Picture: ISTOCK
Picture: ISTOCK

The World Bank sees a modest and very fragile recovery for the South African economy this year off a low base, one of its officials said in Parliament on Wednesday. The bank has projected a growth rate of 1.1% this year, rising to 1.8% in 2018 assuming there is no sovereign credit ratings downgrade.

There were downside risks to this growth, however, unless private investment accelerated, the bank’s programme leader for SA Sebastian Dessus said when reporting on the World Bank’s Economic Update on SA to members of Parliament’s appropriations and economic development committees. The update was released in January.

Dessus noted that an acceleration in private investment would reassure the credit ratings agencies. One of the ways to foster growth, he said, was for tax incentives to be re-oriented towards agriculture, manufacturing, construction and trade, as this would encourage private investment and increase job creation.

These sectors have become more competitive and would benefit from a better targeted tax incentive regime — more so than the mining sector, which has been hit by a decline in commodity prices over the past few years. This decline has resulted in a four percentage point fall in GDP since 2012.

"By better targeting investment tax incentives, poverty can be reduced through job creation at no additional fiscal cost," Dessus said. The bank’s research indicated that these four sectors, as well as the services sector, were most responsive to income tax incentives and were also those which created the largest number of jobs.

The financial sector and services sectors have been the main drivers of growth, with services outperforming industry and the primary sectors, and creating most of the jobs. Manufacturing’s share of GDP and of the private capital stock has declined since 1993.

Dessus noted that tax incentives and the prevailing tax rates could have contributed to capital moving from the manufacturing to the less productive mining sector in recent years. New investments over the past few years have shifted to sectors where the return on capital is the lowest; Dessus said this allocation of capital was "very worrisome".

He reported that since 2012, 600,000 jobs needed to be created annually to reduce the unemployment rate, but only about 250,000 a year were created, resulting in a rise in jobless numbers.

Investment has remained very weak since 2015. The structural decline in the value of the rand since 2011 — its value has declined by almost 50% over the past five years — has also had a significant effect on the economy and its extreme volatility has created problems for investors. South African investors invested more abroad than foreign investors did in SA, which has a lot of potential to attract more investment if the conditions are right.

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