South Africa Faces Headwinds, Debt-GDP Ratio Jumps to 70%
Cyril Ramaphosa, South Africa's president

South Africa Faces Headwinds, Debt-GDP Ratio Jumps to 70%

South Africa’s economy is facing mounting economic and social challenges, the executive board of the International Monetary Fund (IMF) said after the conclusion of the Article IV consultation with the authority.

According to IMF, growth moderated from 4.9 percent in 2021 to 2.0 percent in 2022 as Russia’s war in Ukraine buffeted the country, 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 multilateral lender stated.

It noted that the average employment level in 2022 was still about 5 percent lower than in 2019, threatening social cohesion.

In line with global development, headline inflation has risen above the South African Reserve Bank (SARB)’s 3–6 percent target range amid higher food and energy prices.

Inflation expectations have inched up but remained within the target range. 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.

IMF said, this, together with tighter global financial conditions, shifts in investor sentiment, and increased domestic political uncertainty have weakened the rand.

The country’s fiscal deficit has continued to narrow, reaching 4.2 percent of GDP in 2022/23, from 4.8 percent in 2021/22, thanks to buoyant revenue and expenditure restraint.

Despite this improvement, the government debt-to-GDP ratio is estimated to have increased to 70 percent. 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.

Looking ahead real GDP growth is projected at 0.1 percent in 2023, reflecting a significant increase in the intensity of power outages, and weaker commodity prices and the external environment, IMF said.

The report indicates that annual growth is expected at about 1½ percent over the medium term, as longstanding 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.

“The growth level would be too low to create enough jobs to absorb the new labour market entrants. 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 stabilize, IMF stated, projecting that headline inflation would return to the midpoint of the target range by the end of 2024.

However, the IMF sees the current account deficit declining to about 2½ percent of GDP in the near term, adding that the outlook is subject to significant uncertainty related to the pace of reform domestically and the challenging external environment.

While recognizing South Africa’s strong fundamentals, IMF directors noted that the post-pandemic recovery is petering out amid several shocks, exacerbating economic and social challenges in a context of elevated poverty and inequality. 

They stressed the urgency of reforms to promote the sustained and inclusive growth needed to address these challenges. #South Africa Faces Headwinds, IMF Estimates 70% Debt-GDP Ratio

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