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IMF warns on South African economy

By Staff Reporter

A South African street vendor awaits customers in Alexandra Township on the backdrop of the Sandton Towers, one of Africa's leading and most prestigious shopping centres, on August 26, 2014 in Johannesburg, South Africa. South Africa narrowly avoided slipping into recession in the first half of the year, thanks in part to election-time government spending, official data showed on Tuesday. Africa's most advanced economy had shrunk in the first quarter of the year by 0.6 percent, amid a mining strike that halted platinum production for five months. AFP PHOTO/MUJAHID SAFODIEN (Photo credit should read MUJAHID SAFODIEN/AFP/Getty Images)©AFP

South Africa urgently needs to tackle structural problems that are stymieing growth, the International Monetary Fund has warned.

The comments came as the rand hit six-year lows against the dollar and as the country endures its worst power cuts since 2008.

Speaking as the IMF released a report on Africa’s most developed economy on Thursday, Laura Papi, the fund’s mission chief there, said that while external demand and softer commodity prices were contributing to the weak economic performance, domestic structural constraints had “become more binding”.

South Africa’s problems include prolonged wage strikes, transport bottlenecks and labour market issues, coupled with the need to improve education and training.

“In terms of policy, our main message is that addressing the structural constraints is more urgent than ever to increase growth, create jobs, and also to increase exports and reduce the current account deficit,” Ms Papi said.

The IMF has revised downwards its estimate for the country’s growth to 2.25-2.5 per cent, below the 3.5-4 per cent it estimated in the early 2000s.

South Africa is one of the most liquid and traded emerging markets but it is vulnerable to global financial shocks and was lumped with the “fragile five” emerging markets last year. It is exposed to Europe’s woes via manufacturing exports, and to China’s slowdown through commodities prices.

Ms Papi said that the subdued potential growth meant that the high unemployment blighting South Africa would remain, as would the government’s battle to narrow high fiscal and current account deficits.

The IMF forecasts growth of 1.4 per cent this year — which would be the country’s lowest level since a 2009 recession — and 2.1 per cent in 2015, if labour relations improve. The economy was battered this year by an unprecedented five-month strike in the platinum sector, a key source of export earnings.

The South African government is struggling with unemployment that has remained stubbornly around 25 per cent; a fiscal deficit of 4.1 per cent of gross domestic product; and a current account deficit of 6 per cent of GDP.

In October, Nhlanhla Nene, finance minister, pledged to curtail government spending, saying fiscal consolidation could “no longer be postponed” and that avoiding it “would risk exposing the country to a debt trap”.

The government is implementing a multibillion-dollar infrastructure programme in a bid to boost growth and has adopted a 20-year National Development Plan as the core of its economic policy. But the power shortages are expected to last into next year and beyond, while businesses, which are suffering from fragile confidence, complain of rising costs, falling productivity and increased labour unrest.

Ms Papi said the electricity problems were having an increasing impact on growth and exports.

“Electricity is absolutely key at this point,” she said. “Normalising industrial relations is the other area where we see increasing [losses] to strikes.”

State-owned utility Eskom is building two multibillion-dollar coal plants to add supply. But their completion has been delayed by more than two years — 12 months of which the company blames on strikes — and they have run far over budget.



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