IMF drops SA growth forecast amid growing labour unrest, joblessness
But attempts to address unemployment were being hampered by "policies, product market structure, and labour market arrangements that end up protecting insiders at the expense of the unemployed", the International Monetary Fund said in its annual staff report, which followed consultation with the government.
It dropped its economic growth forecast for South Africa to 2.6% of GDP.
The report, released earlier on Thursday, came as the country reels in the wake of a violent dispute between striking miners and police at Lonmin's Marikana mine in North West. A memorial service was held to commemorate the deaths of 34 miners killed in the confrontation a week ago.
The IMF report drew attention to the political significance of the ANC's upcoming elective conference where the party will, along with its alliance partners the Congress of South African Trade Unions and the South African Communist Party, choose its next president.
"Impatience with the high structural unemployment, particularly of the young, could lead to inappropriate responses that might threaten macroeconomic stability," it said.
"In addition, adverse external developments and domestic shocks could increase further unacceptably high levels of unemployment."
South Africa also faced a continued slow recovery from recession, thanks to the ongoing crisis in Europe, with economic growth coming in at below 3%.
But domestic factors had also contributed to this, particularly industrial action in both the mining and manufacturing sectors.
Job creation efforts were being hampered by policy choices, an economy dominated by large oligopolistic firms and an inflexible labour market.
The repeated standoffs between business and labour were costing the economy, according to the report.
"The struggle for dividing rents between highly concentrated, oligopolistic firms and strong and politically influential labour unions has resulted in large economic losses associated with frequent labour strikes," it said.
The IMF welcomed progress made to address market dominance and collusive behaviour by private companies but said penalties for misconduct needed to increase, while product market regulation needed to improve. It included state owned companies in its assessment, saying the government should consider "opening the sector reserved for public enterprises to private sector competition".
Critically more flexible wage bargaining mechanisms were needed especially for small businesses, along with more flexible labour laws and regulations to "improve the business environment and increase employment opportunities, especially for newcomers with limited skills" it said.