OECD Economic Surveys: South Africa 2022

Report

OECD Economic Surveys: South Africa

25 August 2022

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1. Key Policy Insights

The pandemic hit South Africa hard, forcing the government to put in place a national lockdown from March 2020, combined with a relief plan mobilising 10% of GDP, despite limited fiscal space. The recovery gained momentum from the end of 2020, as health restrictions became more targeted and gradually relaxed. Activity was interrupted by social unrest in July 2021 and was affected towards the end of 2021 by the new Omicron pandemic wave. Overall, growth rebounded to 4.8% in 2021 and is projected to reach 1.8% in 2022.

The coronavirus crisis has weakened an already fragile economy as South Africa’s growth underperformed during the past decade. GDP per capita was already lower in 2019 than in 2008, and over the period 2009–2019, GDP growth averaged only 1.1% (Figure 1.1), mostly due to low investment.

Figure 1.1. Growth performance and GDP per capita declined in the last decade

Over the last decade, declining productivity weighed on economic growth (Figure 1.2) due to a deteriorating public infrastructure, weak telecommunication networks and low R&D investment (Chapter 3). Failing electricity generation is the main bottleneck to production and concern for investors. Skills shortages remain a constraint in several sectors. The economy remains highly energy-intensive and dependent on coal as the main source for electricity. Moreover, weak competition in many key sectors and a lack of openness to trade increase the cost of doing business and inhibit the entry of new firms and growth of SMEs (OECD, 2020; Chapter 3).

Although weakened by some corruption scandals in past years, South Africa’s administrative capacity remained robust. The government was able to enrol quickly 10.5 million individuals for a new social grant, the social distress relief grant, and to put in place an alert, testing and management of restrictions during the pandemic unparalleled on the continent.

Figure 1.2. Productivity growth has been trending down

Decomposition of GDP growth

Considerable fiscal space will be needed in the years ahead to finance health, infrastructure, and higher-education gaps, which are key to raise growth and well-being. South Africa’s fiscal situation was deteriorating already before the Covid-19 pandemic, with the debt ratio steadily increasing over the past decade, and the crisis only worsened the situation. More efficient spending and revenue collection are necessary to improve fiscal sustainability. One key challenge being to reduce tax distortion to generate additional revenues without penalising growth or exacerbating inequality (Chapter 2).

Against this background, the key messages of this Survey are:

In the short term, fiscal support should become limited and targeted, while monetary policy should stand ready to tighten further to maintain inflation expectations anchored. Moreover, efforts to boost vaccination should increase.
In the medium run, putting public finances on a more sustainable path is key to restore confidence. Spending efficiency should improve. The tax system should contribute more to reducing income and wealth inequalities. A less distortive tax system could also contribute to create fiscal space for growth-enhancing reforms, while improving public finances (Chapter 2).
In the longer term, reviving productivity growth is key to lift living standards. It involves improving transport (road, port, and rail) infrastructure, providing more and stable electricity, fostering the quality and affordability of telecommunication networks, broadening access to higher-education and quality health care and reducing competition barriers.

The recovery is under way, but risks are on the downside

The health system was put under pressure by the pandemic crisis

South Africa was hard hit by the second and third waves of the virus, which resulted in a heavy death toll (Figure 1.3). The pandemic added pressure on the health care system, which is characterised by unequal access to high-quality health care, shortages of health professionals, and lack of adequate protective and medical equipment (Economic Survey of South Africa, 2020). Nonetheless, the COVID‑ 19 crisis has led to closer cooperation and pooling of available resources between the public and private sectors. Moreover, the government quickly increased the funding of health care to improve hospital equipment and health facilities.

The vaccine rollout has been slow, barring a brief period of acceleration between September and November 2021. Just over 45% of the adult population was fully vaccinated by end of June 2022 and South Africa’s vaccination rate is lagging peer countries (Figure 1.3, Panel C). Resistance to vaccination seems widespread among some groups. By end of April 2022, about 69% of people aged above 60 were vaccinated. Evidence-based and transparent educational campaigns aimed at improving public trust in vaccines and tackling misinformation should be reinforced.

The “Omicron” wave hit hard South Africa in December, but the contamination rate decelerated in January. While contaminations were high, the mortality was lower than for previous waves. The economic impact of the “Omicron” wave should be mild as mobility restrictions were not severe and did not last long.

Figure 1.3. Exposure to the pandemic remains high and the vaccination is slow

The economic recovery is led by private consumption and external demand

The riots in July 2021 put a halt to the strong recovery that had started in the third quarter of 2020. GDP is projected to return to its pre-crisis level only in 2023 (Figure 1.4). The recovery has been underpinned by exports and household consumption. Exports were driven by a robust global demand and favourable commodity prices (Figure 1.5, Panel A). South Africa’s export destination and structure are balanced (Figure 1.6). Additionally, the prices of commodities exported by South Africa have experienced a steady increase since the outbreak of the pandemic (Figure 1.5, Panel B). Inflation increased sharply above 5% in the second half of 2021. Household consumption rebounded in 2021, as activity reopened and households’ income increased, thanks to higher government support and facilitated access to credit. However, investment fell sharply during the crisis and remains 13.9 percentage points below the pre-pandemic level (Figure 1.5, Panel C). Investment was already on a downward trend before the crisis, mostly held back by persistent electricity shortages, rising public debt and policy uncertainty.

Figure 1.4. The pandemic triggered a sizeable economic contraction

GDP level index, 2013Q1 = 100

Unemployment, which was already high, continued to increase during the pandemic (Figure 1.5, Panel D). The unemployment rate stood at 34.5% in the first quarter of 2022, up from 23.3% in the first quarter of 2020 (Statistics South Africa, 2021). The youth have been particularly hard hit. The unemployment rate of 15–24 years old individuals increased from an already high 52.3% in 2020Q2 to 63.9% in 2022Q1. Employment losses are likely to persist after the crisis, hurting the poorest the most. The employment of low-skilled workers fell sharply while job losses among high-skilled workers (0.5%) were less severe; employment also recovered relatively faster for this group. Surprisingly, wages increased on average during the same period supported in part by wage growth for high skilled workers.

Figure 1.5. Macroeconomic indicators show that growth is slowing following the rebound

Figure 1.6. The destination and structure of exports are balanced

Share of exports by sector and destination, 2019

Risks to the outlook remain high

GDP growth is projected to slow to 1.8% and 1.3% in 2022 and 2023 respectively (Table 1.1). The economy has picked up strongly in the first quarter of 2022, growing by 1.9%. However, flooding in Kwa-Zulu Natal and more extensive load-shedding are expected to drive the economy into contraction in the second quarter. Nonetheless, growth will remain supported by household consumption, investment, and commodity exports. Household incomes and consumption will be boosted by government social transfers and higher wages. The war in Ukraine has pushed up commodity prices, prolonging the commodity boom cycle for longer than expected Private investment should progressively pick up on the back of needed capital replacement and expected improvements in the implementation of policy reforms and electricity generation. Although remaining prudent, fiscal policy should gain some fiscal space over the projection period, enabling public investment to increase.

	2018	2019	2020	2021	2022	2023
	Current prices (billion ZAR)	2019	2020	2021	2022	2023
Gross domestic product (GDP)	5,357.6	0.1	-6.4	4.9	1.8	1.3
Private consumption	3,408.4	1.1	-6.5	5.7	2.8	1.9
Government consumption	1,037.9	2.7	1.3	0.0	0.5	1.1
Gross fixed capital formation	849.2	-2.4	-14.9	2.0	5.0	6.0
Housing	120.2	-1.1	-22.5	-2.8	1.1	1.3
Final domestic demand	5,295.5	0.8	-6.2	4.0	2.6	2.3
Stockbuilding¹	37.0	0.4	-1.7	0.7	-0.2	0.0
Total domestic demand	5,332.5	1.2	-8.0	4.8	2.4	2.3
Exports of goods and services	1,472.7	-3.4	-12.0	9.9	6.3	3.1
Imports of goods and services	1,447.6	0.5	-17.4	9.4	8.6	6.6
Net exports¹	25.2	-1.1	1.8	0.1	-0.6	-1.0
Other indicators (growth rates, unless specified)
Potential GDP	. .	0.6	0.2	0.5	0.6	0.8
Output gap (% of potential GDP)	. .	-1.9	-8.4	-4.3	-3.2	-2.6
Employment	. .	-0.3	-7.9	-2.5	-0.8	2.6
Unemployment rate (% of labour force)	. .	28.7	29.4	34.3	34.5	34.0
GDP deflator	. .	4.5	5.3	7.1	4.8	4.0
Consumer price index	. .	4.1	3.3	4.6	6.3	5.8
Core consumer price index (excluding food and energy)	. .	4.1	3.4	3.1	4.2	5.6
Current account balance (% of GDP)	. .	-2.6	2.0	3.7	2.8	1.7
General government financial balance (% of GDP)	. .	-5.7	-11.6	-6.4	-5.2	-4.3
Three-month money market rate, average	. .	7.1	4.5	3.9	5.2	6.0
Ten-year government bond yield, average	. .	9.1	10.1	9.8	9.9	9.6

Note: 1. Contribution to changes in real GDP.

Source: OECD (2022), OECD Economic Outlook: Statistics and Projections.

Risks to the outlook notably come from the evolution of the COVID-19 pandemic and the vaccine rollout (Table 1.2). Moreover, the war in Ukraine poses new risks to the global outlook and to energy prices, though South Africa is little exposed to trade with Russia and Ukraine. If the vaccination rate remains low and the number of infections increases fast again, new restrictions might be needed to limit transmission and avoid overwhelming hospitals. If restrictions on international travel pick up again in 2022, it would delay the recovery of the tourism and recreation sector, affecting employment in the service sector. Domestic near-term risks to growth also include increased load-shedding (rolling blackouts) by the power utility and higher-than-expected electricity prices. Moreover, the level of investor confidence in the economy, although improving, remains low and vulnerable to policy developments. Higher than expected increases in inflation would undermine confidence and investment, and trigger further tightening of the monetary stance. On the other hand, if the Rand does not depreciate substantially, given developments in US interest rates and international capital markets, that would shield the current account. Finally, higher commodity prices for a prolonged period would boost growth to higher levels than projected as would do higher-than-expected increases in investment.

Shock	Potential impact
Recurrent COVID-19 outbreaks due to delays in vaccination rollout and/ or new lethal variant	Strengthening of containment measures and repeated local and national lockdowns could reduce mobility and further degrade confidence.
Unsustainable rise of public debt	If the government is unable to implement fiscal reforms and raise more revenues, spiraling debt dynamics could affect macroeconomic and financial stability.
Persistent and widespread electricity load-shedding	Prolonged periods of load-shedding create uncertainty and disturb production processes. It is already a main bottleneck to production.
SOEs bankruptcy or debt default	Eskom is the biggest state-owned enterprise and represents the biggest government contingent liability through debt guarantees. A failure to proceed with its reform or severe liquidity problems could lead to negative market reactions and persistent weak investor confidence.

A balanced macroeconomic policy mix is necessary to promote growth

Slightly accommodative monetary and prudential policies remain relevant

The Reserve Bank has acted swiftly to limit the impact of the pandemic on the economy and the financial system. Between March and July 2020, the Reserve Bank reduced the repurchasing rate in four steps, from 6.25% to 3.50% and maintained the rate at that level up to November 2021. Recent spikes in inflation have led to an increase in the policy rate to 5.5% as of July 2022. Moreover, the Reserve Bank increased its interventions in the money market to provide more liquidity to financial institutions and ease lending conditions, in addition to relaxing regulatory requirements for financial institutions.

The Reserve Bank also initiated a programme to buy government bonds in the market, ensuring the liquidity of the debt market. However, shortages in the money market have diminished during the COVID-19 pandemic, revealing lower recourse of banks to the money market and affecting the effectiveness of monetary policy operations. Diversifying monetary policy instruments, including by considering interventions in financial markets or changing liquidity ratios would help to better reconcile money market objectives, foreign exchange movements and the term structure of borrowing rates.

Headline inflation reached 5.9% in December and further increased to 7.4% in June, above the upper limit of the target band of 3-6%, largely above the Reserve Bank midpoint objective of 4.5%. Inflation is expected to remain above the target band in 2022 and only start to converge toward it in 2023. Benefiting from the Rand’s strength (Figure 1.7, Panel B), subdued labour market pressures and, so far, relatively well-anchored inflation expectations, core inflation remained muted in 2021 and the first half of 2022, hovering around 3% (Figure 1.7, Panel A). However, core inflation will be on the rise in 2022 and 2023. In this context, the central bank should stand ready to raise interest rates again in case inflation drifts further away from the target band.

The banking sector has weathered the crisis

According to several indicators, the banking sector appears to have remained robust during the crisis. Banks maintained a capital adequacy ratio above requirements (Figure 1.8), although the Prudential Authority provided leeway during the crisis. Banks’ pre-COVID stance in terms of capital buffer and regulatory easing have helped to keep channelling funds to the economy. Banks’ assets grew by 11.6% in 2020, driven in part by loans to the public sector (Figure 1.9). Overall, loans to customers continued growing during the crisis, at a rate of 5.6% in 2020 (Figure 1.9). Despite the pandemic, corporate debt remained stable over 2020 (Figure 1.10). Corporate debt is relatively low when compared to most emerging countries.

Figure 1.8. The banking sector appears to remain robust

Figure 1.9. Loans to households have fallen

Figure 1.10. Corporate debt is stable and low among emerging market economies

Credit risk increased since 2020. The ratio of impaired advances to gross loans and advances − a key indicator of credit risk − reached 5.2 in January 2021, the highest level since September 2011 (Reserve Bank, 2021). Households’ non-performing loans increased from around 4% before the crisis to around 6% in April 2021 (Figure 1.11). Non-performing mortgages have increased noticeably (Figure 1.11, Panel B). This likely reflects the effects of the crisis in the labour market. A tighter monitoring of credit distribution to the lower income segments may be necessary.

Small banks are disproportionally more affected by non-performing loans than systemic banks. The Financial Stability Report (2021) indicates that the ratio of smaller banks’ credit losses to net interest income peaked at 45% in September 2020, before moderating to 39% in February 2021, compared to an average of 29% in 2019. These losses are deteriorating the already low profitability of small banks (ROE at 1.3% in 2020). Although the capitalisation of banks and the coverage ratio of credit remain adequate, tightening controls for smaller banks might be necessary to prevent the deterioration of their position.

The increasing exposure of banks to sovereign debt is another risk to financial stability. Government debt has increased by around 40 percentage points of GDP between 2010 and 2020 and is projected to reach 74% of GDP in 2024 (National Treasury, 2022; and Figure 1.12, Panel A). Foreign investors have decreased their holdings of government bonds by around 7 percentage points of GDP since 2018, while domestic financial institutions have increased their share of holdings (Figure 1.12, Panel B), increasing the exposure of domestic banks to the sovereign risk. In particular, the sovereign exposure of non-systemically important financial institutions has been increasing steadily, reaching more than 30% of their assets (Figure 1.13, Panel A). The substitution of domestic investors to foreign investors has been observed in many OECD countries since the beginning of the crisis.

Figure 1.11. Household non-performing loans have increased

The downgrading of the sovereign credit rating to sub-investment level is affecting the borrowing conditions of financial institutions and their funding costs (Figure 1.13, Panel B). Improving the fiscal credibility is essential to preserve the good functioning of financial markets and to improve the borrowing conditions of financial institutions.

Figure 1.12. Public indebtedness is weighing on the risk faced by financial institutions

Figure 1.13. The linkages between public sector and bank risks

Stabilising public debt requires higher growth and increasing government revenues

Fiscal policy reacted forcefully to the coronavirus crisis. In total, ZAR 500 billion (10% of GDP) were mobilised, with 40% of that amount as indirect support for loan guarantees for enterprises. The Covid-19 Temporary Employer-Employee Relief Scheme, established to provide relief to employers and to preserve jobs, was one of the main direct fiscal interventions, with a total disbursement of ZAR 63 billion (1.4% of GDP). It was complemented by one-off grants to SMEs, a loan guarantee scheme and different tax measures to provide cash-flow relief to firms. The crisis and the associated fiscal support pushed the deficit to 10.0% of GDP in 2020. The ratio of gross public debt to GDP rose sharply in 2020, as in most countries (Table 1.3 and Figure 1.14). The cost of financing the debt has increased and represents now 4.3% of GDP and around 17.3% of government total revenue (Figure 1.15). Fiscal support should be maintained until the recovery has been firmly established, but it needs to become more targeted and limited to facilitate the reallocation of resources after the pandemic. However, once the economy has fully recovered, the spending ceiling rule should be reactivated and strengthened to establish a credible trajectory to reduce the debt-to-GDP ratio. In particular, the broad fiscal support to firms and the subsidy for employment are not needed anymore. For instance, spending rules linked to economic activity could be developed.

	2017/18	2018/19	2019/20	2020/21	2021/22¹	2022/23¹	2023/24¹
Spending and revenue
Revenue	28.7	26.7	26.7	25.3	27.5	27.5	27.2
Spending	32.8	30.3	31.8	35.3	33.2	33.5	32.0
Debt-service-costs	3.2	3.4	3.6	4.2	4.3	4.7	4.9
Budget balance
Fiscal balance	-4.1	-3.6	-5.1	-10.0	-5.7	-6.0	-4.8
Primary balance	-0.4	-0.1	-1.3	-5.7	-1.3	-1.2	0.3
Public debt
Gross loan debt	50.5%	53.0%	51.5%	57.4%	70.7%	69.5%	72.8%
Net loan debt	45.4%	48.1%	47.0%	52.7%	64.7%	64.9%	69.9%
Contingent liabilities	15.4%	15.3%	18.6%	19.4%	18.5%	18.1%	17.8%

Source: National Treasury, Budget Review 2022.

Figure 1.14. Public debt has increased markedly

Figure 1.15. Deficits and debt service costs have risen

South Africa needs higher growth and a fiscal reform to stabilise the debt to GDP ratio. Figure 1.16 illustrates the imperative of higher primary balance surpluses and GDP growth to curb the debt trajectory. In the worst-case scenario, debt would continue to increase progressively as in the last decade. Moreover, the government’s contingent liabilities represented 20% of GDP in 2021. Fiscal sustainability might be at stake in the South African context of low growth and high borrowing rates. In the policy reform scenario (structural and tax reforms), where increased government revenues will help finance infrastructure investment and policy reforms, while contributing to the doubling of the primary surplus, the debt to GDP ratio will start declining progressively from 2025. Ensuring fiscal sustainability will also require measures to curtail SOE transfers, raise revenue and improve the efficiency of public spending.

Figure 1.16. Reforms are necessary to stabilise the debt to GDP ratio

Gross debt in % of GDP

Managing spending pressures will not be sufficient

The government may have reached the limits of spending reprioritisation. The government fiscal strategy rests on improving the composition of spending, by reducing wage compensation growth, while protecting capital investment (National Treasury, 2021). Almost half of the reduction in spending growth would come from reducing wage compensation. The government wage bill represented 34% of government spending in 2020 (National Treasury, 2021). In the last decade, compensation spending increased at an average of 11% per year, growing at a rate higher than nominal GDP. The government announced the freezing of civil servants’ wages for three years starting from 2020, which would stabilise the wage bill at 31.5% of total spending by 2023. The wage agreement between civil servant unions and the government is welcome and should be used to base future wage increases on a more fiscally sustainable path. In the future, wage increases in the public sector could be linked to efficiency gains in the public sector or economy-wide productivity growth. Nonetheless, even with wage constraint, spending pressures remain elevated, given the high level of unsatisfied need in access to higher education, water and electricity, for instance.

Reforming state-owned enterprises is necessary to reduce their fiscal impact

Government exposure to state-owned enterprises remains high and represents a risk to debt sustainability and public finances (Table 1.4). In 2021, support to SOEs in terms of state guarantees amounted to around 16% of GDP. The financial performance of SOEs worsened with the pandemic, increasing the pressure on public finances. Most of the main state-owned enterprises are still in a very challenging financial situation, some resorting to borrowing to finance their operational costs and not being able to meet their debt and interest payments (National Treasury, 2021). Despite government efforts to reform key SOEs with new management, underperformance of SOEs remains widespread. The government has also slightly moved toward implementing market discipline in the management of SOEs, with the bankruptcy of South Africa Airlines, followed by an announcement of partial privatisation. Privatisation of SOEs intervening in competitive markets would reduce the fiscal burden.

Addressing SOEs’ underperformance requires the bold and swift implementation of the reforms announced since 2019 (South Africa Economic Survey, OECD, 2020). The government faces two main challenges: (i) some of the largest SOEs are expected to deliver services that are incommensurate with their current earnings and levels of subsidisation; and (ii) SOEs have in the past been subject to a widespread misuse including corruption and political patronage. The Presidential State-Owned Enterprises Council, established in 2020, aims to tackle some of these challenges, but its initiatives and recommendations are still under deliberation. Recommendations in previous Economic OECD Surveys are still relevant, in particular, the need to establish an effective governance framework of SOEs, setting clear company-specific objectives in terms of profitability expectations, capital structure and non-financial objectives that SOEs are expected to deliver (OECD, 2015a).

The OECD Guidelines on Corporate Governance of State-Owned Enterprises provide key principles that could help in setting up a governance framework between SOEs and the State. When it comes to shielding SOEs from undue political interference, professionalising the board of SOEs, including the participation of competent independent members, is instrumental for transparency and proper monitoring of SOEs. A clear distinction between the roles and powers of the board and executive management is necessary, along with the assurance of operational independence of executive management and the absence of governmental intervention in the entity’s operations. The State should act as an informed and active shareholder to set objectives, to validate the strategy, to guarantee the governance of SOEs is carried out in a transparent and accountable manner, and to ensure SOEs are subject to high quality accounting, disclosure, compliance, and auditing standards.

	2019/20		2020/21		2021/22
	Guarantee	Exposure¹	Guarantee	Exposure¹	Guarantee	Exposure¹
Public institutions	8.5%	7.3%	10.4%	6.9%	9.0%	6.7%
of which:
Eskom	6.2%	5.7%	6.3%	5.4%	5.6%	5.2%
SANRAL	0.7%	0.7%	0.7%	0.7%	0.6%	0.8%
Trans-Caledon Tunnel Authority	0.8%	0.2%	0.8%	0.2%	0.4%	0.2%
South African Airways	0.3%	0.3%	0.3%	0.1%	0.3%	0.0%
Land and Agricultural Bank of South Africa	0.2%	0.0%	0.2%	0.0%	0.2%	0.0%
Development Bank of Southern Africa	0.2%	0.1%	0.2%	0.1%	0.2%	0.1%
Transnet	0.1%	0.1%	0.1%	0.1%	0.1%	0.1%
Denel	0.1%	0.1%	0.1%	0.1%	0.1%	0.1%
Independent power producers	3.5%	2.8%	3.6%	3.2%	3.3%	2.8%
Public-private partnerships²	0.2%	0.2%	0.1%	0.1%	0.1%	0.1%
Total	12.2%	10.3%	14.2%	10.2%	12.4%	9.6%

Note: 1. Total amount of borrowing, adjustments to inflation-linked bonds as a result of inflation rate changes and accrued interest. 2. These amounts only include national and provincial PPP agreements.

Source: National Treasury, Budget Review, 2022.

Box 1.1. The governance of State-Owned enterprises

Beyond the contingent liability risk that SOEs pose to government finance, they also represent an important part in the economy. South Africa has one of the highest public ownership of firms with an extended scope in the economy among OECD and emerging economies (Figure 1.17). Such a prevalence of public entities has effects on the competitiveness of the economy through the cost of intermediate goods (in particular network services) and competition (entry-exit) in these sectors. In the case of South Africa, where most public firms are underperforming, it has detrimental effects on the cost of doing business.

Fighting corruption is key

South Africa is still struggling to reduce corruption in the public sector. Corruption raises mistrust, undermines democratic institutions and the rule of law, corrodes the social fabric, and threatens sustainable economic development. Perceptions of corruption remain high, including the recent scandals linked to the COVID-19 response (Figure 1.18). The control of corruption had worsened over the last two decades due to state capture and is only slowly recovering (Figure 1.18, Panel C). State capture refers to a type of systemic political corruption in which private interests significantly influence a state’s decision-making processes to their own advantage through illicit, non-transparent provision of private gains to public officials. The Judicial Commission of Inquiry into Allegations of State Capture highlighted serious governance failures and the undermining of legislated procedural checks and balances. The first two out of three final reports and recommendations of the Commission have been published in January and February 2022 and the last report was released in June 2022.

Judicial responses to the findings of the State Capture Commission are slow. However, the findings of the State Capture Commission have led to changes in the management of the major state-owned companies such as Eskom, Transnet, SAA, Denel and SARS, and it has also allowed to recover part of the funds or contracts embezzled and the lodge of criminal cases related to allegations of corruption with the police. However, many investigations have not progressed to prosecution and convictions, further contributing to public distrust. Better enforcement of sanctions for corruption offences is needed to restore public confidence and proper functioning of public services. In particular, a reform of the National Prosecuting Authority is needed to increase its accountability but also to reinforce its independence.

Improving the management of public procurement would reduce the weaknesses and exposure of the government to public sector bribery and embezzlement (Figure 1.18, Panel D). In its annual reports, the Auditor General consistently found material irregularities pertaining to non-compliance in procurement processes and inefficiencies in expenditure and revenue management (Auditor General, PFMA, 2019-20 and various editions). The supply chain management appears to be the weakest component across all levels of government and public entities, driving most of these inefficiencies and irregularities (Auditor General, PFMA 2021, Annexure II). Concerns are related to uncompetitive or unfair procurement processes, but also rigidities in rules. Root causes have to deal with lack of capacity, skills and knowledge, inadequate planning and monitoring in the supply chain management and implementation weaknesses (Fourie and Malan, 2020).

South Africa needs an integrated public procurement framework to enhance efficiency, combat corruption and respond to the multiple objectives assigned to public procurement. The government has published a draft public procurement bill to regulate public procurement and prescribe a framework for procurement policy (National Treasury, 2020). The bill deals with issues related to the protection or advancement of disadvantaged persons or groups by unfair discrimination and the provision for categories of preference in the allocation of contracts. The bill intends to provide a more flexible and robust legal basis for the treatment of preferential policies (points and Broad-based Black Economic Empowerment programme) in the public procurement framework and supply chain management. The bill aims to consolidate and simplify regulation on public procurement across all levels of government and public entities. Also, it proposes to elevate the Chief Procurement Office within the National Treasury to a Public Procurement Regulator providing to the National Treasury the authority to regulate and monitor public procurement practices across all entities.

The public procurement bill is welcome, as it provides for a unified framework to the highly decentralised procurement system. The government should proceed with the adoption and implementation of the bill. However, additional measures and policies at the implementation level are needed to increase the efficiency and robustness of the procurement system. The OECD Recommendation of the Council on Public Procurement (2015b) provides a set of principles and actions that could enhance the delivery of the procurement system. More specifically, to increase value for money, South Africa could consider more centralisation of purchasing activities, enabling it to reduce red tape and costs while obtaining better terms and conditions through aggregation of purchases (OECD, 2019). The use of digitalisation should move beyond e-catalogues and e-auctions to embed digital technologies into the design, development, delivery and monitoring of procurement frameworks and processes.

Finally, the most prominent weakness in the public procurement system is the workforce’s lack of skills. Shortages of qualified workers with the competences needed are widespread across government entities in charge of procurement (Fourie and Malan, 2020). South Africa should develop a strategy for upskilling its public procurement officials, with a clear mapping of competences needed, certifications and training. The establishment of a public procurement regulator offers an opportunity to develop a unified competency framework.

Figure 1.18. The fight against corruption can be further improved

Increasing tax revenues while reducing inequalities and boosting growth

To reduce the government deficit and finance the needed investments and growth accelerating expenditures, it is key to increase revenues. The reallocation of expenditures will not be sufficient. As developed in the productivity chapter in this Economic Survey, investments are needed for electricity generation, transport infrastructure, access to higher education for instance to boost productivity and potential growth.

South Africa’s tax-to-GDP ratio is higher than in many other emerging economies (see chapter 2 in this Survey). At 26% of GDP, tax revenues are lower than the OECD average (Figure 1.19) but represent a high level of mobilisation of revenues when compared to most emerging countries. The analysis of the tax structure in Chapter 2 of this Survey indicates that there is room to increase tax revenues while reducing inequality and making the tax system less distortive to growth. Overall, tax rates are already high or comparable to OECD levels, but there is a wide range of tax provisions and exemptions that reduce effective tax rates significantly below statutory tax rates. There is scope to redesign these tax provisions in ways that are both fair and efficient.

Figure 1.19. The collection of fiscal revenues is high for an emerging economy

Government revenue as a % of GDP, 2019

South Africa’s corporate income tax rate at 28% is above the OECD average of 23%. The government intends to reduce it to 27%. On the other hand, corporates benefit from indefinite carry-forward of assessed losses and scope exists to improve the design of the capital depreciation rules for tax purposes and the interest deductibility from the CIT base (see Chapter 2). There is room to reduce the corporate income tax rate and broadening the corporate income tax base could help fund the reduction in the CIT rate. The deduction of losses that have been carried forward and interest payments resulted in corporate tax expenditures of around ZAR 20 billion in 2019. The carry-forward of assessed losses could be limited and other tax deductions (interest, capital expenditure) redesigned.

The progressivity of the personal income tax is undermined by sizeable tax deductions and allowances benefiting mostly high-income earners. Tax allowances and deductions reduce the effective tax rate, and the progressivity of the personal income tax, as higher income-earners end up facing lower effective tax rates than middle-income earners (Figure 1.20). Tax allowances and deductions are substantial and, most importantly, regressive. Reducing tax allowances (travel expenses, share options exercised and others), deductions, and the tax relief for pensioners would increase tax collections, restore the progressivity of the tax schedule and decrease income inequalities. In particular, deductions for medical expenses should be reduced along with improving the quality of public health care services. Moreover, fringe benefits should be brought more substantially into the taxable income base. This is especially the case in relation to the acquisition of assets at less than market value, the private use of company cars and the payment of other expenses of employees by the employer. Also, as South Africa has the highest level of wealth inequality in the world, increasing estate duties would reduce inequalities (Chapter 2). Various deductions are allowed to determine the net value of the estate, in particular, bequests made to qualifying public benefit organisations, and property accruing to surviving spouses – either in terms of a will or by intestate succession. All transferable benefits – including lump-sum benefits, payable from South African pension, provident and/or retirement annuity funds and trusts – are not deemed as ‘property’, and therefore not subject to estate duty. Also, the benefits of a life insurance policy are, under certain rules, exempted from estate duty.

Figure 1.20. Tax deductions reduce the progressivity of the tax schedule

Given that consumption taxes are one of the least distortive forms of taxation and that the current VAT rate is relatively low, there is scope to raise additional revenue using VAT. For instance, lifting the rate by 2 percentage points could raise VAT revenue by around 1% of GDP. The main concern about raising the VAT rate is its impact on poverty and inequality. Different analyses show that the VAT rate after taking into account preferential treatment (exemptions and zero-rated goods) is mildly progressive, with the implicit VAT rate (as a share of disposable income) rising from 9.5% for the lowest income decile to 12% for the highest income decile (Inchauste et al., 2015). This is largely because food items with preferential VAT treatment are a larger share of the overall consumption for poorer households (Jansen and Calitz 2015). An assessment of the recent VAT increase from 14% to 15% in 2018 accompanied with transfers to low-income households shows that high-income deciles were more affected by the reform than low-income deciles (Gcabo et al. 2019; Figure 1.21, Panel B). Nonetheless, many adults and youth are not included in the social transfer system. To mitigate any potentially adverse distributional effects and to increase the political acceptability of a further VAT rate reform, it is preferable that any increase in the standard VAT rate be accompanied with increased transfers to low-income households and that efforts are increased to reach all low-income households. If, in the future, the social relief grant covering all the unemployed working age people is permanent, it will allow for a further tailoring of the support to poor people when increasing the VAT rate.

Figure 1.21. There is room to increase VAT rate

	Budget impact
Broaden the tax basis of the corporate income tax	0.5%
Broaden the tax basis of the personal income tax	0.5%
Increase the value added tax rate from 15% to 17%	1%
Significantly broaden the estate tax base by reducing exemptions for life insurance, pension savings and trust vehicles as well as close other tax avoidance schemes.	0.5%
Increase the efficiency of public expenditure through better procurement and contracting	Not possible to estimate
Privatise state-owned enterprises operating in competitive markets when the economic situation improves.	Not possible to estimate
Spending
Make permanent the COVID-Social relief distress grant	-1.0%
Augment the funding of road infrastructure from the general government budget	-1.0%
Improving public infrastructure maintenance	-0.5%

Note: Only the main recommendations with direct impact on public finances are estimated. The impact of tax measures is based on the room available to broaden fiscal bases based on our analysis in Chapter 2. The estimate for infrastructure investment is derived from our analysis of needs in Chapter 3 and its growth impact is analysed with the DSGE model (see Box 1.3).

Recommendations from previous surveys	Action taken since the July 2020 Survey
Provide temporary financial support to households and businesses to protect livelihoods and employment Implement the budget consolidation strategy and improve spending efficiency. Index wages in the public service below inflation for 3 years and link to productivity requirements.	All social grants were increased for 6 months. A social distress relief grant covering unemployed working age individuals has been created. Civil servants’ wages are frozen for 3 years.
Restructure state-owned enterprises to ensure their financial sustainability including staff reduction and bringing in private participation. Clearly separate the responsibilities of the board and the management of SOEs by giving the board the mandate to strategically supervise, monitor and audit the management of SOEs.	New management has been appointed in many SOEs and tasked to restructure and improve performance.
Privatise state-owned companies, such as telecoms, that are in markets with a sufficient degree of competition.	No action taken.
Improve prosecution process and enforcement of national and foreign corruption offences.	No action taken.
The government should continue to seek opportunities to increase the efficiency of public expenditure.	All suppliers must be registered with a central database. All contracts above ZAR 500 000 at national and provincial level, and ZAR 200 000 at municipal levels are subject to a competitive bidding process. Efforts to expand centralised procurement of goods and services and renegotiation of transversal contracts continue.
Deepen implementation for public procurement reform and enforce sanctions for breaches of the Public Financial Management Act (2017 Survey)	No action taken.

Strengthening post-COVID 19 social policy

South Africa has an extensive and well-functioning means-tested cash-transfer system, as analysed in the 2020 OECD Economic Survey. The social assistance programme (i.e., social grants) provides income support for the elderly, children, and people with disabilities, as well as social relief for individuals and households that experience sudden income distress (Table 1.7). Around 18.2 million out of 57 million South Africans now receive social grants – the majority of which are children and the elderly – with little support for the unemployed. In 2020/21, spending on social assistance programmes amounted to 4.5% of GDP (National Treasury, 2021). Social grants are funded from tax revenues and are non-contributory and unconditional.

The coverage of social grants has improved owing to a combination of policy changes, outreach campaigns to raise awareness and service delivery improvements. Coverage, including indirect beneficiaries, is almost universal in the poorest pre-transfer quintile (95.2 percent) and is as high as 74.1 percent in the third quintile (World Bank, 2021). Indeed, more than half (56.1 percent) of the population in the poorest pre-transfer quintile alone are direct grant beneficiaries, while coverage for the child support and older persons grants of the age-eligible population in the bottom quintile is 86.9 percent and 96.6 percent respectively (World Bank, 2021).

Social assistance plays a critical role in reducing poverty, inequality and protecting vulnerable households from economic shocks. Social grants dominate the income profile of many poor households, accounting for as much as 71% of total household income for the poorest 20% of the population (World Bank, 2018;Figure 1.22). The World Bank estimates social grants reduce the poverty rate between 10.1 percentage points and 38.5 percentage points, depending on the choice of the official poverty line (World Bank, 2021). Similarly, the post-transfer Gini coefficient (i.e., income including social grants) is 6.7 percent lower than the pre-transfer Gini coefficient (i.e., income excluding social grants) (World Bank, 2021). However, the incidence of poverty remains relatively high. Based on per capita household income, the World Bank estimates that in 2014/15, 46.6% of the South African population were poor relative to the national upper-bound poverty line (World Bank, 2021).

Figure 1.22. Social grants increase the disposable income of lower deciles

	Baseline per month	Number of beneficiaries	Top-up	Top-up %	Social grants Spending (Rand billion)
Child support (1)	460	13160	300	65.2%	73.3
Old-age	1890	3745	250	13.2%	86.5
Disability	1890	1038	250	13.2%	23.6
Foster care	1050	273	250	23.8%	4.3
Care dependency	1890	154	250	13.2%	3.7
Social relief of distress	350	10500			31.6
Social grants (2)		18400			192.9

Note: 1) includes veterans; 2) exclude beneficiaries of the Social relief of distress grant.

Source: National Treasury, Budget Review 2022.

The social grant system could be strengthened to further reduce poverty. The child support grant on its own is not able to meet even the most basic needs of its beneficiaries (i.e., food costs) (Zembe-Mkabile et al., 2015). Food insecurity, stunting and child malnutrition remain significant challenges, and have risen since 2012 (World Bank, 2018). In 2019, the official national food poverty line was ZAR 561 per person per month (Statistics South Africa, 2019). People living below the food poverty line are considered to live in extreme poverty. The child grant (ZAR 445 per month in 2020/21) lies well below the food poverty line (for adults). As many families receiving the grant have other sources of revenues, the government could consider an additional means test for extremely poor households. For example, only households with a revenue such that the whole family lies below the food poverty line would receive extra-support. The value of such an extra-amount should be decided taking into account budget constraints.

The social distress relief grant (SDR grant) instituted during the COVID-19 crisis provided for the first time a social grant to unemployed working age individuals, including informal workers. The value of the relief grant was set at ZAR 350 per month for 6 months from May to October 2020. It was then extended up to April 2021 and has been reinstated from August 2021 and extended up to February 2023. Around 10.5 million people received the SDR grant.

The COVID-relief grant was highly redistributive and helped low-income households cushion the impacts of the pandemic (Figure 1.23). An early assessment by Barnes et al. (2021) indicates that COVID-related grants substantially increased the disposable income of the households in the first three deciles, and in particular, by more than 100% for the first decile. The SDR grant seems to play an important role in the overall impact of the relief plan on disposable income of low-income households. This has triggered a debate on the introduction of a basic universal income.

Figure 1.23. The impact of COVID-related grants on income distribution

Change in mean disposable income by income decile between March and June 2020 with dampening of SDR

The possibility of transforming the SDR COVID-19 grant into a permanent grant has been raised. The COVID-SDR grant temporarily closes a gap in the social protection system by covering the unemployed working-age population that receives no income transfers from the government. The rapid assessment of the SDR grant conducted by the Social Development Department shows that applicants between ages 20 and 34 make up 61.3% of all applicants. While the amount of the grant is very low, it constitutes an important share of the revenue of the beneficiaries, reducing poverty.

In the context of limited budget space, the government needs to strike a balance between increasing already high social transfer spending and increasing social cohesion in a very divided and unequal society. A basic grant at ZAR 350 per month covering 10.5 million individuals would cost annually around ZAR 42 billion, representing around 19% of social grants spending. There are different ways to accommodate such an increase, representing around 0.8% of GDP. First, spending savings and strengthened public procurement procedures could contribute to offset part of this additional cost. Secondly, as developed in Chapter 2, increasing the VAT rate or broadening the basis of corporate and personal income taxes would support government revenues. Making permanent the SDR grant should go along with reviewing and strengthening the overall social grant system to protect the most vulnerable individuals.

Recommendations	Actions taken
Gradually increase the public financing of health care through a form of public insurance at a pace and scale that is affordable. Entrust an independent body to develop a price schedule for reimbursement of health care.	Public health spending has increased and funds allocated to the development of the national health insurance scheme.
Develop prevention of non-communicable diseases and strengthen the promotion of a healthier lifestyle.
Scale up the Labour Activation Programmes by gradually increasing the number of participants in skills development and training programmes through the UIF programmes.	The UIF has increased participation in labour activation programme
Consider an additional means-tested support on top of the child support grant for children in households with a revenue such that the whole family lies below the food poverty line.	No action taken
Install mandatory preservation of retirement plans and at least partial annuitisation of savings-retirement pay-outs.	No action taken
Generalise programmes to assess children’s health and raise awareness of the risks linked to obesity and promote healthy diet and sports activity.
Accelerate the upgrading of public clinics and better co-ordinate and contract with private doctors to guarantee access to doctors in primary care.	Upgrading of public clinics is roll out progressively.
Set binding prices for mandatory reimbursement of treatments covered by the prescribed minimum benefits package.	No action taken
Limit the number of options per scheme with a basic option corresponding to a revised prescribed minimum benefits (PMB) scheme. Revise the PMB to be simpler, easier to implement and develop a universal and agreed coding system of health services.	No action taken

Reforms for strong, fast, and inclusive growth

Policies to stimulate the recovery are needed beyond the relief plan. Most immediately, a swift implementation of reforms would reduce uncertainty and boost growth. In particular, lifting the energy shortage, as developed below, is crucial for investors’ confidence and to reverse weak investment. In the medium run, as developed in Chapter 3 of this Survey, a more effective regulatory framework including greater attention to competition would contribute to a better pricing of services and improve incentives to invest. The OECD Product Market Regulation indicators show that South Africa compares unfavourably in most indicators, even to emerging market peers. Adjusting its regulations to produce the right incentives presents vast potential to raise growth levels (see Box 1.4).

Land is a key source of inequality in South Africa. Land restitution addresses claims on dispossessed land and forced removals from various acts after 1913. The tenure reform aimed to provide more secure access to land in the former homelands. Lastly, land redistribution deals with land not covered by restitution and tenure reform, transferring white-owned commercial farmland to black farmers. Progress on the land reform has been slow. While the land reform has implications for the development of both urban and rural areas, recent focus has turned to redressing structural inequalities in the agricultural sector (OECD Economic Survey 2020). In the context of limited financial resources, the government turned more recently to discussions aiming to allow for expropriation of land in the public interest without compensation for the current owners. In December 2021, the constitutional amendment to adopt expropriation without compensation failed to reach the two-third majority vote. The government still envisages to use existing laws to reach its land redistribution objectives. It is important to clearly define the policy objectives and assess the risks of land policy as even a careful implementation could undermine agriculture performance and reduce investment. Going forward, investors need to be ensured on the security of their property rights.

Lifting the electricity shortage’s drag on growth

Electricity shortages have intensified and could derail the recovery of economic activity. The Council for Scientific and Industrial Research estimated that lack of electric power in 2019 lowered GDP growth by about 2.4 percentage points in South Africa. The World Bank reported that in 2020, 92% of firms were affected by power outages and that those affected lost about 5% in sales. The availability of electricity has been deteriorating since 2018, with the number of hours of load shedding steadily increasing, despite the coronavirus crisis (Figure 1.24).

Measures to increase electricity generation capacity have not delivered enough electricity yet. Of the 11.8 GW added capacity from private providers announced by the Government in September 2020, only 2.5 GW capacity has been already procured. Eskom is also expecting the completion of two new coal power stations, but this will not bridge the capacity gap. Maintenance works on the ageing fleet of coal-fired generators are delayed, leading to unexpected breakdowns and generation capacity falling from 72% in 2018 to 65% in 2020.

Figure 1.24. Electricity availability has fallen dramatically

Yearly hours of load shedding by stages and total annual supply in TWh

The cost of electricity is high and rising, pushed up by poor governance in South Africa. High wages and prices of coal are driving costs up. Wages in Eskom are about 25% above the OECD average in the sector, whilst wages in the mining sector are also high. The coal prices paid by Eskom have increased fivefold between 2007 and 2019, twice as much as the coal price increase in the international market.

In the last two decades, Eskom moved away from long-term arrangements where coal was bought at a fixed rate above the operational cost and delivered directly to power stations. Eskom is now using short- and medium-term contracts, which are much more expensive. The heterogeneity of purchase prices, ranging from ZAR 264/ton to ZAR 980/ton, strongly suggests that the utility is not using its large market power, raising suspicions of corruption and collusion with the private mining sector (Auditor General, 2018/19; 2019/20).

The financial distress of Eskom is also worsened by regulatory restrictions on tariff increases, considering that consumers should not pay for inefficiencies of the utility company. Therefore, Eskom has not been able to recover its costs and has been accruing a large debt, despite a recent reduction, amounting to 8% of GDP. However, revenue shortfall linked to the load shedding remain the first cause of the debt. As the company’s utilisation rate of coal-fired generators remains low, Eskom cannot sell enough electricity to remain afloat.

The government announced in 2019 the split of the national utility company in three distinct entities (generation, transmission, and distribution), which would allow other electricity producers to compete and complement Eskom’s capacity while bringing prices down. Eskom completed this process of functional separation of the three divisions and is now awaiting legal separation. The government should proceed with the separation of Eskom and the creation of the transmission entity to reassure investors willing to take the opportunity of the 100 MW embedded production without licensing.

The financial situation of Eskom is also worsened by the outstanding debt of municipalities to Eskom. While revenues collected by municipalities from service charges for electricity amount to around ZAR 122 billion in 2020/21, the outstanding debt of municipalities to Eskom reached ZAR 35 billion (Eskom, 2021). These municipalities’ debt to Eskom and Water Boards and weak financial management capacities in many municipalities (Auditor General, 2019/20) have prompted the government to propose reforms to the financing and management framework of municipalities.

Municipalities, unlike provinces, have significant revenue-raising powers. However, municipalities differ in their revenue-raising capacities. Cities have a significant potential to raise revenue from property taxes and the sale of services, while rural municipalities’ budget, with mostly poor residents, is mainly funded from government transfers. In 2020, service charges on electricity represented the most important source of revenues for municipalities, followed by government transfers and, in third position, revenues from property taxation (Figure 1.25).

The National Treasury has proposed a draft amendment to the Municipal Fiscal Powers and Functions Bill designed to strengthen the revenue-raising framework for municipalities. The amendment mainly aims to regulate the power of municipalities to levy land development charges (National Treasury, 2020b). Unfortunately, the amendment bill does not address the challenges posed by municipal reliance on utilities pricing. A task force led by the Deputy President is in place to reflect on the financing framework of municipalities. South Africa should proceed with a reform of the financing model of municipalities and clarify the duties and fiscal powers of municipalities. In terms of utility service charges on electricity and water, the provider (Eskom or Water Boards) could be entrusted to recover the financial bill from customers and thereafter to transfer to municipalities their share. Alternatively, other sources of financing of municipalities could be found as the fuel levy, the carbon tax or other national taxes that are managed by the SARS.

Figure 1.25. Sources of municipal revenues

Recommendations	Actions taken
Increase and extend relief support in sectors hard hit by the crisis, especially for the tourism sector, up to mid-2021, particularly if there is a renewed virus outbreak later in the year.	Relief supports were extended over 2021
Reduce red tape and the regulatory burden for entrepreneurs and small enterprises.	No action taken
Give more independence to regulators in energy, transport, and telecom industries vis-à-vis line ministries. Accelerate the adoption and implementation of the Single Transport Economic Regulation Bill.	No action taken The examination of the Bill has advanced through parliament committees but is not adopted yet.
Use the ongoing restructuring of Eskom to diversify power generation and invest in renewable sources of energy.	Amendments were adopted to allow 100 MW embedded electricity generation without licencing.
Increase public investment in transport infrastructure, skills and education. Improve cost containment, planning and implementation.	Public investment in infrastructure is increasing and a National Infrastructure Development Plan has been developed.
Implement electronic visa programmes on a large scale for emerging target markets.	No action taken
Investments in transport and tourism infrastructure have to be aligned to connect tourists to places.	No action taken
Reduce red tape and regulatory burden for entrepreneurs and small enterprises.	No action taken

Mitigating climate change: transitioning to net zero

CO₂ emissions per unit of GDP are high and have not fallen much since 2000, as discussed in Chapter 2 of this Survey. It reflects, in part, the high-energy intensity of the economy (Figure 1.26). In particular, coal accounts for around 70% of total energy and is an important part of electricity generation. Also, it is the main energy source in industrial processes. Heavy coal use contributes to air pollution, to which South Africans are very exposed, with important impacts on premature mortality (Roy and Braathen, 2017) and child development (World Health Organisation, 2018).

The carbon tax was introduced in 2019 at a tax rate of ZAR 120 (EUR 6.5) per ton of carbon dioxide equivalent emission. As discussed in Chapter 2 of this Survey, carbon pricing could increase progressively and exemptions could be reduced.

Figure 1.26. Green growth indicators show high energy intensity and incidence of pollution

Transitioning from coal to renewable energy would reduce the greenhouse gas emission footprint and decrease the cost of electricity. Electricity generation using coal has been falling since 2011, compensated by the rapid development of solar and wind energy (Figure 1.27). However, this has been accompanied by an increase in electricity exports rather than an increase in domestic supply.

According to IRENA, the United Nations agency for renewable energy, the cost of energy generation using new solar and wind capacities was lower in 2020 than the cheapest fossil-fuel technology at the global level (IRENA, 2020). The cost gap between renewables and coal-based electricity generation is even larger in South Africa because construction costs of new coal power plants have ballooned (see Knorr et al., 2016). According to data from independent power producers, electricity from renewable sources was already 30% cheaper than electricity from coal in 2019. Moreover, South Africa has huge solar and wind resources for renewable electricity generation according to Bofinger et al. (2016).

Allowing private providers to send power to the grid would likely shorten the period during which electricity is constraining growth. In August 2021, regulations were officially amended to allow electricity generation projects from private providers up to 100 MW to proceed without applying for a licence. This will allow private investors to develop cost-effective electricity capacity while permitting large industries to secure their own energy supply, avoiding the detrimental impacts of load shedding. The investment in a significant number of smaller projects will help close the capacity gap and will be faster to be deployed than large-scale projects procured centrally, which typically take years to materialise. However, while this policy may contribute to bridge the capacity gap in the short-run, additional policies, allowing, for instance, green finance, are needed to support the large-scale deployment of renewable energy. Moreover, the government should ensure that registration process and undue regulatory procedures will not delay the implementation of the 100 MW embedded electricity generation policy.

The agreement between South Africa and France, Germany, the United Kingdom and the EU – Just Energy Transition Partnership with South Africa – signed during the COP 26 global summit offers a ground-breaking opportunity to finance the transition from coal to renewable energy. Partners committed to provide $8.5 billion to South Africa to achieve its emissions target under the Paris Agreement. In practice, this funding will serve three goals: early retirement of coal plants, building cleaner energy sources, and support for coal-dependent regions.

Retiring coal plants and supporting coal-dependent regions will be a political challenge. The transition away from coal will impact around 120 000 workers at heavily unionised mines and power plants. But the energy transition will also require new energy sources and thus new jobs. As in 2019, an estimated 1 billion barrels of gas was discovered in South Africa, its exploitation as a backup power source will allow to replace coal generation by renewables like wind and solar.

Figure 1.27. The share of renewable electricity sources has increased

Electricity generation by main sources

Recommendations	Actions Taken
Raise irrigation water prices to discourage water overuse and ensure that costs are covered, for example by charging depreciation costs in full.	No actions taken
Set up an independent water regulator to ensure cost-reflective prices Apply better regulation to costs and environmental performance of municipal water services.	The government included the creation of an independent water regulator in its infrastructure development plan.
In designing climate change mitigation policies, favour broad and easy-to-implement instruments with limited demands on administrative capacity, such as a simple carbon tax (2015, 2013, 2010 Survey).	The carbon tax has been adopted in July 2019.
Reduce implicit and explicit subsidies for energy and coal consumption, and use other instruments, such as cash transfers or supply vouchers, for protecting the poor (2015, 2013, 2010 Survey).	The diesel fuel levy refunds for the electricity sector were reduced from April 2016.

Infrastructure investment is needed to lift productivity

Infrastructure investment has declined in the last decade and is contributing to diminishing productivity (Chapter 3). The decline of investment, and in particular, public investment, is weighing on the quality of transport infrastructure. Private investment dropped by 38% between 2008 and 2019 (Figure 1.28). Public and private sectors investment, which amounted to 17.9% of GDP in 2019, is far from the National Development Plan target of 30% of GDP.

Developing public transport infrastructure is needed

The government economic recovery plan, announced in October 2020, prioritises infrastructure spending to support the economy and boost potential growth. Most of the infrastructure projects involve pooling resources with the private sector, multilateral development banks and development finance institutions. Increasing public investment from 3.6% to 5% of GDP would boost potential growth (Box 1.4). However, better cost-benefit analysis to identify priority projects is required, alongside improved cost containment, planning and implementation.

Improving public transportation will better connect people to jobs and boost economic activity. Part of the unemployment problem in poor urban neighbourhoods stems from underdeveloped commuter links. Poor households tend to commute by time-consuming walking, or their transport access is limited by the high costs of minibus services. The estimated total number of workers’ trips using public transport decreased significantly from 5.4 million in 2013 to 4.7 million in 2020 (The 2020 National Travel Household Survey). Taxis accounted for most public transport usage (80.2%), followed by buses (16.6%) and train (3.2%), the latter having decreased from 12.9% in 2013 (Department of Transport, 2020). Travel costs are high when compared to the median wage, whilst travel by train is the least expensive.

Low-cost public rail commuter transport is provided by PRASA (an SOE), which has been underperforming. The functional capacity of the company has been impaired with mismanagement and inability to properly perform and control its investment and corruption (Auditor General Report, 2018 to 2020). Despite ZAR 80 billion of capital subsidies being allocated to PRASA for modernising the Metrorail network since 2009, the level of dissatisfaction is high due to perceived unreliability, bad information and conditions of travel, resulting in a 60% decrease in the number of paying passengers using Metrorail and a 90% decline in long-distance rail passengers (Department of Transport, 2021).

Fixing PRASA is important for a well-functioning multimodal transport system. The government plans to upgrade the rail transport infrastructure by renewing the fleet, modernising train stations and renovating the two biggest corridors (Mabopane – Pretoria Corridor, in Gauteng and the Central Line, in the Western Cape). As recommended for other state-owned enterprises, improving the governance and procurement policy will be key. Moreover, access to the Transnet-owned railway network is an issue for PRASA in the absence of a sector regulator as Transnet gives preferential access to its own transport services. Accelerating the deployment of the integrated national transport regulator will help to improve the cooperation between rail transport providers.

The gap left by the limited availability of public rail transport has been filled by informally regulated private minibus and taxis services offering commuter services to inhabitants of many poor neighbourhoods. They account for 80% of public transport usage (Department of Transport, 2021). However, the cost for low-income workers is often prohibitively high. Local governments are engaging more with minibus operators, with the rolling out of regular bus services in larger cities (so-called Bus Rapid Transit systems) sometimes involving minibus operators (as shareholders) and drivers. It is part of a public-private partnership in which cities build and maintain the infrastructure, stations, depots, control centres and a fare collection system. Private operators own and manage the buses, hire staff and provide services on a long-term contract. The Public Transport Network Grant has been developed to incentivise cities to develop an integrated rapid public transport network. The implementation of the grant has been slow, only benefiting 10 cities. It should be further used to expand the Bus Rapid Transit systems to more cities and to incentivise them to use hybrid or low polluting buses.

Figure 1.28. Declining investment contributes to low productivity

Labour market reform can help raise employment

The pandemic worsened already dire labour market outcomes

The South African labour market is particularly weak, contributing to wide income inequality, leading to losses of human capital and potential growth. Unemployment is strikingly high and persistent when compared to other emerging market economies, while the employment to population ratio is among the lowest (Figure 1.29, Panel A). The picture is even more challenging for young people, who face an unemployment rate of 57%, 30% of whom are not in education, employment or training (Figure 1.29, Panel B).

The COVID-19 crisis delivered a further blow to the already weak labour market. About 2.2 million people lost their jobs in the second quarter of 2020, while by year-end only 800 thousand workers had regained employment in net terms (Kohler et al., 2021). Employment losses were concentrated among the most vulnerable workers, including those with lower skills and working in the informal sector. As recovery funds are progressively withdrawn, reforms to improve labour market outcomes should be a priority. Economic growth is needed to generate stronger labour demand, and successful implementation of structural reforms would boost growth. A well-designed policy framework should allow job creation and self-employed workers to bridge the employment gap without increasing informality rates.

Figure 1.29. A large share of workers, particularly young people, are excluded from employment

Gender differences in the labour market remain high

South Africa performs well on many gender dimensions, though there is scope for progress in women’s access to economic opportunities and assets (land for instance) and in eliminating violence against women. Participation in the labour market is relatively low both for men and women but the difference between men and women is much lower than in most emerging economies (Figure 1.30). However, the gender pay gap is higher than the OECD average and in most emerging countries. Policies to guarantee equal pay and favour women’s access to higher position should be run for more gender equality.

Figure 1.30. Women have lower opportunities in the labour market

Informality and employment growth

The relatively low level of informality is an indicator of low activity and job creation. The informality rate in South Africa, at 32%, is significantly lower than in most other emerging market countries (Figure 1.31). While this could be a positive indicator, South African workers who would otherwise be in informality are not in the formal sector either, remaining excluded from economic activity and challenged by poverty. The challenge in South Africa is to increase economic inclusion through labour market participation without increasing informality. Boosting entrepreneurship and self-employment can bridge the gap between economic participation and informality (Economic Survey of South Africa, OECD, 2017).

Figure 1.31. The informality rate in South Africa is below other emerging economies

Formalisation of SMEs and self-entrepreneurs, reducing red tape and licensing barriers are relevant instruments to reduce informality. Several countries have adopted differentiated tax regimes for SMEs to stimulate entry and formalisation. Their effects on formalisation have been found to be muted in many countries, including in the case of South Africa’s own SME turnover tax. Nevertheless, a well-designed special tax regime may render positive formalisation effects and increase the tax base (Box 1.2). In particular, it should combine low formalisation cost, reduced taxation and eventually be linked to tangible social benefits.

As discussed in Chapter 2, South Africa has a “Small Business Corporations” regime designed for firms with turnover between ZAR 1 million and ZAR 20 million and a microbusiness regime for microenterprises with a turnover below ZAR 1 million. It allows tax-free income of ZAR 335 000 and a tax rate that rises to 3% of turnover. An alternative is to merge the two regimes and to introduce a progressive tax rate schedule that would lower the tax burden on businesses with lower turnover without creating the hurdles to growth; the presumptive tax rates could vary across sectors in order to take average business sector profitability into account. In the meantime, communication of the microbusiness regime benefits should be increased, and administrative and social benefits should be tied to the registration and take up of the microbusiness regime.

Box 1.2. Brazil’s experience in fostering SMEs formalisation

Brazil is a country with higher informality but lower unemployment rates than South Africa, and also offers insights on the importance of targeting and complementarity in special tax regimes. A first programme designed to boost formalisation among SMEs, the Simples Nacional, unified several taxes into a single one and lowered total tax rates. However, the scope of the scheme was increased by augmenting the regime’s participation threshold, which now covers three quarters of Brazilian firms – and amplifying its distortions and fiscal costs. As a result, the programme has had controversially low efficacy in decreasing informality rates (OECD, 2018; Fajnzylber, Maloney and Montes-Rojas, 2011; Monteiro and Assunção, 2012; Piza, 2018). Meanwhile, a more recent programme, the “Micro-Empreendedor Individual”, targeted micro enterprises and, on top of consolidating taxes and reducing their overall rate, also reduced firms’ entry costs. Even though the programme did not constitute a silver bullet against informality, it has led to significant formalisation gains accruing from the complementarity between reducing entry costs first and then stimulating firms to stay formal via lower tax rates (Rocha, Ulyssea and Rachter, 2018).

Compliance with the new national minimum wage is low

The country introduced a national minimum wage (NMW) to reduce poverty among workers and to make growth more inclusive. Effective from the 1^st of January 2019, the national minimum wage was set at ZAR 3 500 per month or ZAR 20 per hour (EUR 240 monthly or about EUR 1.37 hourly). To minimise the impact on employment, lower minimum wages were set for those employed through the government’s public works programmes (ZAR 11/hr), domestic workers (ZAR 15/hr) and farmworkers (ZAR 18/hr). A two-year period was agreed for the convergence of these sectors’ minimum wages toward the national minimum wage. The minimum wage is revised every year depending on recommendations from the national minimum wage commission.

The impact of the national minimum wage on employment and income is not yet discernible because the pandemic hit the labour market and led to the massive destruction of jobs. The scope of the national minimum wage is large, potentially affecting 6 million workers, almost half (47%) of all wage earners (OECD South Africa Economic Survey, 2017). However, an initial assessment by Bhorat et al. (2021) indicates that non-compliance with the law is widespread and lack of enforcement and knowledge of the law is not helping.

The government needs to step up efforts to enforce the law. First, information campaigns could be run to increase knowledge of the law both from employees and employers. Second, the South African Revenue Service and the Unemployment Insurance Fund could be mandated to recall the law to employers that display a high non-compliance in their fillings of employees’ tax and contribution forms.

Tackling skills mismatch and easing school to job transitions

The labour market also features persistent high qualification and field-of-study mismatches. The economy is constrained by the scarcity of skilled workers (Depken, Chiseni and Ita, 2019). The average level of education among the majority of the work force is low. Primary and secondary education quality needs to improve and Chapter 3 in this survey provides recommendations to increase basic literacy and numeracy skills that would increase workers' employability. The shortage of high-skilled workers is mainly driven by low access to higher education. In particular, the financing formula of universities should be reformed to incentivise them to decrease their cost per student and to enrol more students.

Increasing the practical course content and improving the worker-firm matching at an early stage could also decrease after school unemployment (Economic Survey of South Africa, OECD, 2015). Technical and vocational education and training (TVET) could play a more important role in reducing skills mismatch and improving the general skills of the workforce. There is evidence that the current TVET system has exclusionary selection criteria, does not target the sought-after skills in the labour market and lacks coordination (Field, Musset and Álvarez-Galván, 2014; World Bank, 2021b). Reviews of the colleges consistently point to the need for stronger links with businesses to increase the relevance of the course content, teachers with practical experience and use of internships and work placements (Field et al., 2014; Economic Survey of South Africa, OECD, 2017). To increase availability of work placements, awareness of the learnership tax incentive for firms could be strengthened. Procedures associated with applying for the skills development levy could be eased. Moreover, the German vocational education training system could provide lessons for strengthening the transition from schooling to job (Box 1.3).

Box 1.3. Lessons from the German vocational training and educational system

Germany has a youth unemployment rate similar to the overall unemployment rate. In other words, the school-to-job transition works about as well as the labour market overall. The vocational training and education system (the VET system) is seen as successful and is an example of close cooperation with future employers and social partners.

The German VET system rests on two pillars. One is designed for those who leave the general education system at a young age to join a combined school and on-the-job training apprenticeship programme. Participants in this programme are employed and receive practical training in the workplace, while contributing to the output of the employing company. Compensation is far below the minimum wage, but there is an employment guarantee after the successful completion of the three- to four-year programme with a skilled worker certificate in the respective trade (plumber, carpenter, car mechanic, etc.). Apprenticeship programmes are very popular and chosen by about one quarter of any cohort. Successful participants have access to tertiary education in the area of their profession after a certain employment period.

The second pillar of the German VET system is high-school based with teachers, who must have several years of practical experience in the area. The curriculum is designed in close cooperation with social partners and in many cases such schools become part of a sectoral cluster of companies. Graduates from such schools have immediate access to most tertiary education programmes. The graduates from higher vocational schools are in high demand and their entry wages are often higher than those of university graduates without work experience.

The German VET system builds on a comprehensive school system and productivity-minded cooperation between social partners. Considering South Africa’s widespread youth unemployment, it is worth investigating – perhaps in the form of regional or sectoral pilot studies – which aspects of the German VET system could be transferred to South Africa.

Source: Christopher Loewald, Konstantin Makrelov and Andreas Wörgötter (2021), “Addressing low labour utilisation in South Africa”, ERSA Policy Paper 27.

Reducing labour market rigidities

Wage bargaining negotiations are often combative and wage increases are weakly linked to productivity developments. Cooperation in labour-employer relations and flexibility in wage determination have been ranked among the lowest in the world by the World Economic Forum (Figure 1.32). While the labour tax wedge is low, collective bargaining procedures can be improved to enhance cooperation (Figure 1.33). While collective action is key for workers, particularly when employers hold significant dominance in the relevant labour market, rigid and overbearing rules may backfire and stifle job creation.

The wage bargaining system entails a relatively high-level of bargaining at industry level and almost no coordination between different bargaining councils. There are 21 registered national bargaining councils, 5 at the provincial level and 14 at the city and town level. Bargaining councils cover many industries and service sectors (Department of Labour, 2021). This structure reinforces the focus on insiders’ interests in each bargaining council and the lack of incentives to consider the potential economy-wide adverse effects on employment and inflation. Moreover, declining trade union membership is putting growing pressure on the representativeness of bargaining councils and is influencing unions’ flexibility in wage negotiations. Bargaining systems characterised by a high degree of wage co-ordination across bargaining units are associated with higher employment and lower unemployment for all employers, compared to fully decentralised and uncoordinated systems (OECD, 2019). Co-ordination helps the social partners to account for the business-cycle and the macroeconomic effects of wage agreements on competitiveness.

Figure 1.32. Cooperation between employer and labour is low

Cooperation in Labour-Employer Relations 2019, 1 (worst) - 7 (best)

On the business side, SMEs are insufficiently represented and often complain about wage negotiations that adversely affect their competitiveness. Automatic extension of terms negotiated between larger firms and unions to smaller firms, for instance, has been found to substantially decrease employment especially among smaller firms (Magruder, 2012). Extensions are often issued out of fairness considerations to ensure the same treatment and standards to all workers in the same sector, in particular for workers for foreign firms or service providers, and migrant and posted workers (Hayter and Visser, 2018). The ILO recommends that extensions may be issued when the “collective agreement already covers a number of the employers and workers concerned which is, in the opinion of the competent authority, sufficiently representative” (ILO Recommendation on collective agreements No. 91).

In several OECD countries administrative extensions are subject to threshold representativeness criteria: collective agreements can only be extended if they are signed by employer organisations representing a minimal share of workers (most often the majority). A few countries also request that signing unions represent a majority of workers (OECD, 2019). However, while these criteria may be important, a more important concern is to ensure that signing employer organisations do not only represent a few selected firms (OECD, 2019). While representativeness criteria aim to reflect as much as possible the situation of a wide set of firms, they cannot account for their full diversity. Few countries, therefore, also allow for exemptions from extensions. In the Netherlands clearly pre-defined criteria for exemptions are even a condition for extension. Moreover, firms can request an ad hoc exemption from the ministry if they can justify dispensation. Hijzen et al. (2019) report that, between 2007 and 2015, 191 requests of ad hoc exemptions were presented by Dutch firms, but only 58 were accepted.

Figure 1.33. Industrial disputes are high

The bargaining system needs to be reformed. In particular, the rules to form a bargaining council, the thresholds to determine the representativeness of bargaining councils and of their members, and the extension of these agreements to non-members need to be reconsidered and adjusted. Actions to improve the coordination mechanism between unions and businesses are also needed to pacify wage negotiations and render them more accountable for their impact on the overall economy. The Commission for Conciliation, Mediation and Arbitration (CCMA) on labour issues has piloted an assistance programme with bargaining council members before wage negotiations that seems to be effective in helping to reach conclusive negotiations (CCMA, 2020). The CCMA could be tasked to aid and sectoral and aggregate economic analyses on productivity, profits, wage evolution, inflation and other relevant information, including briefing sessions to bargaining council members before negotiations.

More flexibility in the collective bargaining system is needed. In particular, more wage negotiations at the firm level could be encouraged. For instance, agreement with representative unions at the firm level could be accepted as substitute to agreements at the sector level. SMEs could be allowed to opt out from extended agreements depending on reaching agreements validated by a majority of workers or their representatives within the firm. Austria, Denmark, Finland (after 2015), Germany, the Netherlands, Norway and Sweden have an organised decentralised and co-ordinated bargaining system: in these countries sectoral agreements, even in the case of extensions, leave significant room for lower-level agreements to set the terms of employment by leaving up to bargaining parties the design of the hierarchy of agreements (Denmark, Finland, the Netherlands, Norway and Sweden) or by allowing for the possibility to opt-out (Germany and Austria). In these countries co-ordination is relatively strong (at least in certain sectors), and usually takes the form of pattern bargaining (OECD, 2019).

Job separation can also be overly long, uncertain and costly, which is known to be detrimental to permanent job hiring. Procedures within the CCMA on labour issues are perceived as too long, which particularly affects small businesses. The CCMA has seen a steady increase in the number of case referrals from 179 000 in 2015/16 to 221 000 in 2019/20. Strengthening the initial sorting of claims brought to the Commission and limiting the number of appeals and the time allowed to appeal would reduce costs of employment termination and therefore the uncertainty involved in hiring staff. More flexibility could be given to small businesses by permitting them to end employment due to unsatisfactory performance at the end of the probation period without facing unfair dismissal claims (small businesses in Spain may use a one-year trial period, for instance) or protecting them from unfair dismissal cases for a given period, as in Australia. The CCMA has adopted a 5-year Strategic Plan with a focus to invest more on dispute resolution by assisting firms with grievance handling and dispute management at the enterprise level. The CCMA could be financed to further develop assistance and advice provided at the firm level.

Boosting the take up of the employment tax incentive

The youth employment tax incentive is the only direct government intervention in the labour market to stimulate youth employment. It is complemented by the Presidential Youth Employment Initiative and the public work programme. The employment tax incentive aims at reducing the effective cost of hiring young workers between the ages of 18 and 29 years. It allows employers to reduce their pay-as-you-earn (PAYE) tax payments for the first two years in which they employ qualifying employees with a monthly remuneration of less than ZAR 6 500, but more than the minimum wage. The subsidy rate decreases between the first year and the second year but increases with the wage level up to 50% of the salary.

The fiscal cost of the tax incentive has not increased much since its inception. The cost of the employment tax incentive peaked at ZAR 5 billion in 2017 before receding to ZAR 4 billion in 2020 (Figure 1.34), while the number of firms claiming the incentives fluctuates around 30 000 firms. The percentage of firms claiming the employment tax incentive was around 14% in 2015 and 2016 (Ebrahim et al., 2017; Bhorat et al. 2020). In 2016, around 10.6% of total jobs were subsidised by the ETI (Bhorat et al., 2020). The average monthly subsidy amount per job was ZAR 3700 in 2016, slightly above the national minimum wage.

The impact of the employment tax incentive on youth job creation has been modest so far. Most studies (particularly those using administrative tax data) find a positive, but small impact on job creation for youth (Bhorat et al. 2020; Ebrahim, Leibbrandt and Ranchhod 2017). Administrative bottlenecks and costs associated with claiming may explain the low take up rate of the ETI by small firms. In 2016, the take up rate was 3% for firms with 1 to 3 employees, less than 10% for firms with 10 or fewer employees and 68.5% for firms with more than 500 employees. Increasing awareness of the employment tax incentive and simplifying access for SMEs could widen the reach of the tax incentive. However, the employment tax incentive rests on the idea that the wage cost is determining the low employment of the youth. As wage-based contributions are very low in South Africa, the analogy with the impact of wage costs on employment in advanced countries with high wage contributions may be misleading. The overall wage-skills structure and productivity levels could be playing a more prominent role in job creation in South Africa, contributing to the low effectiveness of the employment tax incentive.

Figure 1.34. The take up of the employment tax incentives remains modest

Easing access to jobs: information, distance, placement

The labour market is characterized by high job search costs. Access to job information is difficult, reflecting the need to strengthen public employment services. Moreover, spatial mismatches between economic activity and housing also add to job search costs, because some job seekers must make long trips to search for work and also because access to information on job openings is more limited (Economic Survey of South Africa, OECD, 2015). In South Africa, public employment services are under-resourced and do not have the quantity and quality of counsellors necessary to provide effective services for millions of job seekers (Loewald et al., 2021). Instead, around 600 private employment agencies provide job placement services, but they are concentrated in some segments and areas of the market. Private providers could play a useful role to improve the delivery and targeting of employment services or alleviate capacity constraints, conditional on adequate performance management OECD (2018). Strengthening the public employment service to provide access to training and other support programmes and to develop a centralised database of job openings, would lower the cost of the job search, improve skills and the matching of workers to jobs, as done in Finland (OECD, 2021). These tasks require a well-resourced institution, with strong interactions with businesses, and determined actions to collect job openings.

Strengthening activation policies

The public Unemployment Insurance Fund (UIF) provides short-term benefits to workers when they become unemployed or are unable to work due to illness, maternity leave or adoption leave. It also provides a death benefit to the dependents of a deceased contributor. The Unemployment Insurance Fund is funded entirely through contributions from employers and employees and the returns generated on investments. The contribution rate is 2% of wages equally paid by the employee and the employer. Contributions to the UIF are subject to a maximum earnings ceiling, which is ZAR 17 712 per month for 2021 (around 5 times the minimum wage. The Unemployment Insurance Fund has accumulated a substantial surplus, which is managed by the Public Investment Corporation (UIF, Annual Report 2021).

The total number of claims has been increasing since 2015/16, driven by rising unemployment (Figure 1.35). In 2019/20, around 801 302 claims were received increasing by 174 000 compared to 2018/2019. The UIF is effective in terms of service delivery and has improved the processing times for claims (UIF, 2021), but many of the unemployed do not receive unemployment benefits (Figure 1.35). A significant share of the unemployed are new entrants to the labour market and have never worked, hence would not have had access to this contributory support mechanism, which explains the low ratio of unemployment insurance compared to South Africa’s total unemployed population.

The Unemployment Insurance Amendment Act of 2016, which came into effect in 2019, expanded the level and reach of benefits. In particular, after becoming unemployed, workers have one year instead of currently 6 months to claim their benefits. The benefit duration is increased from eight months to a year. Civil servants and students completing apprenticeships or vocational education and training programmes are covered. Finally, a better coverage of maternity leave is provided (66% replacement rate up to a maximum benefit of ZAR 17 712 per month). Income from contributions and investments should be sufficient to cover the expanded benefit pay-outs.

Increasing on-the-job training programmes would strengthen employability and mobility of workers. Active labour market policies (ALMPs) as job training programmes should be expanded to include more vulnerable workers, particularly among those not covered by the Unemployment Insurance Fund, to increase their employability. Finally, better targeting training programmes at demanded skills should lift their effectiveness (Hyman, 2018). Recent evidence from Brazil shows that job training programmes closely aligned to labour skills’ demand were significantly more successful in increasing employment prospects among trainees (O’Connell et al., 2017; Grundke et al., 2021).

In response to the global financial crisis, the Labour Activation Programmes (LAP) Unit was established within the UIF. This unit provides training and reskilling opportunities for unemployed UIF beneficiaries to enable them to either start their own business or re-enter the labour market. The Labour Activation Programme has been revamped and the number of beneficiaries of the new programme was only 2131 individuals in 2018/19 but increased to 33205 individuals in 2019/20. The spending on labour activation programmes represented 8.3% of unemployment benefit spending in the fiscal year 2019/20. The Labour Activation Programme should be scaled up by considerably increasing the number of individuals participating in skills development and training programmes.

Figure 1.35. The number of beneficiaries of unemployment insurance is low

The ratio of unemployment beneficiaries to unemployed individuals

Recommendations	Actions Taken
Develop apprenticeship and internship programmes to increase youth inclusion. Streamline conciliation and labour arbitration by strengthening the initial sorting of claims	Businesses have been called to develop apprenticeship. Arbitration process has been streamlined and limited to 30 days.
Limit the number of appeals and time allowed to appeal in labour disputes	No action taken

Recommendations

Actions Taken

Develop apprenticeship and internship programmes to increase youth inclusion.

Streamline conciliation and labour arbitration by strengthening the initial sorting of claims

Businesses have been called to develop apprenticeship.

Arbitration process has been streamlined and limited to 30 days.

Limit the number of appeals and time allowed to appeal in labour disputes

No action taken

Box 1.4. Modelling the impact of policy reforms for South Africa

A Dynamic Stochastic General Equilibrium (DSGE) model has been developed to simulate the impacts of OECD recommended policy reforms for South Africa (see the Technical Background Paper, Cahu and Fall, 2022). To reflect the complexity and duality of the South African economy, a model economy with a structure of three sectors, two types of workers and two types of consumers is developed.

More precisely, the structure of the model corresponds to the following three distinct sectors: (1) a sector of tradable goods and services including mining, manufacturing, trade, transport and personal services; (2) a sector of non-tradable services including agriculture, utilities, construction, and business services and (3) a public sector providing services such as health, education and general government services (Table 1.12).

Sector	Value-added	Output	Employment	Gross monthly wage	Mark-up	Investment
1: Tradable	1,714	4,758	6,361	11,416	1.130	271
2: Non-tradable	1,239	2,338	6,485	6,220	1.164	380
3: Public services	727	1,058	3,082	13,819	1.000	132
Total economy	3,680	8,154	15,928	31,454	-	783

Note: Value-added, output and investment are displayed in million Rand 2015. Gross monthly wage is in Rand 2015, Employment figures are in thousands.

Source: Authors’ calculations from the QLFS (2015) and National Accounts.

The labour market

The duality of the labour market is dealt with by considering two types of workers and three distinct sub-labour markets. Workers who completed secondary education and above are considered as high-skilled, while the rest of the active population is assumed to be low-skilled. High-skilled workers are assumed to be hired from a competitive labour market denoted A, where participation is limited to high-skilled workers. Low-skilled workers can work either in the submarket B which regroups hiring from the tradable sector and the public sector and the submarket C, which is related to the non-tradable sector. Average wages differ substantially from the three submarkets (Table 1.13).

Submarket	Gross monthly Wage (2015)	Total employment (2015)	Share of the labour force	Share of the total labour compensation
A	15,322	8,167,905	51.3%	80.5%
B	5,794	3,955,962	24.8%	14.7%
C	1,965	3,804,485	23.9%	4.8%
Total	9,765	15,928,352

Source: Authors’ calculations from the QLFS (2015).

This structure of the model allows considering the degree of segmentation in the South African economy. Moreover, two types of consumers are also considered. On the one hand, the liquidity-constrained households with a “Keynesian” profile who consume all their income including transfers from the government. On the other hand, the “Ricardian” type of consumers who optimise the allocation of their revenues between consumption and savings and their assets portfolio. Introducing the “Keynesian” type of consumers will allow to show the impact of redistributive policies, in particular the important share of social transfers.

The public sector plays an important role in the model. The government raises taxes on profit, capital income, consumption and labour income and produces public services such as administrative, health and education services using labour and capital. The government makes monetary transfers to households. Finally, the government also builds and maintain public infrastructure which has an impact on total factor productivity that is taken into account.

	1 year	5 years	10 years
Policy reforms for growth
- Raising competition in the tradable sector (-10% in markup)	2.4%	1.2%	1.3%
- Raising competition in the non-tradable sector (-10% in markup)	-0.4%	0.3%	0.2%
-Increasing the value for money of public infrastructure investment	0.001%	1.0%	1.1%
-Improving public infrastructure maintenance by 0.5% of GDP	0.9%	1.7%	4.3%

Note: Reforms in the tradable and non-tradable sectors corresponds to a reduction in the mark-up rate by 10%.

Source: Technical Background Paper, Cahu and Fall (2022).

Main findings and recommendations

MAIN FINDINGS	RECOMMENDATIONS (key in bold)
Inflationary pressures and the risk of inflation expectations de-anchoring from the central bank’s target have accentuated. The central bank has started increasing the policy interest rate.	Increase the policy interest rate if needed to keep inflation expectations well anchored to the midpoint of the target band.
Households’ non-performing loans have increased, in particular, non-performant mortgages have increased noticeably. The ratio of smaller banks’ credit losses to net interest income has increased while their profitability was already low.	Strengthen prudential regulation of credit distribution to low-income earners. Increase prudential requirements of small banks to prevent the deterioration of their financial position.
Public debt is historically high and spending pressures, if not addressed, could put it on an unsustainable path while the spending ceiling rule had been suspended following the outbreak of the pandemic. The economy is recovering, the broad fiscal support to firms and the subsidy for employment are not necessary anymore. Government wage bill is high.	Maintain a progressive consolidation strategy to bring back debt on a sustainable path, notably by reinstating and strengthening the spending rule, for example by developing fiscal anchors. Phase out the broad fiscal support and target resources toward the poor, unemployed and vulnerable sectors. Index future wage increases to aggregate productivity growth. Increase the efficiency of public expenditure through better procurement and contracting.
Government exposure to state-owned enterprises (SOEs) is high and represents a significant risk to debt sustainability. Underperformance of SOEs is widespread due to mismanagement, corruption, overstaffing and uncontrolled wage bill.	Privatise state-owned enterprises operating in competitive markets when the economic situation improves. Separate clearly the responsibilities of the board and the management of SOEs by giving the board the mandate to strategically supervise, monitor and audit the management of SOEs.
Corruption remains a source of leakage in public finances. The work of the State Capture Commission revealed widespread corruption in public entities, but prosecution is slow.	Improve the prosecution process and enforcement of national and foreign corruption sanctions for offences. Increase the accountability and reinforce the independence of the National Prosecuting Authority.
Public procurement remains the weakest component in the management of public funds. The Auditor General found consistently material irregularities pertaining to non-compliance in procurement processes.	Adopt and implement the public procurement bill proposal. Consider more centralisation of purchasing activities. Develop a competency framework strategy for upskilling of public procurement officials, with a clear mapping of competences needed, certifications and training.
The CO₂ per GDP emission intensity is high. The energy intensity of the economy is high. Coal remains the main source of energy. Lack of electricity is holding back production. Load shedding is permanent.	Reduce exemptions to the carbon tax progressively and gradually increase its level. Increase and accelerate the procurement of renewable electricity from independent power producers. Proceed with the separation of Eskom and to the creation of the transmission entity.
Vaccination is relatively low compared to emerging countries.	Reinforce evidence-based and transparent educational campaigns to improve public trust in vaccines and tackle misinformation.
Public transportation is underdeveloped and expensive. Transport costs remain high and competition low.	Restore management capacity and effectiveness of PRASA, the state-owned company responsible for metro trains service, for a well-functioning multimodal transport system.
Supply of public bus and rail transport services is insufficient Poor households tend to commute by time-consuming walking or are rationed by the high costs of minibus services.	Accelerate the deployment of the integrated national transport regulator to ease the cooperation between rail transport providers. Expand the Bus Rapid Transit systems to more cities using the Public Transport Network Grant.
Youth unemployment rate is at 57 percent, and 30 percent of them are not in education, employment or training.	Address skills mismatches and ease school-to-job transition. Increase awareness of the youth employment tax incentives and simplify access costs for SMEs.
The gender pay gap is higher than the OECD average and in most emerging countries.	Enforce equal pay legislation and favour women’s access to higher position for more gender equality.
Collective bargaining remains confrontational. Wage bargaining is held at a relatively high level, at industry level. Automatic extension of terms negotiated between larger firms and unions to smaller firms is a concern for employment in SMEs. Job separation can be overly long, uncertain and costly. The number of cases referred to the Commission for Conciliation, Mediation and Arbitration on labour issues have increased.	Streamline the bargaining system, including the rules to form a bargaining council, their representativeness and the extension of their agreements. Mandate the CCMA or the NDELAC secretariat to provide assistance and relevant information to bargaining council members before negotiations. Strengthen the initial sorting of claims brought to the Commission and limit the number of appeals and the time allowed to appeal.
Unemployed between 19 and 64 years old are excluded from social transfers. Poverty incidence remains high at 46.6% relative to the upper-bound poverty line.	Strengthen the social transfer system to cover unemployed individuals by, for instance, making permanent the Social Distress relief grant with a sustainable source of revenue. Consider an additional means-tested support on top of the child grant for children in very poor households.
The take up rate of the microbusiness regime is low.	Simplify access to the microbusiness regime and link administrative and social benefits to registration and take up of the microbusiness regime.
Skills mismatch is high. The economy is constrained by the scarcity of skilled workers. Access to job information is difficult. The public employment service is weak. Only around 12% of unemployed workers are receiving an unemployment insurance benefit. Spending on labour activation programme is modest.	Increase the practical course content and the worker-firm matching at an early stage. Upgrade the basic skills by increasing the quality of primary and secondary schools, further developing vocational training and adult learning. Strengthen the public employment service by increasing its capability and upskilling its workforce. Scale up the Labour Activation Programmes of the UIF to considerably increase the number of individuals participating in skills development and training programmes.

MAIN FINDINGS

RECOMMENDATIONS (key in bold)

Maintaining monetary and prudential policies’ stance

Inflationary pressures and the risk of inflation expectations de-anchoring from the central bank’s target have accentuated. The central bank has started increasing the policy interest rate.

Increase the policy interest rate if needed to keep inflation expectations well anchored to the midpoint of the target band.

Households’ non-performing loans have increased, in particular, non-performant mortgages have increased noticeably.

The ratio of smaller banks’ credit losses to net interest income has increased while their profitability was already low.

Strengthen prudential regulation of credit distribution to low-income earners.

Increase prudential requirements of small banks to prevent the deterioration of their financial position.

Improving public spending to stabilise the debt level

Public debt is historically high and spending pressures, if not addressed, could put it on an unsustainable path while the spending ceiling rule had been suspended following the outbreak of the pandemic.

The economy is recovering, the broad fiscal support to firms and the subsidy for employment are not necessary anymore.

Government wage bill is high.

Maintain a progressive consolidation strategy to bring back debt on a sustainable path, notably by reinstating and strengthening the spending rule, for example by developing fiscal anchors.

Phase out the broad fiscal support and target resources toward the poor, unemployed and vulnerable sectors.

Index future wage increases to aggregate productivity growth.

Increase the efficiency of public expenditure through better procurement and contracting.

Government exposure to state-owned enterprises (SOEs) is high and represents a significant risk to debt sustainability.

Underperformance of SOEs is widespread due to mismanagement, corruption, overstaffing and uncontrolled wage bill.

Privatise state-owned enterprises operating in competitive markets when the economic situation improves.

Separate clearly the responsibilities of the board and the management of SOEs by giving the board the mandate to strategically supervise, monitor and audit the management of SOEs.

Corruption remains a source of leakage in public finances.

The work of the State Capture Commission revealed widespread corruption in public entities, but prosecution is slow.

Improve the prosecution process and enforcement of national and foreign corruption sanctions for offences.

Increase the accountability and reinforce the independence of the National Prosecuting Authority.

Public procurement remains the weakest component in the management of public funds.

The Auditor General found consistently material irregularities pertaining to non-compliance in procurement processes.

Adopt and implement the public procurement bill proposal.

Consider more centralisation of purchasing activities.

Develop a competency framework strategy for upskilling of public procurement officials, with a clear mapping of competences needed, certifications and training.

Stronger, faster, and inclusive growth

The CO₂ per GDP emission intensity is high. The energy intensity of the economy is high. Coal remains the main source of energy.

Lack of electricity is holding back production. Load shedding is permanent.

Reduce exemptions to the carbon tax progressively and gradually increase its level.

Increase and accelerate the procurement of renewable electricity from independent power producers.

Proceed with the separation of Eskom and to the creation of the transmission entity.

Vaccination is relatively low compared to emerging countries.

Reinforce evidence-based and transparent educational campaigns to improve public trust in vaccines and tackle misinformation.

Public transportation is underdeveloped and expensive.

Transport costs remain high and competition low.

Restore management capacity and effectiveness of PRASA, the state-owned company responsible for metro trains service, for a well-functioning multimodal transport system.

Supply of public bus and rail transport services is insufficient

Poor households tend to commute by time-consuming walking or are rationed by the high costs of minibus services.

Accelerate the deployment of the integrated national transport regulator to ease the cooperation between rail transport providers.

Expand the Bus Rapid Transit systems to more cities using the Public Transport Network Grant.

Youth unemployment rate is at 57 percent, and 30 percent of them are not in education, employment or training.

Address skills mismatches and ease school-to-job transition.

Increase awareness of the youth employment tax incentives and simplify access costs for SMEs.

The gender pay gap is higher than the OECD average and in most emerging countries.

Enforce equal pay legislation and favour women’s access to higher position for more gender equality.

Collective bargaining remains confrontational. Wage bargaining is held at a relatively high level, at industry level.

Automatic extension of terms negotiated between larger firms and unions to smaller firms is a concern for employment in SMEs.

Job separation can be overly long, uncertain and costly. The number of cases referred to the Commission for Conciliation, Mediation and Arbitration on labour issues have increased.

Streamline the bargaining system, including the rules to form a bargaining council, their representativeness and the extension of their agreements.

Mandate the CCMA or the NDELAC secretariat to provide assistance and relevant information to bargaining council members before negotiations.

Strengthen the initial sorting of claims brought to the Commission and limit the number of appeals and the time allowed to appeal.

Unemployed between 19 and 64 years old are excluded from social transfers.

Poverty incidence remains high at 46.6% relative to the upper-bound poverty line.

Strengthen the social transfer system to cover unemployed individuals by, for instance, making permanent the Social Distress relief grant with a sustainable source of revenue.

Consider an additional means-tested support on top of the child grant for children in very poor households.

The take up rate of the microbusiness regime is low.

Simplify access to the microbusiness regime and link administrative and social benefits to registration and take up of the microbusiness regime.

Skills mismatch is high. The economy is constrained by the scarcity of skilled workers.

Access to job information is difficult. The public employment service is weak.

Only around 12% of unemployed workers are receiving an unemployment insurance benefit.

Spending on labour activation programme is modest.

Increase the practical course content and the worker-firm matching at an early stage.

Upgrade the basic skills by increasing the quality of primary and secondary schools, further developing vocational training and adult learning.

Strengthen the public employment service by increasing its capability and upskilling its workforce.

Scale up the Labour Activation Programmes of the UIF to considerably increase the number of individuals participating in skills development and training programmes.

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