff estimates and projections.

For fiscal year beginning April 1.

For national government main budget only.

Table 3.

Statement of Operations—National Government Main Budget 2008/09–2013/141

(GFSM2001 basis; in percent of GDP unless otherwise noted)

article image
Sources: South African authorities; and Fund staff estimates and projections.

For fiscal year beginning April 1. National government comprises the central government, including transfer to subnational government financed by the national revenue fund.

Staff projections base on the authorities' policy intentions as outlined in the 2011 budget.

Table 4.

South Africa: Balance of Payments, 2009–2016

article image
Sources: South African Reserve Bank (SARB); and Fund staff estimates and projections.

End of period.

Gross reserves minus foreign loans and minus forward position.

Table 5.

South Africa: Monetary Survey 2004–2010

article image
Sources: South African Reserve Bank (SARB).

Appendix I. Measuring South Africa's Potential Output

The analysis, which applies a wide range of estimation techniques to measure potential output, suggests that, while potential output growth steadily accelerated in the post-apartheid era to about 3.5 percent (1994-2008), it decelerated considerably following the outbreak of the financial crisis, as it did in other advanced and emerging economies. While this indicates that, at around -1.5 percent, the estimated 2010 output gap is lower than previously thought, there is a fair amount of uncertainty regarding its "true" magnitude, reflecting in part the backward looking nature of the estimation methods. Going forward, staff is thinks potential growth is likely to revert gradually to its precrisis pace, and the output gap will close by early 2012.

One source of uncertainty surrounding the potential output measurement relates to the massive job shedding that took place in the past two years and the timely pace of recovery over the medium term. While the analysis suggests that part of the employment loss is cyclical in nature, stemming from a shift in the size of output gap from a positive 2 to 3 percent in the precrisis period to negative terrain in 2009-10, some of the employment loss may be more protracted, partly reflecting a marked deterioration of external competitiveness, owing to the sharp appreciation of the real effective exchange rate and the rising unit labor cost. And indeed, a breakdown of employment confirms that the sizeable employment loss is exclusively concentrated in the exporting sectors, most notably manufacturing. The deterioration of competitiveness and the related weak export volumes may also explain the considerable contraction in fixed domestic investment in the past two years.

A02ufig16

South Africa: Estimated Potential Growth, 1994-2010

(Percent per year, moving average)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Source: IMF staff estimates.

The analysis explores the extent in which the output gap is sensitive to domestic and external variables. The estimation shows that, although the output gap is significantly affected by policy instruments such as the short-term interest rate and the change in public consumption (as a share of GDP), its sensitivity to the global economic cycles has increased steadily in the past decade. This finding points to South Africa's increasing economic integration into the global economy in recent years, and as corollary, the growing sensitivity of the economy to global economic shocks.

Appendix II. Does South Africa Have a Competitiveness Problem?

The poor performance of exports since the crisis raises concerns about possible competitiveness problems. Exports are 15 percent below their precrisis levels, even though partner demand has fully recovered, whereas most other emerging markets (EMs) have already regained precrisis levels of export volumes. This appendix presents the findings of work done by staff looking at both direct and indirect measures of competitiveness.

On average, the three staff (CGER) approaches point to the real effective exchange rate being misaligned by 10 to 15 percent:

  • The macrobalance approach, which compares the medium-term current account projection (-5.8 percent of GDP) with a norm of -3.5 percent of GDP, yields a misalignment estimate of 14 percent.

A02ufig17

South Africa: Exchange Rate Variation Estimates and 90 Percent Confidence Intervals

(Percent)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Macro Balance External Sustainability Equilibrium (ERER)

  • The external sustainability approach, based on stabilizing South Africa's net external liabilities at the EM average, produces a higher estimate of misalignment (20 percent).

  • By contrast, the equilibrium real exchange rate (ERER) approach suggests that the real exchange rate is broadly aligned with its determinants. This result reflects an appreciation in the equilibrium exchange rate driven in part by terms of trade gains as well as rising government consumption. However, the ERER results are very sensitive to specification, as well as estimation period.

Indirect indicators corroborate these concerns:

  • South Africa's share of global exports has stagnated since 2005, falling sharply in the crisis, but recovering somewhat in 2010. During the same period comparable EMs have, by contrast, expanded their global market shares by 16 percent on average (or 0.25 percentage points).

  • Moreover, the export performance appears even more disappointing once the composition of South Africa's exports is controlled for: while commodity producers have done well, there have been declines in the market share of manufactured exports.

  • The weakness of non-commodity exports could reflect structural factors, including weak skills, poor transportation infrastructure and weak take-up of technology.

Appendix III. What Can South Africa Learn from Jobs Champions?

The New Growth Path has set an ambitious goal of creating five million jobs in the next decade. Against this backdrop, staff examined the job creation performance in 20 large emerging market countries, including South Africa, during 2000-09. The findings are as follows:

  • Average annual employment increases in the sample ranges from 3 percent (in India) to -0.2 percent (in Hungary). South Africa is at the lower end of this spectrum, ranking seventeenth out of the 20 countries in the sample. Had South Africa performed as well as the median country, it would have had 1.3 million more jobs during this period. Many countries create more jobs than required to keep pace with working-age population growth, but South Africa has failed to do this. The labor intensity of growth in South Africa is also well below the median for the group.

  • Fast job creators tend to have slightly higher output growth, lower inflation, more depreciated REER, tend to be more export oriented, and have lower tax-to-GDP ratios. South Africa's growth and inflation performance were worse than that of the median for slow job creators.

  • Perception and survey-based labor market rankings present an overall mixed picture, but point to a more cooperative labor relationship in high job creators. South Africa is ranked reasonably well in volume adjustment, but does poorly on dimensions of wage flexibility and how well employers and employees cooperate.

  • Fast job creators tend to have lower U.S. dollar wage levels and fewer restrictions on working hours. South Africa does poorly on all these dimensions. Hourly pay in the manufacturing sectors is markedly higher than is the case among high jobs creators. The ratio of the minimum wage to average output in South Africa is also twice the median for slow job creators.

  • Social and human capital indicators do not point to noticeable differences between slow and fast job creators. South Africa does not seem to be different from other countries in the sample, with the exception of income distribution which is much more skewed in South Africa.

A02ufig18

Average Employment Growth, 2000-09

(Percent)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

Sources: WEO, countryauthorities, and IMF staff calculations.

Appendix IV. Drivers of Portfolio Flows

South Africa has been privy to a large volume of capital inflows over the last year. These flows helped supplement domestic savings and thus helped sustain a higher level of consumption and investment than would have otherwise been the case. All the same, the inflows have likely engendered a stronger rand, exacerbating competitiveness concerns. In an effort to disentangle pull from push factors, an empirical model of the drivers of portfolio flows was estimated using a panel regression approach:

  • The panel confirms the generally held view that macroeconomic variables help explain portfolio flows in emerging markets. For bond flows, the key macro variables, or "pull factors", are the fiscal balance, excess growth over the world average, and an indicator of external vulnerability. For equity flows, the key variables seem to be excess growth over the world average and lagged exchange rate volatility.

  • External variables and domestic institutional factors also play an important role. These include external financial conditions like global interest rates, global risk aversion (as proxied by the VIX), and trends in global stock market prices. Domestic institutional factors include stock market capitalization and population size, among others.

  • But South Africa seems to have received more inflows than these factors would suggest. On local bond markets, regression residuals have been positive for most of the sample period (2000Q1-2010Q3). But they were especially high during 2009Q4-2010Q3 (text figure).

A02ufig19

Residuals from Regressing Bond Share with Explanatory Variables Except Diff. in GDP Growth Rate

(In percentage of total inflow to EM countries)

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

  • Equity flows into South Africa also appear to be higher than can be justified by domestic variables. This said, factors related to the size of South Africa's equity market (that is, factors beyond macro variables) have contributed to high volumes of equity inflows. This has been evident for the entire period (2000-10), but especially before the global financial crisis (2000-08).

  • In short, South Africa appears to have received more portfolio inflows, especially bond flows, during 2009Q4-10Q3 than what systematic pull and push factors can explain.

Appendix V. Macro Policy Mix: Effect on Growth and Real Appreciation

In the globalized economy, external developments significantly influence macroeconomic outcomes in emerging markets. But macroeconomic policies, and how they interact with each other, matter. That is the experience of 20 emerging economies in South Africa's peer group and of South Africa itself. Simulations from the IMF's Global Integrated Monetary and Fiscal Model (GIMF), calibrated to South Africa, show how different policy designs yield markedly different outcomes.

Would a tighter fiscal, looser monetary, and greater reserve buildup increase growth and depreciate the rand in real terms? The existing empirical and theoretical literature would say "maybe." Such a policy mix would reduce macroeconomic vulnerabilities and help prevent financial crises that set back macroeconomic progress. But such a policy mix does not guarantee higher growth or competitiveness even under steady external conditions.

A fresh look at the experience of South Africa and its peers over the last twenty years, through the lens of several econometric techniques, concludes the same. These techniques range from cross-section regressions to panel and South-Africa specific dynamic systems. They suggest that higher public spending contributed to growth, but this effect was partly offset by the adverse effect of higher public revenue and public debt. Taking the cross-country parameters at face value, a country that increased public spending and revenue in the same amount lowered its growth potential. Those that funded the expanding fiscal spending with debt grew more. Nevertheless, this effect will be partly offset when they need to raise taxes to pay back or stabilize the debt.

These results suggest that the proposed shift in the policy mix will raise growth only if the expansionary effect of monetary and reserve policies offset tighter fiscal policies. The effect of fiscal policies on exchange rates is ambiguous. A looser monetary policy characterized by lower real interest rates tends to increase growth in the medium run and depreciate the domestic currency in real terms. Finally, reserve accumulation seems to have contributed to higher growth, even if it is associated with stronger domestic currencies in real terms. A South Africa specific dynamic system, however, suggest that at least during 2003-2010, such a change in the policy mix would have delivered a more depreciated rand in real terms.

The Global Integrated Monetary and Fiscal Model (GIMF) simulations support the conclusions that fiscal tightening tends to contract economic activity and has ambiguous effects on the real exchange rate. It also shows that funding and the composition of fiscal spending matters for growth, with cuts in public investment hurting growth the most. It also shows that the monetary policy reaction is crucial for determining the macroeconomic impact of fiscal measures. The model does illustrate that a fiscal tightening may be expansionary if it reduces the risk premium, lowering policy rates.

Figure 1:
Figure 1:

Global Integrated Monetary and Fiscal Model, Calibrated to South Africa Simulations of Higher Fiscal Spending under Alternative Funding Assumptions

Citation: IMF Staff Country Reports 2011, 258; 10.5089/9781463902216.002.A002

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1

Although the real exchange rate has appreciated during the past year, so has the estimated equilibrium because, among other things, recent sizable terms of trade gains are expected to persist.

2

Empirical analysis identifies a negative relationship between “excess” real wage growth and employment, even controlling for output and exogenous factors.

3

South Africa maintains an exchange arrangement that is free from restrictions and multiple currency practices and is fully consistent with its obligations under the Fund Articles of Agreement.