South Africa needs to step up its reform efforts to avoid its economic recovery from the COVID-19 pandemic losing steam, according to a new OECD report. Persistent weaknesses in productivity growth and the negative impact of Russia’s war of aggression against Ukraine on purchasing power through the rise in food and energy prices continue to weigh on economic activity.
The latest OECD Economic Survey of South Africa says that improving the tax system and reducing spending inefficiencies would help to put public finances on a more sustainable path, while taking action to revive productivity growth would help to revive GDP growth and raise living standards. If needed, the tightening of monetary policy should continue to allow inflation – which disproportionately affects the poorest households – to return to the Reserve Bank’s target. It is also vital to intensify efforts to raise the country’s low COVID-19 vaccination rate to reduce the health and economic risks from future outbreaks.
“Without a strong and sustained recovery, South Africa risks losing some of its hard-earned social progress in areas like education, housing, welfare and healthcare,” OECD Acting Chief Economist Álvaro Pereira said. “Strengthening public finances, creating a more growth-friendly tax system and fostering higher productivity through enhanced infrastructure, education and competition and more reliable power supply will be key to get the recovery back on track and ensure higher living standards.”
The South African government’s decisive response to the pandemic helped to limit its socio-economic impact. After a rebound of almost 5% in 2021, GDP growth is seen slowing to 1.8% in 2022 and 1.3% in 2023 and inflation is projected at 6.3% this year, with risks remaining from future COVID-19 outbreaks and from the global repercussions of the war in Ukraine.
Electricity shortages remain the most pressing bottleneck to economic activity, with firms hit by worsening power cuts following several years of deteriorating energy supply. Proceeding with a planned split of state utility company Eskom into three distinct entities for generation, transmission and distribution and easing regulatory barriers to firm entry would enable other producers to enter the market, adding supply as well as bringing down prices, the Survey says.
Productivity growth is also held back by an insufficient provision of high-quality infrastructure, from roads and railways to telecommunications. Improving the effectiveness of public investment, in part through strengthening the selection process for large infrastructure projects, would be a step towards restoring productivity growth.
Improving skills in line with employer needs will also be key to revive GDP growth. While educational performance has improved in recent years, progress has slowed since 2015 and the supply of graduates remains limited. Education policy should focus on increasing the quality of primary and secondary schools and further developing vocational training and adult learning. Changing the financing formula of universities would reduce the cost per student and allow enrolling more students.
Accelerating the green transition by increasing the share of renewable energy would also support growth through investment and reducing electricity shortages. The carbon tax introduced in 2019 is welcome in a country where coal remains the main energy source, but the level needs to be gradually increased and exemptions reduced.
In parallel with fostering economic activity, the tax system could be made more progressive and efficient at raising the revenues needed to reduce the budget deficit and finance investments. For example, the allowances and deductions in personal income tax that tend to benefit high earners could be reduced while wealth transfer taxes and estate duties could be adapted to limit the transmission of wealth inequality. Once inflation has abated, there is room to raise the relatively low VAT rate, balancing that with increased transfers to low-income households.