IMF praises SA economy
22 July 2002
The International Monetary Fund (IMF) has welcomed the resilience of the South African economy, which has seen the country weather the impact of the recent global economic downturn, and praised the government for its continued fiscal discipline and the Reserve Bank for its skillful handling of currency developments.
New deputy governor praises economy
The new deputy governor of the Reserve Bank, Ian Plenderleith, praises SA's monetary policy, saying it has contributed greatly to the underlying strength of the economy. 
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In its annual
review of the South African economy, released on 19 July, the Washington-based lender said that South Africa’s resilience reflects “an improved macroeconomic policy environment, gains in international competitiveness and export diversification, and a further reduction in the central bank's short-term foreign currency exposure.”
Economic performance underpinned by sound fiscal policy
While the South African economy felt the impact of global slowdown in 2001, the IMF noted that this had been milder than in previous cycles and that a “modest recovery” was now under way.
The extensive trade liberalisation undertaken in the 1990s, together with a depreciated currency, had helped to increase South Africa’s competitiveness and diversify its export base, “contributing to a relatively strong trade performance and a narrowing of the current account deficit to 0.1% of GDP in 2001”, the IMF reported.
“In addition, industrial profitability has
been boosted by lower borrowing and input costs. In particular, real interest rates fell during 2001, and wage moderation and substantial productivity gains led to a decline in real unit labour costs. As a result, domestic demand held up well, with both fixed investment and private consumption remaining relatively strong.”
This economic performance, the organisation said, had been underpinned by sound fiscal policy. South Africa’s national budget deficit was reduced from 2% of GDP in 2000/01 to 1.5% in 2001/02 - well under the original target of 2.5% - as a result of strong tax revenue growth and steps taken to improve expenditure monitoring and control.
“Provincial governments' budgets also overperformed, contributing to a narrowing in the consolidated government deficit from 1.7% of GDP in 2000/01 to an estimated 1.3% in 2001/02.”
The IMF said the modest relaxation in fiscal policy announced in the 2002/03 budget was appropriate, and would provide “welcome room
for income tax cuts and higher spending on key social services, HIV/Aids, and efforts to address the high rate of crime”.
Structural reforms ‘picking up pace’
The central policy challenge for South Africa, the IMF said, “is to achieve higher, broad-based and job-creating economic growth”.
Structural reforms were key to this, the organisation said, and should focus on speeding up government’s privatisation and trade liberalisation plans. The lender also stressed continued labour market reforms, and a sustained effort to address the HIV/Aids pandemic, as crucial to South Africa’s economic well-being.
The IMF noted that after some delays, South Africa’s structural reforms were picking up pace. “Implementation of the programme for restructuring public enterprises that was launched in 2000 has been slow, but Telkom, the state telecommunications company, is now expected to be divested by March 2003, and the restructuring of Denel, the state
defense corporation, is well ahead of schedule.”
The government is also implementing an integrated human resource development strategy to address skills deficiencies, and amendments to South Africa's labour legislation are about to come into law that include more flexible work practices, steps to protect the interests of retrenched workers, and streamlined arbitration and conciliation procedures.
The IMF said that it strongly supported the government's efforts to address South Africa's unemployment problem through programmes to raise educational standards and provide job training. However, the organisation noted that the use of a payroll tax to finance the skills development programme might have a negative affect on job creation, and suggested finding alternative sources of financing for the programme.
The lender also welcomed “the importance that the government is attaching to combating HIV/Aids by implementing a multisectoral approach and treating the disease as a
fiscal priority, while ensuring that budgetary funds are properly targeted and well spent”.
Skillful handling of currency developments
Monetary policy was eased during 2001 in the context of an inflation-targeting strategy that South Africa adopted in 2000. With inflation expectations falling through the third quarter of 2001 to within the official target range of 3-6%, short-term policy interest rates were lowered by 150 basis points between June and September. The monetary easing was reflected in an increase in broad money growth from 7.5% at end-2000 to 17% at end-2001.
However, the effort to lower inflation suffered a setback during the last quarter of 2001 when the value of the rand dropped sharply, making it unlikely that the Reserve Bank’s inflation target for 2002 will be met.
The IMF attributed the rand’s fall to a number of factors - including an easing of monetary policy, delays in the privatisation programme, and
contagion from developments in Zimbabwe – while noting that the speed and size of the currency’s depreciation “were difficult to reconcile with [South Africa’s] otherwise sound macroeconomic environment”.
The IMF commended the Reserve Bank for its “skillful handling” of the currency situation, saying it supported the increases in short-term policy interest rates so far this year to dampen inflationary expectations and contain wage increases, and welcomed the authorities' determination to take all necessary steps to achieve the 2003 inflation target.
The organisation also praised the Reserve Bank for reducing its net open forward position (NOFP) - a major source of external vulnerability - and supported its goal of eliminating the NOFP by March 2003. It warned, however, that South Africa's international reserve position would still remain relatively weak, and encouraged the Bank to continue to build up its net reserves with the proceeds of privatisation and prudent
external borrowing.
Sound, well-regulated financial system
The IMF said that South Africa's financial system was sound and well regulated, and had proven itself capable of withstanding the impact of a substantial currency depreciation. It added that the difficulties relating to microfinancing operations experienced by a few small banks in the first quarter of 2001 had been “satisfactorily resolved”.
The organisation also welcomed the recent Report on the Observance of Standards and Codes (ROSC) on Fiscal Transparency, which concluded that the quality of fiscal management and transparency in South Africa are high by international standards, as well as a recent Data ROSC which found that South Africa's economic data are generally of high quality and adequate for surveillance purposes, “although there is scope to improve the reliability and timeliness of labour market data”.
SouthAfrica.info reporter
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