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Country analysis > South Africa Last update: 2020-11-27  

IMF Staff report for the 2005 Article IV Consultation

Prepared by the Staff Representatives for the 2005 Consultation with South Africa

International Monetary Fund (IMF)

10 August 2005

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Executive Summary


  • Macroeconomic performance was strong in 2004 and early 2005, with real GDP growth of 3.7 percent in 2004 and 3.5 percent in the first quarter of 2005, and inflation within the 3–6 percent target band. International reserves continued to grow, and the fiscal deficit fell to 1Ѕ percent of GDP in FY2004/05. In 2004, strong domestic demand and a strong rand led to a widening of the current account deficit to 3.2 percent of GDP. The rand has weakened so far in 2005.

  • The short-term outlook is broadly favorable, with the main risks arising from a possible worsening of the external environment. South Africa faces important challenges in the form of high unemployment and widespread poverty, and high prevalence of HIV/AIDS.
Policy Discussions

  • Staff generally supported the authorities’ broad-based strategy to raise economic growth, reduce poverty, and improve social conditions, while maintaining macroeconomic stability.

  • On fiscal policy, staff supported the plans for moderate and targeted increases in social and infrastructure spending over the next few years, which together with continued strong revenue performance would be consistent with a stable government debt to GDP ratio.

  • The authorities stressed that inflation remains the sole objective of monetary policy. On the policy stance, staff noted some upside risk to the inflation outlook which may require a raise in the repo rate over the next year to stabilize inflation close to the mid-point of the band.

  • The authorities plan to maintain a flexible exchange rate, and to intervene in the foreign exchange market only to accumulate international reserves when market conditions are favorable. Staff agreed with this policy, while noting that the point may be approaching when the marginal costs of further reserve buildup starts to outweigh the marginal benefits. Staff welcomed the further easing of exchange controls over the past year and the possible move from exchange controls to prudential regulations for institutional investors, and favored also easing restrictions on non-financial firms.

  • The banking system is sound and short-term vulnerabilities appear limited. Some pressures could arise from banks’ large mortgage portfolio carrying variable interest rates. Various initiatives are underway to facilitate access to banking services by the poor; there are already some positive results.

  • On structural reforms, staff supported current initiatives to generate jobs, but considered that easing labor legislation—including by relaxing centralized collective bargaining and streamlining dismissal procedures—was critical to have a significant impact on unemployment. Staff also favored further liberalization and simplification of the trade regime as a way of enhancing competition and raising productivity. The authorities are focusing on restructuring state-owned enterprises to increase efficiency; staff supported these efforts, while suggesting that privatization be kept as an option.

  • Staff supported the Broad Based Black Economic Empowerment and land reform programs, as they would help reduce social and wealth disparities and strengthen social cohesion. The government has reinforced its efforts against HIV/AIDS, but progress remains difficult.

  • South Africa is one of the few Fund members to have completed reviews of the full range of standards and codes. Economic data are generally of good quality and are provided on a timely basis.

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