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15 December 2014

EDITORIAL: IMF lays bare SA’s bleak prospects

DECEMBER 12 2014

WHETHER or not one agrees with the International Monetary Fund’s (IMF’s) annual evaluation of the economy, it does reflect the efforts of a well-resourced team of professional economists, so the technical work deserves be taken seriously.

And what the IMF technicians say about SA’s economic growth record, and its growth prospects, is more than a bit bleak.

We may think we didn’t come out of the financial crisis too badly. But, says the IMF, while several emerging markets are facing growth challenges, SA’s slowdown seems to be "more profound" than other emerging markets — and SA’s growth since 2010 is estimated to have been about two-thirds of a percentage point a year lower than expected, given its trading partners’ growth.

The IMF had already revised its growth forecast for this year down to 1.4%, which is in line with our Reserve Bank and Treasury revisions. The latest report revises next year’s forecast down too, from 2.3% to just 2.1%, assuming labour relations improve.

The medium-and longer-term expectations are, however, more sobering. IMF staff see growth improving in the next couple of years, thanks to slowly easing infrastructure constraints and stronger demand for our exports. But the 2.75% average they forecast in the period 2016 to 2019 is hardly shoot-the-lights-out stuff, and, as they note, not enough to lower unemployment significantly.

Worse still, the IMF’s estimate is that SA’s potential or trend growth rate — the rate the economy can sustain over the longer term — has declined from an average 3.5%-4% during the period 2000-08 to 2.25%-2.5% currently, mainly because productivity has fallen.

This is roughly in line with the revised estimate of about 2.5% which the Reserve Bank published recently, so no great surprise there. But it is worth noting that potential growth rates for most countries have been revised downwards in the wake of the financial crisis and the great recession.

However, few countries have SA’s 25.5% unemployment rate, nor its inequality and poverty challenges. The National Development Plan has targeted an average growth rate of 5.4% until 2030 to cut unemployment. Trend growth of 2.5% is a long way from that.

The IMF’s economists emphasise that SA can’t expect more from monetary or fiscal policy to boost growth and repeat a refrain we are no doubt growing quite weary of — that we need structural reforms.

The IMF’s chief economist for SA, Laura Papi, says easing electricity constraints and normalising industrial relations are the two priority reforms that are urgently needed to boost growth. "These are two long-standing structural issues which have become increasingly binding constraints," she says.

Urgent action is needed.

But it’s important, too, for SA to start with the bigger political picture, in particular the messaging coming from the government — which has not been firm enough to drive home, to labour, business and indeed within government itself, how urgently reform is needed — and how little space there is for wasteful spending, excessive public (or private) sector pay hikes or other profligate spending.

The government needs to prime SA for the difficult period that lies ahead and communicate consistently that responsible action must be taken and that sacrifices will be required.

The Treasury said on Thursday in response to the IMF report: "SA continues to face challenges to support growth and reduce unemployment; however, we are taking steps to address this challenge." Soothing words — but not nearly strong enough.

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