South Africa’s Finance Minister Trevor Manuel said on Monday that the overall International Monetary Fund (IMF) assessment report on South Africa was optimistic about robust growth, rising employment and further improvement of the fiscal position and foreign reserves.
“There is agreement between South African authorities and the IMF about these economic prospects,” stated Manuel.
The IMF warned the rapid growth of the past few years would be undermined by capacity constraints.
“The mismatch between demand and supply is reflected in South Africa’s significant current account deficit and rising inflation,” the IMF said in a statement.
SA growth has been driven largely by domestic consumer demand, and its manufacturing industry has been unable to meet the demand.
Investments in infrastructure programmes by government and the private sector have necessitated capital equipment imports, putting pressure on the current account.
The current account deficit narrowed marginally to 7% of gross domestic product in the first quarter of 2007, from 7,8% in the last quarter of 2006.
The IMF said that inflation risks are on the upside and there may be need for further monetary tightening.
Inflation worry
Last week central bank Governor Tito Mboweni warned that inflationary pressures were “more worrying” and the Reserve Bank may have to raise interest rates.
The Reserve Bank has raised its repo rate by 250 basis points to 9,5% since mid-2006 to tame inflation and robust consumer demand, but credit-driven spending remains high.
The IMF said the rand currency’s volatility was a possible constraint to the country’s economic growth, but the central bank should maintain the flexible exchange rate policy.
“The IMF is supportive of the economic policies of the South African government. The report supports the government’s efforts to address the challenges of high unemployment and poverty while aiming to preserve macro-economic stability,” said Manuel.
“The IMF supports targeted initiatives to reduce unemployment but suggests that these initiatives should be evaluated to ensure the efficient allocation of resources,” he said.
He said in a written speech that the government’s continued sound fiscal policies and improved public finances were commended by the IMF as a means of raising the level of government savings in order to mitigate the risks associated with the widening current-account deficit. — I-Net Bridge