IMF warns that SA faces constraints in implementing reform
Fund commends government on governance efforts and says calls for improvement on business models of SOEs
While the government has ramped up efforts to improve governance, SA faces reform implementation headwinds, says a delegation from the International Monetary Fund (IMF).
In a concluding statement released on Monday, which describes the preliminary findings of IMF staff at the end of a visit to SA, the fund said: “Some of the initial optimism has dissipated as growth remains stuck in low gear and reform implementation has faced constraints.
“This is therefore a critical time to implement stalled reforms to restore confidence, attract investment, support growth, and rebuild buffers to deal with a challenging environment.”
Reforms the IMF calls for include addressing remaining governance issues and improving the business models of state-owned entities (SOEs), revisiting labour market practices to create more jobs, promoting competition in all sectors of the economy to boost business opportunities and reducing uncertainty by clarifying some recent policy proposals, particularly on land reform.
Despite SA’s economic resilience, the country had been knocked by negative effects in the external environment, the IMF said.
“Amid deepening global trade tensions and capital outflows from most emerging markets, nonresident investors have been selling South African assets, more than reversing the large inflows that followed the change in government, although the country has not been as badly hit as some emerging markets.”
Despite important mitigating factors, such as the free-floating exchange rate, sophisticated financial and corporate sectors, and favorable currency and maturity profiles of the sovereign debt, it said that “there is no room for complacency”.
The fund said SA should consider introducing a debt anchor in its budget to signal the government’s commitment to reduce its obligations and help tighten fiscal policy.
Ahead of the Reserve Bank's monetary policy committee (MPC) decision on Thursday, the IMF said monetary policy had to focus on anchoring inflation expectations close to 4.5% and not try “to address structurally induced low economic activity”.
The MPC cut the key repo rate in March, but has not made any moves since then. Some analysts are expecting the start this week of a cycle of interest-rate hiking. Half of the 18 economists in a Bloomberg survey predicted a rate increase.
“With inflation expectations remaining close to the upper end of the target band, the accommodative monetary policy stance is running out of space, risking the central bank falling behind the curve,” warned the IMF.