The country would need a tighter fiscal stance than currently envisaged over the medium term to rebuild policy buffers and contain public debt at moderate levels, the lender said. The IMF Executive Board Directors also urged the authorities to rebalance the composition of public spending to help support higher potential growth and sought a moderation in public wage growth.
Acknowledging the difficulty in determining the timing for the start of the tightening cycle given the uncertain global scene, the IMF asked South African authorities to remain vigilant about the pass through of high international food and fuel prices.
"A pronounced increase in wages or inflation expectations would call for policy tightening sooner than currently envisaged," the report said.
The lender also said capital flow management measures, such as continued exchange rate flexibility and further accumulation of international reserves, are an option, but their costs and effectiveness should be carefully considered.
The IMF Directors also stressed that increased product and labor market flexibility is critical to improve competitiveness and inequality and sought decisive steps to improve the wage-bargaining framework. More efforts are need to remove entry-barriers in key industries, they said. South Africa's banking system is sound, but needs continued vigilance due to reasons including the recent turbulence in the global financial markets, the report said.
The IMF forecast 4 percent growth for the country this year and next led by domestic demand. In the next 12 months, the output gap would close and there is a likelihood that inflation will breach the top of the target range. Further, the IMF said the expected recovery in investment will likely cause the current account deficit to gradually further widen to about 5-6 percent.
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