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IMF Country Report No. 25/28

SOUTH AFRICA

2024 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR SOUTH AFRICA

January 2025

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2024 Article IV consultation with South Africa, the following documents have been released and are included in this package:

• A Press Release summarizing the views of the Executive Board as expressed during its January 27, 2025, consideration of the staff report that concluded the Article IV consultation with South Africa.

• The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on January 27, 2025, following discussions that ended on November 25, 2024, 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 January 7, 2025.

• An Informational Annex prepared by the IMF staff.

• A Statement by the Executive Director for South Africa.

The documents listed below have been or will be separately released.

• - Selected Issues

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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© 2025 International Monetary Fund

Press Release

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PR 25/19

IMF Executive Board Concludes 2024 Article IV Consultation with South Africa

FOR IMMEDIATE RELEASE

Washington, DC – January 30, 2025: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with South Africa.

South Africa’s economy has continued to face challenges in recent years. Power shortages and disruptions to rail and port operations constrained growth to 0.7 percent in 2023. Activity remained subdued in 2024, given election-related uncertainty in the first half of the year and severe droughts. Nonetheless, power generation was stabilized and, following the formation of a reform-oriented Government of National Unity in June, consumer, business, and investor confidence rebounded. Inflation moderated from 5.9 percent in 2023 to an estimated 4.5 percent in 2024, with the central bank cutting interest rates by 50 basis points in 2024. While still high, unemployment declined to an estimated 32.8 percent in 2024. Government deficits remained elevated, pushing public debt to above 75 percent of GDP by end-2024.

Looking ahead, real GDP growth is projected to accelerate to 1.5 percent in 2025, driven by recovering private consumption and investment supported by stable electricity generation. Over the medium term, annual growth is expected to reach 1.8 percent, as investment improves gradually on the back of ongoing reform efforts to address electricity and logistics bottlenecks. Inflation is projected to average 4 percent in 2025 and stabilize at the midpoint of the SARB’s target range (4.5 percent) in the medium run. With fiscal deficits projected to stay elevated over the medium term, public debt is expected to continue to rise.

The outlook remains marked by high uncertainty, with the balance of risks tilted to the downside. Key downside external risks relate to a further deepening of geoeconomic fragmentation and intensification of protectionist policies, an escalation of ongoing conflicts, a deeper slowdown in main trading partners, or slower global disinflation and tightening financial conditions. Domestically, resistance to and delays in the implementation of needed reforms could add to downside risks. On the upside, faster and more ambitious reform implementation by the new government, or stronger global growth, could boost confidence and growth.

Executive Board Assessment²

“Directors agreed with the thrust of the staff appraisal. They welcomed South Africa’s new Government of National Unity and its commitment to reforms aimed at addressing long-standing challenges. While there are signs of recovery, economic activity remains subdued amid heightened global uncertainty and long-standing structural impediments.

Against this background, Directors emphasized the importance of prudent macroeconomic policies complemented by ambitious structural reforms to support macroeconomic stability and place the economy on a path toward higher, more inclusive, and greener growth.

“Directors welcomed the authorities’ commitment to fiscal prudence, including plans to reduce the fiscal deficit and stabilize debt. Given increased risks, most Directors called for more ambitious fiscal consolidation efforts to lower debt to more prudent levels and rebuild fiscal buffers, although a few felt that the authorities’ preferred approach may be more appropriate given political economy considerations. Directors considered that an evenly paced fiscal consolidation focused on cutting inefficient spending while protecting priority social and infrastructure spending, and continuing to strengthen tax administration, can support debt sustainability while minimizing the negative impact on the economy. Most Directors agreed that introducing a prudent debt anchor supported by a fiscal rule could help underpin the adjustment and bolster credibility, although a few Directors felt that a debt ceiling could constrain flexibility. Enhancing fiscal transparency and risk management can further support the resilience of public finances.

“Directors commended the South African Reserve Bank’s effective monetary management, which supported a decline in inflation. Looking forward, they recommended maintaining a flexible and data-driven approach to monetary policy decisions amid ongoing uncertainties. Directors saw merit in shifting, at an opportune time, from the current inflation target band to a lower point target, which will require careful design, gradual implementation, close coordination, and appropriate communication.

“Directors welcomed the authorities’ efforts to safeguard financial stability, including recent banking-resolution and safety-net reforms and macro-prudential policies. They encouraged the authorities to continue to monitor risks, including those related to the sovereign-bank nexus, and to stand ready to implement prudential measures as needed. They considered that strengthened supervision, including for non-bank financial institutions, alongside continued efforts to bolster the AML/CFT framework, remain essential.

“Directors commended the authorities for their structural reform efforts aimed at removing critical impediments to growth. They encouraged the new government to implement resolutely ongoing energy and logistics reforms, including by promoting private sector participation. To support higher and greener growth and job creation, particularly among the youth, while reducing inequality and poverty, Directors recommended additional reforms to enhance the business environment, bolster governance, and improve labor market flexibility, along with sustained efforts to facilitate trade and achieve climate goals.

Directors wished the authorities success during South Africa’s G20 Presidency and welcomed their leadership in support of multilateral cooperation.”

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SOUTH AFRICA

STAFF REPORT FOR THE 2024 ARTICLE IV CONSULTATION

January 7, 2025

KEY ISSUES

Context. A new Government of National Unity (GNU) has been in place since June 2024, which the markets have welcomed. The GNU faces difficult challenges: declining GDP per capita, high unemployment, poverty and inequality, and rising public debt and debt service, which crowd out other urgent spending needs. Its fresh mandate represents an opportunity to pursue ambitious reforms to safeguard macroeconomic stability and address these challenges, placing the economy on a path toward higher, more inclusive, and greener growth.

Outlook and Risks. Real output growth, estimated at 0.8 percent in 2024, is expected to accelerate to 1.5 percent in 2025 on the back of improved electricity generation, monetary policy easing, and a return of investor and consumer confidence post elections. Growth is projected to reach 1.8 percent by the end of the decade, supported by ongoing electricity and logistics reforms, while inflation stabilizes around the midpoint of the central bank’s target range. With fiscal deficits moderating but still elevated over the medium term, public debt is projected to continue to rise under the baseline scenario. The outlook critically depends on the ability of the GNU to fully implement much needed structural and fiscal reforms: ambitious actions could further boost growth and reduce public debt, while delays in the implementation of reforms would weigh on growth and the public finances. Risks are tilted to the downside, related to a possible intensification of geoeconomic fragmentation and protectionist policies in the context of an uncertain global environment.

Policy Recommendations:

• Safeguarding Fiscal Sustainability. While the GNU has committed to reducing fiscal deficits and stabilizing public debt, a more-ambitious-than-envisaged fiscal consolidation is needed to put debt on a firmly downward path and rebuild fiscal buffers. Durable reforms aiming at improving the efficiency of public spending will be essential in this regard. A fiscal rule, anchored in a prudent debt ceiling, could help underpin the adjustment and support policy credibility.

• Monetary Policy Normalization. With inflation declining, the central bank has started to lower the policy rate and should continue to manage its normalization toward the neutral level in a flexible and data-driven manner. Transitioning from a target band to a lower point target with a well-calibrated tolerance band at an appropriate time can help strengthen macroeconomic stability. Close coordination among policymakers and clear communication will be key to minimize costs and help anchor inflation expectations.

• Safeguarding Financial Stability. Ongoing banking-resolution and safety-net reforms, together with macro-prudential measures to bolster capital buffers, are welcome. Continued monitoring of risks, including related to the bank-sovereign nexus, together with enhanced supervision, are essential to maintain financial stability. Efforts should continue toward strengthening the AML/CFT framework and enabling exit from the Financial Action Task Force (FATF) grey list in 2025.

• Bolstering sustainable, inclusive, and green growth. Ongoing electricity and logistics reforms aiming at alleviating critical supply constraints are welcome and should be ambitiously implemented. Additional well-sequenced business-environment, governance, and labor-market reforms aiming at closing structural gaps relative to peers can help support investment and job creation, particularly in SMEs, generating substantial output gains and helping reduce inequality. Meeting South Africa’s climate goals requires further efforts to increase effective carbon taxation and accelerate the rollout of renewable energy. Adequate communication, targeted support to vulnerable groups to mitigate near-term costs, and strengthened institutions, are key to increase the social acceptability of reforms.

Approved By

Andrea Richter Hume (AFR) and Anna IIyina (SPR)

Contents

• A NEW POLITICAL DAWN

• SOME EARLY GREEN SHOOTS EMERGING

• RECOVERY UNDERWAY, OUTLOOK DEPENDENT ON REFORMS

• POLICIES FOR MACROECONOMIC STABILITY AND GROWTH

• A. Restoring Fiscal Buffers, Debt Sustainability, and Policy Credibility

• B. Managing the Normalization of Monetary Policy

• C. Safeguarding Financial Sector Stability

• D. Bolstering Inclusive, Sustainable, and Green Growth

• STAFF APPRAISAL

• BOXES

• 1. Two-Pot Pension System Reform

• 2. Opportunities Offered by the African Continental Free Trade Area

• 3. The Transition to Renewable Energy

• FIGURES

• 1. Real Sector Developments

• 2. Financial Market Developments

• 3. Inflation and Monetary Sector Developments

• 4. Fiscal Sector Developments

• 5. External Sector Developments

• 6. Credit and Financial Sector Developments

• 7. Labor and Product Market Developments

• 8. Climate and Carbon Tax Developments

• TABLES

• 1. Selected Economic Indicators, 2022–27

• 2. Consolidated Government Operations FY22–30

• 3. Balance of Payments, 2022–30

• 4. Financial Corporations, 2022–30

• 5. Financial Soundness Indicators, 2019–24

• 6. Medium-Term Macroeconomic Framework, 2022–30

• 7. Gross External Financing Requirement and Sources, 2019–25

• 8. Indicators of Fund Credit (RFI arrangements) 2023–30

• ANNEXES

• I. Status of Key Recommendations from the 2023 Article IV Consultation

• II. Credit Trends and the Credit Gap in South Africa

• III. External Sector Assessment

• IV. Drivers of Growth in South Africa–A Growth Accounting Analysis

• V. Risk Assessment Matrix

• VI. Income Inequality and Structural Factors

• VII. Sovereign Risk and Debt Sustainability Framework

• VIII. Fiscal Transparency

• IX. Implementation of 2021 FSAP Key Recommendations

• X. Electricity and Transportation Reforms: Current Status and Next Steps

• XI. Factors Impacting Social Acceptability of Electricity Sector Reforms in South Africa

• XII. Effects of Foreign Exchange Volatility on Exports

• XIII. Climate Policies at the Firm Level

• XIV. Data Issues