The World Bank in South Africa

Electricity supply shortages have constrained South Africa’s growth for several years. Rolling scheduled power cuts (load-shedding) started in 2007 and have intensified exponentially, reaching close to 9 hours daily in 2022. This severe electricity shortfall has disrupted economic activity and increased operating costs for businesses, many of which rely on costly diesel generators. It has also affected other infrastructure such as water, IT, and service delivery (health and education). Although new reforms and investments are being considered, load-shedding is expected to continue for at least two more years.

Weak structural growth and the COVID-19 pandemic have exacerbated socio-economic challenges. South Africa has recovered its pre-pandemic GDP but not its employment level. At the end of the second quarter of 2023, there were still about 74,000 fewer jobs than at the end of 2019, with women and youth persistently more impacted. Inequality remains among the highest in the world, and poverty was an estimated 62.6% in 2022 based on the upper-middle-income country poverty line, only slightly below its pandemic peak. These trends have prompted growing social demands for government support, which could put the sustainability of public finances at risk if they are to be met.

The global environment remained supportive but increasingly severe domestic constraints led to GDP growth slowing to 1.9% in 2022 from 4.7% in 2021. Mining production fell while manufacturing production stagnated, as load-shedding and transport bottlenecks intensified. The services sectors (financial, transport, and personal) and domestic trade were key drivers of growth. The labor market has remained weak. The employment ratio only increased slightly to 39.4% at the end of 2022 and 40.1% in the second quarter of 2023 from a pandemic low of 35.9% in September 2021. In this context, the COVID-19 Social Relief of Distress Grant, introduced in May 2020, was extended for another year until March 2024. Socio-economic challenges were further exacerbated by rising fuel and food (bread and cereals) prices, which disproportionately affected the poor. Inflation averaged 6.9% in 2022 but was 8.2% for those at the bottom 20% of the income distribution.

Key Development Challenges

South Africa has taken considerable strides to improve the well-being of its citizens since its transition to democracy in the mid-1990s, but progress has stagnated in the last decade. The percentage of the population living below the upper-middle-income country poverty line fell from 68% to 56% between 2005 and 2010 but has since trended slightly upwards, to 57% in 2015, and is projected to have reached 60% in 2020.

Structural challenges and weak growth have undermined progress in reducing poverty, heightened by the COVID-19 pandemic. The achievement of progress in household welfare is severely constrained by rising unemployment, which reached an unprecedented 35.3% in the fourth quarter of 2021. By the second quarter of 2023, the unemployment rate had declined marginally to 32.6%, still above the already high pre-pandemic levels. The unemployment rate is highest among youths aged between 15 and 24, at around 61%.

Other structural challenges have also increased, transport and logistics, which have deteriorated due to weak management of the state-owned enterprise Transnet, theft, and sabotage, constraining South Africa’s export capacity.

South Africa remains a dual economy with one of the highest and most persistent inequality rates in the world, with a consumption expenditure Gini coefficient of 0.67 in 2018. High inequality is perpetuated by a legacy of exclusion and the nature of economic growth, which is not pro-poor and does not generate sufficient jobs. Inequality in wealth is even higher, and intergenerational mobility is low, meaning inequalities are passed down from generation to generation with little change over time.

Last Updated: Sep 14, 2023

The World Bank Group (WBG) Country Partnership Framework (CPF) for 2022-2026, continues the theme of the past three Country Partnership Strategies, to support South Africa in its quest to complete a post-apartheid socio-economic transition. It is informed by the Systematic Country Diagnostic (SCD) of 2019, developed by the WBG in broad consultation with South Africans. The SCD identifies five binding constraints to socio-economic transition, reducing poverty, and boosting shared prosperity. They are: (i) insufficient skills; (ii) the skewed distribution of land and productive assets, and weak property rights; (iii) low competition and low integration in regional and global value chains; (iv) limited or expensive connectivity, and underserviced, historically disadvantaged settlements; and (v) climate change and the transition to the low-carbon economy, as well as water insecurity.

Aligned with the South African government’s National Development Plans for continued reforms to sustain economic recovery and reconstruction (for a more inclusive and resilient economy), the CPF charts a clear path for collaboration in the following focus areas: (i) increased competition and an improved business environment; strengthened micro, small, and medium enterprises and the supporting ecosystem to boost job creation; (ii) increased resilience to external (climate and health) shocks; and improvements in the infrastructure investment framework and selected infrastructure services. All focus areas are approached through a lens of harnessing the digital economy, empowering women and girls, strengthening public sector institutions and governance frameworks, and promoting integration and cooperation in the region and continent.

Overall, the WBG’s support is driven by increased private sector investments through the International Financing Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). In a departure from previous strategies, the government has signaled its intent to make greater use of International Bank of Reconstruction and Development (IBRD) financing under the CPF.  As a result, IBRD lending to South Africa reached $1.2 billion in FY22.

Supporting South Africa’s Just Energy Transition

In November 2022, the World Bank approved the $497 million Eskom Just Energy Transition Project. The project is financing the decommissioning and repurposing of the Komati coal-fired power plant, including: (i) decommissioning the plant, including demolition and environmental remediation of the site; (ii) repurposing the facility with innovative hybrid renewable technologies (wind, solar PV) and batteries; and, (iii) sustainably mitigating socio-economic impacts for workers and affected communities. The project leverages significant financing from various development partners and sets the stage for future support for coal plant retirement in South Africa with anticipated Climate Investment Fund support of $500 million.

Catalyzing Financing and Capacity for the Biodiversity Economy Around Protected Areas Project

The World Bank is supporting the implementation of a new wildlife initiative, a $8.9 million grant from the Global Environment Facility (GEF), to step up investment in South Africa’s wildlife and biodiversity sectors in the Kruger National Park, Addo Elephant National Park, and iSimangaliso Wetland Park. The project aims to improve stewardship of the country’s rich biodiversity and to expand the benefits of protected areas for local communities by helping address high unemployment and limited livelihood opportunities, as well as inequality in rural economies.

Last Updated: Sep 14, 2023

The $750 million South Africa COVID-19 Response Development Policy Operation supports government efforts to accelerate its COVID-19 response, aimed at protecting the poor and vulnerable from adverse socio-economic impacts of the pandemic and promoting sustainable recovery. The DPL supports the implementation of South Africa’s Economic Reconstruction and Recovery Plan, including priority reforms. It is aligned with the Bank’s Crisis Response Approach, aimed at protecting lives and livelihoods and supporting inclusive and resilient growth. Its support is also improving financial sector stability and supporting the country’s commitment to climate change.

So far, more than 10 million people have received COVID-19 Social Relief of Distress (SRD) grants to mitigate the socio-economic impact of the pandemic on unemployed and informal sector workers who were not otherwise eligible for social grants or unemployment insurance benefits. The operation is the first budget support South Africa has received from the World Bank during the country’s post-apartheid, democratic era.

As part of a four-year Reimbursable Advisory Services agreement (2018-2022) for Infrastructure Investment and Integrated Urban Planning, the World Bank is providing targeted technical assistance to support the integration, implementation, and institutionalization of approaches and instruments to urban management in South Africa. This is to support the second phase of the government Treasury’s Cities Support Programme.

This program has contributed to strengthening economic incentives, increasing the speed of starting a business, reforming infrastructure finance and fiscal management, and promoting inclusive urban development—with a focus on informal settlements. Supported also by Switzerland’s State Secretariat for Economic Affairs, it is in line with South Africa’s National Development Plan and Integrated Urban Development Framework.

The Country Climate Development Report (CCDR) is a new core diagnostic report of the World Bank that integrates climate change and development considerations. They help countries prioritize the most impactful actions that can reduce greenhouse gas (GHG) emissions and boost adaptation while delivering on broader development goals. The South Africa CCDR was prepared in late 2022 and shows that South Africa’s ambition to build a more inclusive, resilient, and sustainable economy depends on the extent that the country will be able to shift from its current heavy dependence on coal to low-carbon activities (decarbonize) and to address the growing risks from climate change (adapt and build resilience). Its decarbonization and adaptation must be people-centered, creating jobs and protecting the poorest in the most unequal society in the world (a “just transition”), to build the necessary broad support in favor of reforms.

The Wildlife Conservation Bond (WCB), also known as the “Rhino Bond”, (a $150 million IBRD bond) is the world’s first species impact bond linking investment return (under a bond issuance to conservation performance) to allow private and institutional investors to participate in a market that is historically a focus of donor and philanthropists. Rhino Bond investors agree to forego periodic interest coupon payments and instead direct the money to fund rhino conservation in two protected areas in South Africa. If rhino population growth rates climb over five years (that is, if black rhino growth is above 4% annually), investors receive a payment, financed through the Global Environment Facility (GEF), of $0 to $13.76 million.

The coupon payments that are foregone are used to improve the management of the Addo Elephant National Park and Great Fish River Nature Reserve, both of which contain populations of black rhino, and to raise the benefits of their presence to local communities. Project activities have included measures to increase the supply and distribution of water, and to improve security through more staffing, equipment, facilities, training, fence upgrades, and improved aerial support and communications, as well as national and regional coordination. Financing also supports local communities through the creation of conservation-related employment, such as park maintenance, rangers, monitors, gate guards, joint operations center staff, and project managers.

The South Africa Financial Sector Development and Reform Program Phase 2 (FSDRP 2) is a five-year Bank technical assistance program, launched in September 2018, with a contribution from the Swiss State Secretariat for Economic Affairs. Through this program, the World Bank supported the South African Reserve Bank (SARB) on the Financial Sector Law Amendment Bill, which provided for the orderly resolution of designated financial institutions and establishment of a deposit insurance scheme. A feasibility study and cost-benefit analysis for using bail-in as a recapitalization mechanism in South Africa (the “Flac” study) was published by the World Bank in December 2020 to provide guidance to the SARB on implementing bank resolution secondary legislation.

The World Bank also supported the development of regulatory and policy response to fintech, including undertaking a landscape assessment of the fintech sector in South Africa, in collaboration with the Intergovernmental Fintech Working Group (IFWG), to better inform policy and regulatory priorities. This helped inform discussions on the development of a vision for South Africa to be a leading fintech hub for Africa by promoting financial inclusion while spurring competition, digital skills, and economic growth through innovation.

The World Bank’s South Africa Digital Economy Diagnostic examined the strengths, weaknesses, and opportunities in the digital economy. It forms part of the WBG’s Digital Economy for Africa Initiative (DE4A), a collaboration between the African Union and the WBG. The initiative aims to ensure that every individual, business, and government in Africa is digitally enabled by 2030.

The report provides insights and shows South Africa has good potential to continue to grow and expand its digital economy by building on its strong foundations, in particularly by including playing a regional leadership role to boost digital infrastructure and skills. Considerations to be given priority include updating its policy on national broadband in line with international best practice, fast-tracking spectrum licensing, and ensuring the independence and capacity of the Independent Communications Authority of South Africa.

Last Updated: Sep 14, 2023

Partners include the United Nations, African Development Bank (AfDB), New Development Bank, International Monetary Fund (IMF), Department for International Development (DfID), and the State Secretariat for Economic Affairs of Switzerland (SECO).

Last Updated: Sep 14, 2023