IMF advises South Africa on structural reforms to boost economic growth

The International Monetary Fund (IMF) has thrown its weight behind the South African government, stressing the urgent need for structural reforms and adjustments in the public sector wage bill to stimulate economic growth.

This advisory comes as Finance Minister Enoch Godongwana prepares to present the 2025 Budget Review, amid tough measures to bolster the country’s fiscus as growth struggles to exceed 1% and national debt hovers unsustainably around R6 trillion.

The concerns surrounding South Africa's economic situation are significant, with the government debt-to-GDP ratio projected to surpass a historic 76% in the medium term.

To address this, the government has earmarked R11 billion for the fiscal year 2025/26, aimed at incentivising 30 000 civil servants to accept early retirement voluntarily as part of wider efforts to manage the bloated public sector wage bill.

IMF senior resident representative for South Africa Tidiane Kinda on Tuesday said safeguarding fiscal sustainability was key for South Africa’s economy. 

“A more ambitious fiscal consolidation is needed to put debt on a firmly downward path—a 1% of GDP consolidation per year for three years,” Kinda said, also suggesting implementing a fiscal rule with a defined debt ceiling to ensure policy credibility and support the necessary adjustments.

Kinda highlighted the excessive operating costs associated with State-Owned Enterprises (SOEs) that have cumulatively cost South Africa about 5% of GDP since 2008.

“Reducing SOEs operating costs, including by rationalising wages and staffing, tackling waste, divesting non-core assets, and focusing on core mandates,” he said.

“The public sector wage has increased by 2.2 percentage points of GDP since 2007, due to hiring and compensation higher than inflation. Limit wage increases to below inflation, reduce allowances and pay progression, introduce evidence-based approach to pay-setting, and control public sector workforce growth, including through early retirement, as authorities are planning.”   

Kinda was presenting the findings of the IMF’s bilateral discussions, which it holds with member countries every year under Article IV of IMF’s Articles of Agreement.

He also recommended better targeting subsidies toward vulnerable households such as the allocation of resources to tertiary education subsidies and broadening the revenue base by ending poorly targeted tax exemptions, strengthening tax administration and raising other taxes to finance health insurance or increasing the effective carbon tax.

In a blog on Monday penned by the IMF’s mission chief for South Africa,  Delia Velculescu, and senior economist for South Africa in the IMF's African Department, Kamil Dybczak, the IMF recommended fully implementing the reforms already underway as well as pursuing a package of further structural reforms.

The IMF said the government needed to take actions to enhance the business environment by cutting excessive red tape and administrative requirements and ensuring that small and medium enterprises have fair access to markets as these were essential to help support entrepreneurship, firm growth, and job creation. 

It recommended further efforts to fight corruption, professionalize public administration, and improve the governance of State-Owned Enterprises, as well as complementary labor-market reforms to reduce spatial disparities, help young people enter the labor force, and make regulations for small and medium-sized enterprises more flexible are key to durably reduce the high unemployment rate. 

Recent IMF analysis suggests reforms halving South Africa’s business regulation, governance, and labor-market gaps relative to peers could increase medium-run output by 9% and further boost employment. 

By raising employment and growth, such reforms are also key to reducing poverty and ensuring the benefits of growth are widely shared. 

IMF staff estimates that South Africa’s Gini coefficient—a measure of inequality, with higher numbers reflecting higher income disparity—would decline by 10 points, bringing South Africa closer to its peers.

“For example, providing information about the cost of electricity in South Africa, which is 68% higher than in the US, was found to boost support for electricity reforms by 9 percentage points,” the IMF said.

“While the challenges are massive, South Africa’s new government has a unique opportunity to use its fresh mandate to implement an ambitious package of reforms that can put the economy on a path toward higher growth and prosperity for all.” 

BUSINESS REPORT