The International Monetary Fund (IMF) has slashed South Africa’s growth forecast for 2023 significantly due to heightened power cuts, weak commodity prices and weakening global economy.
The IMF yesterday lowered South Africa’s real gross domestic product (GDP) growth forecast from 2023 drastically to 0.1% from 1.2% previously projected in January.
This forecast is contained in the Concluding Statement describing the preliminary findings of IMF staff at the end of an official staff visit in South Africa for consultations under Article IV of the IMF’s Articles of Agreement.
IMF’s head of research in the African Department, Papa N'Diaye, said South Africa’s near-term growth outlook had deteriorated.
N’Diaye led an IMF team on March 1-17 to hold meetings with the economic authorities and other counterparts from the public and private sectors as part of their routine economic surveillance function.
N'Diaye said South Africa’s economic and social challenges were mounting, risking stagnation amid an unprecedented energy crisis, increasingly binding infrastructure and logistics bottlenecks, a less favourable external environment, and climate shocks.
“Real GDP growth is projected to decelerate sharply to 0.1% in 2023 mainly due to a significant increase in the intensity of power cuts, as well as the weaker commodity prices and external environment,” N'Diaye said.
In the medium term, growth was expected to rebound, though only to about 1.5% per year, with income per capita likely to stagnate as a result.
“This is because of long-standing structural impediments, such as product and labour market rigidities and human capital constraints, offsetting expected improvements in energy supply, higher private spending on energy-related infrastructure, and a more supportive external environment,” he said.
However, the IMF said the country’s large external asset position, low levels of foreign currency debt, diversified economy, sophisticated financial system, and flexible exchange rate regime were sources of strength, supported by the South African Reserve Bank’s (SARB) pro-active monetary policy that has kept inflation expectations anchored.
It said these features provided a favourable base for growth, as fiscal and structural challenges continue to be tackled, including through Operation Vulindlela.
On the policy front, the IMF noted that the government had made important headway on domestic revenue mobilisation, removed licensing requirements for embedded power generation, announced a plan to create a mechanism for private sector participation in transmission infrastructure, completed the spectrum auction, and had taken steps to improve third-party access to the country’s ports and freight network.
It said that the progress made over anti-corruption measures in response to the recommendations of the Zondo Commission was welcomed and needed to be sustained.
However, the IMF noted that further reforms were urgently needed to durably lift potential growth, create enough jobs to reduce unemployment, absorb new entrants into the labour force, and reduce poverty and inequality.
Responding to the IMF, the National Treasury said it took note of the main findings.
“National Treasury is aware of most of the risks to economic growth and is working on mitigating measures to address these, as detailed in the 2023 Budget Review,” it said.
“Treasury awaits the Article IV report and will respond to the more detailed analysis and recommendations when the Report is published.”
The Article IV consultation culminates in the IMF Article IV Report on South Africa, which will be published later this year, following further research and engagement with the National Treasury and the IMF Executive Board.
Momentum Investments economist Sanisha Packirisamy said a number of issues raised by the IMF suggested significant headwinds for longer term trend growth and social cohesion.
Packirisamy said they broadly agreed with the IMF’s assessment of longer-term trend growth of around 1.5% due to these factors as well as deficiencies in SA’s network industries.
“We continue to estimate growth for this year of around three quarters of a percent given some support for household consumption due to lower inflation outcomes giving a boost to real wage growth, particularly for higher income earners,” Packirisamy said.
“That said, we cannot dismiss that more intense load shedding poses the biggest downside risk to growth despite a lower energy intensity of the economy due to private sector involvement and a more efficient use of energy. We expect load shedding to remain a notable drag on growth in 2024 and 2025.”
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