Sound Policies Shield South Africa from Worst of Recession
| Author | Rodney Ramcharan |
| Position | IMF African Department |
In its regular assessment of South Africa's economy, the IMF stresses the importance of progress on structural reforms to remove long-standing barriers to growth and employment.
South Africa's prudent macroeconomic policies have also contributed impressively to the country's development-a significant achievement considering the challenges faced following the end of apartheid only 15 years ago. These policies have been underpinned by a consistent and transparent policy framework, including a credible inflation targeting regime.
Looking forward, the authorities need to calibrate their policy response in order to maintain price and external stability, mitigate systemic risks, and make progress on structural reforms to remove long-standing barriers to growth and employment.
South Africa enjoyed a buoyant economy in the mid-2000s. A favorable external environment and strong domestic demand helped raise growth to 5 percent on average in 2004-07 and lowered the unemployment rate by 5 percentage points. However, the global financial crisis of late 2008 sharply changed the outlook for an already slowing economy. South Africa is now in its first recession since 1992, and there are new priorities for macroeconomic policy.
The authorities have responded vigorously to the downturn. Building on past prudent fiscal management, which helped lower national government debt from around 48 percent of GDP in 1998 to just over 27 percent in 2007, fiscal policy has been countercyclical. The government implemented a large front-loaded easing (4.5 percent of GDP) in fiscal year 2008/09 primarily aimed at upgrading the country's infrastructure. This investment program is expected to relieve critical bottlenecks in electricity and transportation, while also supporting demand in the short run.
The South African Reserve Bank also aggressively eased monetary policy starting in late 2008. As economic activity weakened and the inflation outlook improved, the monetary policy committee (MPC) reduced interest rates by 450 basis points between December 2008 and May 2009. But with inflation remaining stubbornly outside the target band of 3-6 percent, the MPC has recently taken a more measured approach, leaving the policy rate unchanged at its June 2009 meeting, while cutting rates by 50 basis points in August.
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