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IMF Positive On South African Economy

by Robert Lee,, London

08 August 2007

The International Monetary Fund has this week published the conclusions of its Article IV Consultation with South Africa, which was completed at the end of July.

The IMF Directors noted that South Africa has started to reap the benefits of sustained sound macroeconomic management and structural reforms, recently supported by favorable external conditions. The economy has experienced vigorous growth and rising employment, accompanied by rapid credit expansion, booming asset prices, strengthening public finances, and rising international reserves. At the same time, however, the external current account deficit has widened markedly, and inflation pressures have recently intensified.

The Directors also noted that South Africa continues to face high unemployment and poverty, and welcomed the government's efforts to tackle these problems while pursuing policies aimed at maintaining macroeconomic stability.

The IMF officials stated that:

"Directors considered that the economic outlook for South Africa remains broadly positive. Going forward, a range of indicators point to continuing robust growth. Inflation is expected to remain above the upper edge of the target band in the near term, however, and continuing strength of domestic demand would keep the current account deficit at relatively high levels."

"Directors saw the main risks to the outlook coming from the global environment and the strong pace of domestic demand. On the external front, the economy could be adversely affected by weaker appetite for emerging market assets, a global slowdown, or a sharp deterioration in the terms of trade. Directors noted that the widening current account deficit and high reliance on portfolio inflows have raised vulnerability to external shocks."

"However, they believed that the country's strong fundamentals should limit the adverse impact of these shocks on the economy. On the domestic front, Directors considered that a continuation of rapid growth in domestic demand, in combination with capacity constraints, could lead to further widening of the current account deficit and intensifying price pressures."

The assessment went on to add that the IMF Directors supported the authorities' commitment to the flexible exchange rate regime, as this is an integral part of the inflation targeting framework and provides a cushion against external shocks, thus helping to promote external stability. They noted that there was little conclusive evidence of any significant exchange rate misalignment. The officials encouraged the authorities to continue to relax exchange controls gradually, in order to allow for better allocation of resources and ultimately reduce exchange rate volatility through a deepening of the market.

The Article IV report continued:

"Directors commended the authorities for their continuing sound fiscal policies. They noted that the budget balance has turned into a surplus for the first time in several decades and public debt has been declining steadily. Moreover, expenditures are appropriately focused on upgrading infrastructure and relieving pressing social needs. Directors welcomed the authorities' intention to maintain a broadly neutral fiscal stance in the current fiscal year, and most Directors considered that keeping such a stance until the external current account deficit starts declining may be warranted."

Turning its attention towards regulatory and financial matters, the IMF report added:

"Directors noted the strength and resilience of the financial system, and encouraged the authorities to continue enhancing regulation and oversight, especially in the context of the current buoyant credit environment and the recent increase in household indebtedness. They commended the authorities' efforts to improve access to basic financial services, especially outside of urban areas. Directors also welcomed the authorities' interest in an update of the Financial Sector Assessment Program for South Africa in 2008."

The Article IV report concluded by announcing that:

"Directors supported the government's goals of raising growth and reducing unemployment under the Accelerated and Shared Growth Initiative for South Africa. Potential growth seems to have increased in recent years, and could increase even further with the envisaged strong capital accumulation and productivity-enhancing structural reforms. In that regard, Directors considered that efforts to boost growth and employment could be complemented by further initiatives to improve the functioning of labor markets and liberalize the trade regime, and cautioned against the possible distortions that might arise from industrial policy interventions."

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