IMF forecast upbeat on SA's economic prospects

The International Monetary Fund forecast more upbeat economic growth for the country on Thursday, with the release of its latest report into macroeconomic conditions in South Africa.

But longstanding problems such as South Africa’s competitiveness and the need for labour market reform were highlighted by the IMF as key to addressing the on-going challenge of unemployment.

The soaring public wage bill needed reducing it argued, to support higher potential growth and enhance public service delivery.

Treasury welcomed the report, saying that while “government does not share all the views expressed in the IMF report”, it was a fair assessment of the economic conditions in South Africa, and would be considered, along with similar assessments, during policy formulation.

The IMF argued for stronger fiscal consolidation beyond this financial year, and the rebalancing of state spending, which had seen marked increases in wages for civil servants.

The government wage bill had increased markedly from 9.5% of the gross domestic product in 2007/2008, to 11.5% of GDP, it noted. This was well above the average for other emerging markets in the G20 currently at 8.75%

“Given the influence that the public sector wage agreement round seems to be having on private sector wage adjustments, [IMF] staff also underscored the need for public sector wage increases to be kept to levels that can be justified by productivity improvements,” it said in the report.

The efficiency of public spending needed improving it noted, before public investment could be increased substantially.

“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,” it said.

“At the municipal level, it requires better financial management, more efficient supply-chain management, and improved capacity to meet requirements for conditional grants.”

Limited competition
The IMF also pointed to problems of concentration and limited competition in local goods and service markets.

Regulatory barriers are particularly problematic it said, with market regulation in South Africa the fifth most onerous as measured against 39 advanced and developing countries.

It also called for more aggressive efforts to attract new entrants into key network industries, where state-owned enterprises hold sway. The report listed telecoms, rail and road haulage, and energy generation—the opening up of which “could also help improve efficiency and the cost of production”.

The IMF welcomed the notion of a wage pact between government, labour and business, as proposed by the state’s new growth path. If this was not feasible however, it argued for 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”.

The report noted the arguments put forward by trade unions that labour share of national income has declined in recent years. Labour pundits have suggested that companies have taken an ever-increasing proportion of the country’s wealth, while workers are seeing less.

But it argued that the decline labour’s share of income may reflect the rising trend in commodity prices over the last decade, which have accrued to sectors with relatively low or declining labour intensity.

It also pointed out that by international standards the decline in the labour share was not unique to South Africa. In addition in sectors subject to international competition, such as manufacturing, the labour share in South Africa actually increased.

Nevertheless it recognised that beyond the consideration of reforms consensus had to be built around these issues which would take time.

The IMF also highlighted the steps the government was taking to address challenges such as the competition commission’s work to tackle anti-competitive practices in key industries. It also commended budget provision to support for private sector initiatives with a strong job-creating component.

It threw its weight behind the youth wage subsidy saying this would “better align pay and productivity for new job market entrants”.

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