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IMF staff report for the 2004 Article IV consultation

International Monetary Fund

Prepared by the Staff Representatives for the 2004 Consultation with South Africa.

August 12, 2004

IMF Country Report No. 04/378, December 2004

SARPN acknowledges the IMF website as the source of this document: www.imf.org
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  • The 2004 Article IV consultation discussions were held in Pretoria and Cape Town during May 19–June 1, 2004. The staff team met with the Minister of Finance; the Deputy Governors of the South African Reserve Bank (SARB); senior officials in the Ministries of Agriculture, Trade and Industry, Public Services Administration, Education, Public Enterprise, Health, and Labor; parliamentary committee members; and representatives of the business, labor, diplomatic, and academic communities.


  • The staff team comprised Messrs. Nowak (head), Ahmed, Funke, Harjes (all AFR), Mr. Horton (FAD), and Mr. Hviding (PDR). Mr. Arora, the Fund’s Resident Representative in Pretoria, participated in the discussions.


  • At the time of the 2003 Article IV consultation, Directors considered that the primary policy challenges facing South Africa were to achieve higher rates of growth, substantially reduce unemployment and poverty, and decisively address the HIV/AIDS epidemic. They commended the authorities for their sound macroeconomic management and implementation of structural reforms, which had helped increase the economy’s efficiency and resilience to shocks.


  • South Africa accepted the obligations of Article VIII in 1973 and maintains an exchange system free of restrictions on payments and transfers for current international transactions.


  • South Africa’s relations with the Fund, including recent technical assistance, are summarized in Appendix I and its relations with the World Bank Group in Appendix II. Statistical issues are discussed in Section III and Appendix III. The quality and timeliness of South Africa’s reporting of economic and financial data are generally satisfactory for surveillance purposes, but weaknesses remain in the reporting of key labor market statistics. The medium-term outlook is discussed in Appendix IV.


Executive Summary

The South African economy appears poised for a recovery in activity. Monetary easing last year, a moderately expansionary fiscal stance, increases in investment, and a pickup in external demand should provide a boost to the economy. As a result, growth is expected to rise from under 2 percent in 2003 to more than 2Ѕ percent in 2004 and to over 3 percent in 2005.

The South African Reserve Bank (SARB) eased monetary conditions in 2003 in response to a major improvement in the inflation outlook. CPIX inflation has been within the official target range of 3-6 percent since September 2003, and short-term interest rates were cut by 550 basis points between June and December 2003, and by another 50 basis points in mid-August. However, there is evidence of a modest buildup in inflationary pressures, and an adjustment in interest rates may be required during the next 12 months.

South Africa’s external position has generally strengthened over the past year. The rand has strengthened further, largely reflecting increases in commodity prices. A major milestone was reached with the closure of the SARB’s forward book in the foreign exchange market in February 2004, and the SARB has since replenished its net international reserves. Nonetheless, some further increase in reserves would be desirable in order to help reduce currency volatility and keep long-term interest rates low. In response to strong domestic demand and the currency appreciation, the external current account position turned around from a surplus of 0.6 percent of GDP in 2002 to a deficit of 0.8 percent of GDP in 2003; the external debt situation, however, remains very comfortable.

The fiscal stance has been relaxed to provide countercyclical support and help address South Africa’s pressing social problems. The deficit for 2004/05 is targeted at 3.1 percent of GDP, compared with outturns of 2.4 percent of GDP in 2003/04 and 1.1 percent 2002/03. The authorities agree that a deficit in the region of 3 percent of GDP should be considered the upper limit of what is desirable to maintain macroeconomic stability and to keep indebtedness under control. An important spending initiative that has been adopted is the universal provision of antiretroviral HIV/AIDS drugs through the public health system.

Key prudential indicators suggest that the banking and corporate sectors are generally sound. Real estate prices have risen strongly in recent years, but the banks appear to be well protected against the consequences of a possible drop in property prices.

Rigidities, skill deficiencies, and relatively high costs in the labor market continue to impede efforts to achieve a significant reduction in unemployment. The staff recommends that steps be considered to decentralize the collective bargaining system so as to allow small and medium-sized enterprises more autonomy in setting wages. It is, moreover, concerned that increases in minimum wages have aggravated the unemployment problem, particularly in the agricultural sector. The government’s skills development program could be strengthened by relying less on labor levies as a source of funding and by focusing more on training those presently unemployed.

Policies in the areas of trade reform and public enterprise restructuring are being reviewed by the government. The staff urges that further liberalization of the tariff regime be undertaken and that implementation of the privatization program, which has come to a halt, be stepped up. These actions would help raise productivity and enhance South Africa’s international competitiveness.

The implementation of initiatives that reduce income and wealth disparities is necessary and desirable for maintaining social cohesion. Initiatives being undertaken to implement a black economic empowerment program and accelerate land reform are, therefore, welcome.



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