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South Africa
This Technical Assistance report reviews South Africa’s tax system and also examines the fiscal regime with a view to generating a sustainable revenue contribution from mining and petroleum in future. Mining has historically been the mainstay of the South African economy. Mineral exports remain the principal contributor to foreign exchange earnings on the current account. South Africa is not yet a significant producer of crude oil or natural gas. Oil and gas exploration nevertheless shows promise. Taxation is far from top of the list in current challenges facing the development of extractive industries in South Africa. The national goal of economic and social transformation in favor of Historically Disadvantaged South Africans has major impact on the mining sector.
South Africa
South Africa’s economy faces significant macroeconomic challenges: declining GDP per capita, rising debt, high unemployment, poverty, and inequality. Following national elections in May, the long-ruling African National Congress (ANC) lost its majority in parliament and formed a government of national unity (GNU) with the main opposition party Democratic Alliance and nine other parties. The GNU has indicated its intention to address these challenges, while ensuring social cohesion and good governance, which has been welcomed by the markets.
South Africa
South Africa’s strong economic recovery from the COVID-19 pandemic is petering out. Growth moderated from 4.9 percent in 2021 to 2.0 percent in 2022 as the country was buffeted by Russia’s war in Ukraine, global monetary policy tightening, severe floods, and an unprecedented domestic energy crisis. Inflation rose above the target band though inflation expectations remained anchored. The current account moved back into a deficit after a temporary commodity-price driven surplus.
South Africa: The Financial Sector-Sovereign Nexus
Globally, financial institutions have increased their holdings of domestic sovereign debt, tightening the linkage between the health of the financial system and the level of sovereign debt, or the “financial sector-sovereign nexus,” during the ongoing COVID-19 pandemic. In South Africa, the nexus is still relatively moderate, albeit rising, and the increased focus of the Prudential Authority on the associated risks provide reassurance. Options to mitigate such risks through the use of regulatory measures can be explored. However, absent the necessary fiscal consolidation and structural reforms, risks from the nexus to both the financial system and the sovereign will increase.
South Africa: 2021 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for South Africa
South Africa’s subpar economic performance over the last decade has weakened its macroeconomic fundamentals and social indicators. In response to formidable COVID-19-related challenges, government expenditure surged, and, amid declining revenue, the budget deficit widened significantly. The South African Reserve Bank (SARB) and the Prudential Authority (PA) preserved adequate liquidity conditions and financial-sector stability. The cyclical recovery from the deep contraction has been faster than expected but its strength is unlikely to be sustained. Benign global market conditions have supported asset performance, although term premia are elevated due to fiscal risks. Bank soundness indicators remain solid, but a deepening bank-sovereign nexus raises some concerns.
Surprise, Surprise
This paper investigates possible drivers of volatility in the South African rand since the onset of the global financial crisis. We assess the role played by local and international economic surprises, commodity price volatility, global market risk perceptions, and local political uncertainty. As a measure of rand volatility, the study uses a market-based implied volatility indicator for the rand / U.S. dollar exchange rate. Economic surprises—the difference between market expectations and data prints—are captured by Citi’s Economic Surprise Index which is available for South Africa and its main economic partners. The results suggest that rand volatility is mainly driven by commodity price volatility, and global market volatility, as well as domestic political uncertainty. In addition, economic surprises originating in the United States matter, but not those originating from South Africa, Europe, or China.
An Incomplete Transition
In preparation for its 2019-2022 Country Partnership Framework with South Africa, the World Bank Group has drafted a Systematic Country Diagnostic (SCD) which forms the basis of this book. Its aim is to strengthen understanding of the constraints in achieving two goals in South Africa: to eliminate poverty by 2030, and to boost shared prosperity. These goals are enshrined in South Africa’s Vision 2030 in the National Development Plan. This book is the result of consultations and conversations with key government departments, the National Planning Commission, the private sector, academics and trade unions. It identifies five broad policy priorities: to build South Africa’s skills base; to...
The South African Informal Sector
"Although South Africa's informal sector is small compared to other developing countries, it nevertheless provides livelihoods, employment and income for millions of workers and business owners. Almost half of informal-sector workers work in firms with employees. The annual entry of new enterprises is quite high, as is the number of informal enterprises that grow their employment. There is no shortage of entrepreneurship and desire to grow. However, obstacles and constraints cause hardship and failure, pointing to the need for well-designed policies to enable and support the sector, rather than suppress it. The same goes for formalisation. Recognising the informal sector as an integral part of the economy, rather than ignoring it, is a crucial first step towards instituting a 'smart' policy approach. The South African Informal Sector is strongly evidence- and data-driven, with substantial quantitative contributions combined with qualitative findings--suitable for an era of increased pressure for evidence-based policy-making--and utilises several disciplinary perspectives."--
The Great Recession and the Inflation Puzzle
Notwithstanding persistently-high unemployment following the Great Recession, inflation in the United States has been remarkably stable. We find that a traditional Phillips curve describes the behavior of inflation reasonably well since the 1960s. Using a non-linear Kalman filter that allows for time-varying parameters, we find that three factors have contributed to the observed stability of inflation: inflation expectations have become better anchored and to a lower level; the slope of the Phillips curve has flattened; and the importance of import-price inflation has increased.
Monetary Policy Credibility and Exchange Rate Pass-Through
A long-standing conjecture in macroeconomics is that recent declines in exchange rate pass-through are in part due to improved monetary policy performance. In a large sample of emerging and advanced economies, we find evidence of a strong link between exchange rate pass-through to consumer prices and the monetary policy regime’s performance in delivering price stability. Using input-output tables, we decompose exchange rate pass-through to consumer prices into a component that reflects the adjustment of imported goods at the border, and another that captures the response of all other prices. We find that price stability and central bank credibility have reduced the second component.
