Boosting Growth and Prosperity in South Africa

This article is published in association with IMF.

Improving the business environment, strengthening governance, and reforming the labor market are among the keys to economic success  

South Africa is well-positioned to confront significant longstanding challenges that have been holding the economy back: declining real per-capital income, persistent unemployment, pervasive poverty, and one of the highest inequality rates in the world. These outcomes reflect deepening structural rigidities and governance weaknesses, evidenced by the negative contribution of Total Factor Productivity to growth over the past 15 years.

A new Government of National Unity, in power since June 2024, has committed to tackle these challenges by providing new impetus to the ongoing structural reforms initiated in 2020.  

“We are steadily removing the obstacles to meaningful and faster growth… [through] economic reforms that we are implementing as part of Operation Vulindlela,” South African President Cyril Ramaphosa recently remarked. Major electricity sector reforms are underway, allowing for private-sector participation in electricity generation, including from renewable sources. Reforms to the logistics sector are also ongoing, allowing for private sector participation in freight rail and port operations. The government is also moving to streamline digital communications regulations and water licensing procedures and modernize the eVisa system.

These reforms are an important step in the right direction—necessary to alleviate binding constraints to growth, but on their own not sufficient to generate the productivity gains needed to put the economy on a path toward permanently higher growth. 

To help unlock South Africa’s full growth potential, the IMF recommends fully implementing the reforms already underway as well as pursuing a package of further structural reforms:

• 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—are essential to help support entrepreneurship, firm growth, and job creation. 

• Further efforts to fight corruption, professionalize public administration, and improve the governance of state-owned enterprises are paramount to build trust in public institutions and create a more stable and predictable business climate. 

• 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—and particularly crucial with one in three adults and two in three young people out of work.

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 percent 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.

Building broad social support for reform efforts is essential to achieve their full benefits. Recent IMF analysis highlights that communication and engagement, along with policies to support vulnerable groups, are vital to increase acceptance of reforms. For example, providing information about the cost of electricity in South Africa, which is 68 percent higher than in the US, was found to boost support for electricity reforms by 9 percentage points. Furthermore, providing compensatory support to vulnerable groups affected by the reforms would lead 75 percent ofindividuals initially opposed to reforms to become reform supporters.

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. The IMF stands ready to support South Africa in its efforts to work towards a brighter future. 

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Delia Velculescu is the IMF’s mission chief for South Africa. Kamil Dybczak is a senior economist for South Africa in the IMF’s African Department.