The International Monetary Fund (IMF) has concluded its Article IV assessment on South Africa, warning that the country faces near-zero economic growth in 2023, and conditions are likely to deteriorate further without much-needed reforms.

The IMF noted in its assessment that South Africa’s economy faces mounting economic and social challenges.

Growth moderated from 4.9% in 2021 to 2.0% in 2022 as the country was buffeted by Russia’s war in Ukraine, global monetary policy tightening, severe floods, and an unprecedented energy crisis.

“Business and consumer confidence and investor sentiment remain weak, and the sovereign spread for South Africa remains higher than the pre-pandemic level. The average employment level in 2022 was still about 5% lower than in 2019, threatening social cohesion,” it said.

Headline inflation has risen above the South African Reserve Bank’s (SARB’s) 3% to 6% target range amid higher food and energy prices. Inflation expectations have inched up but remained within the target range, however.

In 2022, the current account balance decreased to a -0.5% GDP deficit from a 3.7% GDP surplus in 2021, due to lower commodity prices and logistical bottlenecks. This, together with tighter global financial conditions, shifts in investor sentiment, and increased domestic political uncertainty, have weakened the rand.

The fiscal deficit has continued to narrow, reaching 4.2% of GDP in FY2022/23, from 4.8% in FY2021/22, thanks to buoyant revenue and expenditure restraint.

“Despite this improvement, the government debt-to-GDP ratio is estimated to have increased to 70%. The SARB has proactively raised interest rates to bring down inflation within the target range and anchor inflation expectations, continuing the removal of monetary accommodation,” the group noted.

Looking ahead, however, the cracks are apparent.

In line with local analyses, the IMF projects that real GDP growth in South Africa will settle at 0.1% in 2023, reflecting a significant increase in the intensity of power outages and weaker commodity prices and the external environment.

“Annual growth is expected at about 1.5% over the medium term, as long-standing structural impediments, such as product and labour market rigidities and human capital constraints, offset expected improvements in energy supply, higher private spending on energy-related infrastructure, and a more supportive external environment,” it said.

Unfortunately, this growth level would be too low to create enough jobs to absorb the new labour market entrants, it said. In addition to this, the fiscal position is projected to deteriorate due to weakening mineral revenue, the Eskom debt relief arrangement, wage bill pressures, and rising debt service.

“As a result, public debt is not expected to stabilise,” the IMF said.

Headline inflation is expected to return to the midpoint of the target range by the end of 2024. The current account deficit is projected to deteriorate to about 2.5% of GDP in the near term.

The fund noted that its outlook is highly uncertain – a major issue for investors – and could change significantly, but this is contingent on the pace of domestic reform as well as conditions in the “challenging external environment”, it said.

The IMF said that South Africa has strong fundamentals but warned that the country’s post-pandemic recovery is petering out amid several shocks.

This is exacerbating economic and social challenges in the context of elevated poverty and inequality. The group stressed the urgency of reforms to promote the sustained and inclusive growth needed to address these challenges.

Some bright spots

On a more positive note, the IMF commended the SARB for its commitment to price stability and endorsed the pace of monetary policy normalisation, which should bring inflation back within the target.

It recommended maintaining a data-dependent approach to monetary policy decisions.

The group also praised the recent reduction in the fiscal deficit, reflecting efforts to contain public spending and improve revenue administration. It encouraged stronger fiscal consolidation under a credible medium-term framework to put public debt on a firmly declining path while protecting productive investment and well-targeted social spending.

“This should be supported by reforms to the fiscal framework, procurement system, and public investment management,” it said.

The IMF said that South Africa’s financial sector has also been resilient, given the volatility of global markets, but stressed that other sectors in the economy need urgent attention – particularly state-owned enterprises.

It said that further measures need to be taken to reform SOEs, open key network industries to private sector participation, reduce the regulatory burden, and enhance labour market flexibility and the quality of education to tackle high structural unemployment.

“Resolving the ongoing energy crisis remains the top priority, providing an opportunity to accelerate the rollout of renewables,” it said.

The group said it supports the steadfast implementation of the government’s energy transition plan and emphasised the importance of well-targeted fiscal support for affected communities and workers.

It also recommended “forcefulness” in tackling governance weaknesses and corruption, noting that timely implementation of the Financial Action Task Force’s action plan is crucial to exit the grey list swiftly.