Overview

South Africa’s peaceful political transition is known as one of the most remarkable political feats of the past century. The African National Congress (ANC) has been driving the policy agenda since 1994.  In August 2016 the country held the most competitive Local Government Election since 1994.The ruling African National Congress (ANC) lost majority support in four of the metropolitan cities. Political parties negotiated coalition deals that saw the ANC unseated in the cities of Johannesburg, Pretoria and Nelson Mandela Municipality.

Due to consistent and sound budgetary policies South Africa has been able to tap into international bond markets with reasonable sovereign risk spreads. The 2012 Open Budget Index prepared by the International Budget Partnership ranked South Africa second among 94 countries surveyed. In 2014 and 2015 however, South Africa’s ratings have been downgraded by most rating agencies citing poor growth prospects and rising government debt as well as high deficits on the current account.

Real GDP growth has been revised downward significantly and is now only expected to reach 0.4% in 2016, with risks to the downside. 2017 is expected to see a moderate uptick to 1.1%. This will mean that per capita GDP will have contracted for four years (2014-17). Key drivers of the forecast are continued external headwinds from the plunge in commodity prices, compounding domestic problems, including weak investment sentiment amid policy uncertainty. The ongoing weakening in growth is exacerbating already high unemployment, currently at 26%.

Key Development Challenges

South Africa has made considerable strides toward improving the wellbeing of its citizens since its transition to democracy in the mid-1990s, but progress is slowing. Based on a poverty line of $1.90 per day at Purchasing Power Parity (PPP), poverty fell from 33.8% in 1996 to 16.9% by 2008. Factors driving this included social safety nets, real income growth, as well as decelerating inflationary pressure on households, the expansion of credit, and growth in formal housing. Yet progress has slowed in recent years due to structural challenges and weak global growth since the global financial crisis of 2008. Poverty was 16.6% in 2011, but World Bank estimates suggest poverty barely changed in 2016, dropping just marginally to an estimated 15.9%. High unemployment remains a key challenge: South Africa’s unemployment rate hit a 12-year high in 2016, at 27.3% in the third quarter. The unemployment rate is even higher among youths, close to 50%.

Real GDP growth has been slowing down and came in at only 0.3% in 2016. 2017 is expected to see a moderate uptick to 0.6%. This will mean that per capita GDP will have contracted for three years (2015–17). Although commodity prices are slowly recovering from their lows, global demand for them still remains fragile. On the domestic side, structural constraints are being compounded by policy uncertainty—one consequence of which included Standard and Poor’s downgrading of South African long-term, foreign currency-denominated debt to sub-investment grade (“junk”) in April 2017, followed by Fitch’s downgrading of the foreign and local currency rating to “junk’ a few days later. The Bank estimates that this downgrade may cost South Africa 1% of GDP (or about ZAR 1,000 per South African) and plunge another 160,000 South Africans into poverty.

Key Development Challenges

South Africa remains a dual economy with one of the highest inequality rates in the world, perpetuating both inequality and exclusion. According to Statistics South Africa, the Gini coefficient measuring relative wealth reached 0.65 in 2014 based on expenditure data (excluding taxes), and 0.69 based on income data (including salaries, wages, and social grants). The poorest 20% of the South African population consume less than 3% of total expenditure, while the wealthiest 20% consume 65%.

The weak economic prospects make the fiscal outlook more challenging. As part of the Budget Law 2017, the government announced additional measures to help contain the public debt, including some previously employed measures, such as limited “fiscal drag” (adjusting tax brackets below the rate of inflation) and increasing the fuel levy and sin taxes. Two new measures speak to the government’s commitment to continued transformation of aiming to raise more money from the better-off: the top personal income tax will be raised from 41% to 45%; and the dividend withholding tax from 15%to 20%. Additional revenue is also expected from a tax amnesty, the Voluntary Disclosure Program (a form of tax amnesty for offshore assets), which will close in August 2017. A Carbon Tax bill isalso expected to be tabled in parliament in mid-2017. The additional revenue raised from these measures is expected to help stabilize the growing debt-to-GDP ratio over the next three years.

Government Policy Priorities

The current administration is acutely aware of the immense challenges it needs to overcome them to accelerate progress and build a more inclusive society. Its vision and the priorities it is making to address them are outlined in the 2030 National Development Plan, which comprises the two main strategic goals of eliminating poverty and reducing inequality from 0.70 to 0.60 by 2030.

To achieve these goals, the NDP lists several factors critical for its successful implementation. These include the sort of focused leadership that provides policy consistency; ownership of the plan by all layers of society; strong institutional capacity at technical and managerial levels; efficiency in all areas of government spending, including management of the public service wage bill and making resources available for other priorities; and prioritization and clarity on levels of responsibility and accountability in every sphere of government, as well as a common understanding of the roles of business, labor, and civil society.

Both the State of the Nation Address of January 2017 and the Budget Speech of February 2017 pointed to additional efforts to reduce economic concentration through enhanced competition in South African markets.

Last Updated: May 03, 2017

Country Partnership Strategy (CPS) for 2013-2016, was discussed by the World Bank Group (WBG) Board in November 2013 and has been extended for a further year. The CPS is demand-driven and centered on knowledge and technical cooperation as well as support to the implementation of the ongoing lending program in energy and the environment.

The CPS is anchored to the government’s National Development Plan. It primarily focus on the “three I’s”: reducing inequality, which responds to priorities in improving access and quality of public service delivery at the national level as well as in smaller cities and townships; promoting investments, refers to the large infrastructure deficit in the country, and ambitious plans to meet this demand through both public and private investments and; strengthening institutions, responds bolstering financial risk management through improving the capacity of public institutions.

Last Updated: Apr 11, 2017

Improving energy security and greening South Africa’s energy mix and preserving the country’s biodiversity

The Eskom Investment Support Project ($3.75 billion) seeks to enhance South Africa’s power supply and energy security in an efficient and sustainable manner. It is the only on-going lending operation and is making progress towards achieving its objectives, but slower than envisaged (four years behind schedule). The synchronization of the first 800 MW generating unit at the Medupi power station has been done successfully and the unit has been connected to the national grid. An additional 100MW from the Sere Wind Farm also came online in December 2014. The project has been restructured and extended to December 2019.

To sustain these investments the WBG is supporting a number of technical assistance and advisory services.

Growth, Jobs and Private Sector Development

The eighth edition of the South Africa Economic Update series focusing on promoting faster growth and poverty alleviation through competition was launched in February 2016. It finds greater potential for South Africa to promote faster growth and poverty alleviation through structural reforms that open markets to competition and enhance product market regulation.

Urban development

The Urban Reimbursable Advisory Service (RAS) worth $5 million, is now under full implementation, supporting the government's efforts to turn around the apartheid spatial legacy of South African cities and improve spatial efficiencies. There is a multi-global practice work program for metropolitan-level support, with a World Bank (WB) team acting as principal technical advisor to National Treasury (NT) on a range of critical policy areas.  Work is being scaled up with financial support from NT ($5m RAS and likely second phase request) and SECO (additional $9 million BETF signed in September 2015), in addition to a potential engagement with the Ministry for Cooperative Governance and Traditional Affairs, (CoGTA) focusing on secondary and fast-growing cities.

Service delivery and human capital

A landmark common treatment protocol for TB in the mining sector was signed in Johannesburg in 2014. This was followed by launch of an ambitious three-year initiative that aims to screen 100% of all mineworkers and communities with the highest concentrations of mining and achieve zero infections of TB by 2018.

Last Updated: Apr 11, 2017

Partners include specialized agencies of the United Nations system, the African Development Bank (AfDB), the Department for International Development (DfID).

Last Updated: Apr 11, 2017