The International Monetary Fund’s (IMF) executive board has commended the South African government and South African Reserve Bank for their macro-economic polices, which have resulted in strong economic growth, low inflation, good fiscal policy management and a marked improvement in foreign reserves.
However, the IMF feels these policies can be bolstered by substantial labour-market reforms and further foreign-trade liberalisation.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year.
A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies.
On return to headquarters, the staff team prepares a report, which forms the basis for discussion by the executive board. At the conclusion of the discussion, the MD, as chairperson of the board, summarises the views of executive directors, and this summary is transmitted to the country’s authorities. The report was made public in Washington late on September 15.
The IMF expects the strong economic growth to lower the unemployment rate to 25,3% this year, from 26,2% last year and a recent peak of 30,5% in 2002, when the rand was its weakest on an annual average basis.
External debt as a ratio of gross domestic product (GDP) is forecast to ease to 19,1% this year, from 19,8% last year and a recent peak of 29,5% in 2002.
The IMF directors agree that sound fiscal management over the past years has created space for a moderate increase in government expenditure in the period ahead.
They support well-targeted additional spending in the social areas and on infrastructure to help address pressing social needs and enhance the productive capacity of the economy.
At the same time, they feel it is important to keep the fiscal deficit at levels that will prevent an undesirable increase in the debt-to-GDP ratio, which will put upward pressure on interest rates.
The directors suggest that the Budget documents could usefully expand the coverage of fiscal indicators to include public enterprises that carry potentially significant fiscal risk.
The IMF gives high praise to the South African Reserve Bank and welcomes the authorities’ skilful implementation of monetary policy, which has kept inflation within the target band for about two years.
The directors note that the inflation-targeting regime has gained credibility, as evidenced by the decline in inflation expectations, and think that continued clear communication with the public, emphasising inflation as the overriding objective of monetary policy, will further enhance credibility.
The IMF suggests that the inflation target should be changed to a “broad point” — in other words, targeting inflation at the mid-point (4,5% year-on-year) with a deviation (plus or minus 1,5%) either side of the “point”, rather than the current practice of the 3%-to-6% range. This will help anchor inflation expectations and increase monetary-policy effectiveness.
They note some risks to the inflation outlook — including higher oil prices, a weakening of the rand and a pick-up in unit labour costs — and encourage the authorities to stand ready to adjust interest rates, if needed, to keep inflation within the target band.
The IMF directors note that the flexible exchange-rate system has benefited the country, being an integral element of its inflation-targeting regime and facilitating the adjustment of the economy to external shocks.
They share the authorities’ view of seeking competitiveness gains through measures that raise productivity and reduce costs.
The IMF directors also support additional accumulation of international reserves, but note that reserves could be approaching levels that would make the case for further accumulation less compelling. Looking forward, they observe that further analysis of this issue will be useful.
The directors agree with the gradual relaxation of capital controls, welcome the advances made in this area in the past year and feel that further progress in this direction will be beneficial.
The IMF regards the banking system as fundamentally sound. It notes that most of the Financial Sector Assessment Programme’s recommendations are being implemented, which, together with other initiatives to enhance the regulatory and supervisory framework, will further strengthen the financial sector’s resilience to adverse shocks.
The directors commend the authorities on progress made so far in facilitating access of previously disadvantaged groups to banking services. Further advances in implementing the Financial Services Charter and the introduction of a regulatory framework for institutions specialised in basic banking services should help accelerate this process.
The directors stress that success in reducing unemployment is critical for bolstering support for ongoing reform initiatives.
They support the government’s approach that includes programmes to enhance skills and to provide temporary jobs in infrastructure and other projects, as well as measures to foster small-business development.
They note, however, that this approach could benefit substantially from a relaxation of restrictive labour-market regulations, and encourage the authorities to consider reducing the scope of centralised collective bargaining, simplifying the minimum-wage structure and moderating minimum-wage adjustments, as well as further streamlining dismissal procedures.
The IMF considers that further trade liberalisation and a simplification of the tariff regime will increase productivity and support growth.
Efforts could focus on lowering the overall level of protection, harmonising protection across sectors, reducing the number of tariff bands and applying ad valorem duties for most items.
It will also be important that preferential trade agreements being negotiated be broad-based and non-discriminatory in order to complement multilateral liberalisation and limit the potential for trade diversion.
The directors support the government’s objective of enhancing the efficiency of state-owned enterprises, as this will increase productivity, support infrastructure investment and reduce the cost of doing business in South Africa. They also consider it useful to keep open the possibility of future privatisation under an effective regulatory framework.
The IMF agrees that further reducing social and wealth disparities is key to improving the living standards of the entire population, and ensuring a favourable environment for further social and economic progress.
It welcomes the advances made with the broad-based black economic empowerment programme.
The directors note that progress with land reform has been more limited, and feel it is important to address the obstacles to faster progress, while keeping the programme grounded on well-defined legal principles. They also note that continued and firm action against the HIV/Aids epidemic will help contain the serious social impact of the disease. — I-Net Bridge