SA Poised for Economic Recovery in 2025 Amidst Structural Reforms and Fiscal Consolidation

The IMF acknowledged progress in banking resolution and safety-net reforms and commended macro-prudential measures designed to bolster capital buffers.

South Africa’s economic growth prospects are set for a recovery in 2025 following a sluggish performance over the past two years. According to an economic and financial assessment by the International Monetary Fund (IMF), real Gross Domestic Product (GDP) output growth is expected to accelerate from an estimated 0.8 percent in 2024 to 1.5 percent in 2025. This positive trajectory is driven by improved electricity generation, monetary policy easing, and a return of investor and consumer confidence post-elections.

On Thursday, the IMF published the findings of its Article IV Consultation with South Africa, conducted from 11-25 November 2024. As part of its surveillance role, the IMF performs periodic economic and financial assessments with each member country.

IMF’s Assessment of South Africa’s Economic Outlook

The IMF acknowledged progress in banking resolution and safety-net reforms and commended macro-prudential measures designed to bolster capital buffers. However, it raised concerns about South Africa’s rising public debt and the challenges the country faces in meeting its climate goals.

The Fund welcomed ongoing electricity and logistics reforms aimed at alleviating critical supply constraints and emphasized the need for ambitious implementation of these reforms. It also highlighted the necessity of increasing effective carbon taxation and accelerating the rollout of renewable energy to meet climate targets.

The IMF projects GDP growth to reach 1.8 percent by the end of the decade, supported by continued structural reforms in energy and logistics sectors. However, risks remain, with potential downside factors including global economic fragmentation and increasing protectionist policies in an uncertain geopolitical environment.

“With fiscal deficits moderating but still elevated over the medium term, the IMF projects public debt to continue rising under its baseline scenario. It recommends a more ambitious fiscal consolidation plan to ensure debt sustainability,” the IMF stated.

Inflation is expected to stabilize within the South African Reserve Bank’s (SARB) target range, with the Fund recommending that the central bank continue managing policy rates flexibly and based on economic data.

The IMF also suggested transitioning from a target band to a lower point target with a well-calibrated tolerance band at an appropriate time to enhance macroeconomic stability.

National Treasury’s Response

The National Treasury acknowledged that the IMF’s concerns align with the South African government’s economic strategy, particularly its efforts to address both immediate and long-term economic challenges.

“The National Treasury remains committed to implementing reforms that will enhance inclusive economic growth, achieve sustainable public debt levels, further strengthen network industries, and bolster state capacity to support economic activity,” the department stated.

In its 2024 Medium Term Budget Policy Statement (MTBPS), the National Treasury projected economic growth to rise from 1.1 percent in 2024 to 1.7 percent in 2025. The Treasury attributed this anticipated improvement to a gradual increase in household consumption, supported by rising purchasing power, employment recovery, and wealth gains.

“South Africa is committed to fiscal consolidation and to placing debt on a sustainable trajectory. The 2023/24 fiscal year marked a significant milestone, with the first primary surplus recorded in 15 years.

“An overall main budget deficit of 4.7 percent of GDP is expected for the current fiscal year, with projections indicating a decline to 4.3 percent in 2025/26. Meanwhile, the debt-to-GDP ratio is expected to stabilize in the 2025/26 financial year, with debt-service costs as a percentage of revenue peaking at the same time,” the National Treasury stated.

Structural Reforms and Policy Initiatives

The South African government continues to prioritize economic and structural reforms aimed at stabilizing key sectors and promoting long-term economic growth. Key reform areas include:

• Electricity Grid Stabilization: Significant progress has been made in ensuring a more reliable electricity supply, with additional capacity expected from renewable energy projects.

• Enhancing Freight and Port Operations: Improvements in logistics are set to alleviate supply chain inefficiencies and support economic activity.

• Implementation of e-Visas: Streamlining visa processes to attract skilled workers and investors.

• Targeted Industry Development: Prioritizing key industries to enhance the business climate and promote equitable growth.

Nearly 94 percent of the targeted reforms for 2024 have been completed or are in advanced stages of implementation.

Following the successful first phase of Operation Vulindlela, the government is launching a second phase with new initiatives to address local government decline, tackle spatial inequality, and advance digital governance for improved service delivery.

These efforts build upon the initial focus areas of reducing power cuts, improving logistics, lowering data costs, ensuring water supply, and attracting critical skills.

Financial Stability and Regulatory Oversight

In an effort to strengthen financial oversight, the SARB conducted its first stress test of South Africa’s key insurance firms during the 2023/24 cycle, emphasizing climate-related risks. The government is also actively working to exit the Financial Action Task Force (FATF) grey list by 2025, with 16 out of 22 required action items already addressed.

 

While South Africa faces ongoing economic challenges, the IMF’s latest assessment suggests that ongoing structural reforms, fiscal consolidation efforts, and policy improvements are laying the groundwork for a sustainable recovery. With enhanced energy reliability, logistics improvements, and a commitment to debt stabilization, the country’s economic outlook for 2025 appears significantly brighter, with further growth projected in the years ahead.