2. Macroeconomic and fiscal context in South Africa

The decade following the global financial crisis has been characterised amongst emerging and developing economies by relatively robust average growth rates. Buoyed by an accommodative monetary policy environment, intensifying global trade and accompanying overall benign investor sentiment, emerging and developing economies managed to grow at high rates and outperformed OECD economies (Figure 2.1). While OECD countries expanded their economies on average by 2% annually before the COVID-19 pandemic, Sub-Saharan Africa achieved a growth rate of around 3.5%. China and India experienced economic growth of 7.7% and 6.7% respectively.

With an average growth rate of about 1.7% between 2010 and 2019, South Africa’s economic performance has been relatively modest compared to other BRICS economies throughout the last decade. Growth rates trended downwards in the aftermath of the 2008/2009 recession in South Africa, with economic expansion weakening further in recent years, held back largely by structural country-specific factors. Supply side constraints in key network industries such as electricity – resulting in still regular power outages - telecommunications and transportation have played a major role in modest growth outcomes, combined with low levels of business confidence amid policy uncertainty (OECD, 2021[1]). As a result, real per capita income has also been falling since 2015 and is now back to its level in 2005 (World Bank, 2021[2]).

South Africa’s level of inequality is a challenge and progress in enhancing the wellbeing of its citizens has been slower relative to major improvements during the previous two decades. Structural inequality remains persistent due to a highly unequal distribution of income and wealth, as well as low intergenerational mobility. Income inequality, measured by the consumption expenditure Gini coefficient (0.65), decreased between 2006 and 2010. However, since then this decline has not continued despite increasing social transfers to over 3% of GDP, which has been higher than in many other developing countries or the OECD average (OECD, 2020[3]). Wealth inequality with a Gini coefficient of 0.9 is even higher (Orthofer, 2016[4]). The percentage of the population below the upper-middle-income-country poverty line (USD 5.50 per day per person) fell from 68% to 56% between 2005 and 2010 but has since trended slightly upwards to 57% in 2015 and was projected to reach 60% in 2020. Unemployment also remains high and has been growing from 22% in 2008 to 34% in the third quarter of 2021 after a steep decline of over 10% during the early 2000s. Currently the unemployment rate is highest among young people, at around 63% (World Bank, 2021[2]). Unmet needs in education, health and infrastructure and corruption have also been a policy challenge (Figure 2.2). These factors highlight the need to reduce income and wealth inequality in South Africa, including through the tax system.

While the economy’s relatively rapid recovery after the global financial crisis was aided by expansionary fiscal policy and public investment, investment growth has declined since then. This has contributed to the lower economic growth in recent years in a context of also declining private investment (Figure 2.3). Investment has weakened, particularly in the manufacturing sector, reflecting a deterioration in solvency but also in the business climate more broadly, with exacerbating factors including rising political uncertainty and social risks (OECD, 2021[1]). Public investment in infrastructure by state-owned enterprises (SOEs) and the general government has been the dominant supporting factor for economic growth in recent years (National Treasury of South Africa, 2021[5]). Increasing public investment from 3.6% to 5% of GDP would boost potential growth if cost containment and planning as well as a better cost-benefit analysis are implemented (OECD, 2020[3]). This highlights the importance of domestic resource mobilisation to support such investments.

The challenging economic growth trajectory and decline in investment growth has been accompanied by a fall in overall productivity. While total factor productivity had accelerated to reach 3% in the 2000s, it has slowed sharply following the 2008/2009 recession and together with a contraction in employment, has triggered a decline in growth. The loss in productivity has particularly been concentrated in important, often state-owned, network industries such as the utilities, mining, construction, and telecommunications sectors (Hausmann et al., 2022[6]).

The post-global financial crisis period has been marked by sustained capital flows to South Africa, with some risks due to potential volatility. Capital inflows have supported economic growth and supplemented to some extent the decline in domestic investment. In recent years, however, South Africa has become more reliant on relatively large but volatile portfolio investment flows, despite foreign investors having reduced their investment in the economy on net (Figure 2.4). A similar story also applies to direct investment, albeit to a lower extent. In terms of bilateral partners, the United Kingdom and the Netherlands account for over half of FDI liabilities (stocks). The United States account for approximately half of portfolio investment liabilities (stocks).

Over the past two decades, South Africa has gradually increased its investment outflows, largely explained by the loosening of exchange controls. Net FDI outflows have been largely positive but on a downward trend since 2014 and entered negative territory during the recent pandemic. The largest FDI assets have consistently been liabilities of China, South Africa’s largest export destination. Major destinations are also the United Kingdom, the United States and the European Union, but also smaller international financial centres (IFCs) such as Jersey, Mauritius or Switzerland. While less in overall size but still substantial, portfolio investments and to a lesser extent bank assets have also been invested in the United Kingdom and the United States but also in IFCs such as the Isle of Man, Luxembourg and Guernsey.

As a result, the net international investment position has turned positive in 2015, primarily due to changes in the valuation of South Africa’s currency. South Africa’s position is expected to moderate further in the medium term due to consistently large current account deficits, though these have reversed since the COVID-19 crisis. While the asset position has been largely fuelled by direct investments, the liabilities side consists to a large extent of portfolio investments (around 50% during the last decade). Due to South Africa’s deep capital markets, implying a low reliance of domestic banks on foreign capital funding and prudential limits to foreign exchange liabilities of banks, foreign portfolio investments flow into domestic equity and bonds. This means that foreign investors rather than domestic borrowers absorb the currency risk associated with these investments and react to changes in economic fundamentals, business sentiment and policy uncertainty. As South Africa’s liabilities are mostly denominated in local currency and its international assets in foreign currency, any shock to the economy which causes exchange rate depreciation will also tend to improve the level of the net international investment position and vice versa (Benetrix et al., 2019[7]).

Recently South Africa has started the process of further liberalising its capital account following the country’s request to adhere to the OECD’s Code of Liberalisation of Capital Movements (CLCM) in October 2017. This entails the replacement of the existing exchange control regulation with a new capital flow management system. The present system, which has been in place since 1995 and gradually adapted to the increasing global integration of South Africa’s economy, allowed the country to attract important inward capital flows supporting domestic investment. Some scholars have argued that restrictions on outward investments were aimed at protecting the limited domestic savings and prohibiting undesired capital outflows (Farrell and Todani, 2006[8]). Non-residents thus could invest freely in domestic capital and money markets and were able to buy and sell securities and instruments. In contrast, investments abroad by residents and domestic companies had been largely restricted and required prior authorisation from the Reserve Bank and National Treasury. The exchange regulation system, however, has suffered from several issues such as a lack of monitoring of financial outflows by non-residents or outflows to the other Common Monetary Area countries, which, despite having substantially implemented similar exchange control systems, their financial and regulatory systems may not reflect the same level of sophistication (Wang et al., 2007[9]).1

The regulatory shift to the capital flow management system can assist in South Africa’s efforts to combat IFFs by realigning resources and improving capital flow management. This approach is aligned with the multilateral CLCM and consists primarily of a fundamental change in the legislative perspective applied to capital flows. While South African legislation so far operates under a ‘positive list’ approach, where cross-border capital movements are subject to approval or not permitted unless stated otherwise, the CLCM applies a ‘negative list’ approach where everything is permitted unless otherwise stated (OECD, 2021[10]). By relying on a transparent, risk-based approval framework, the new capital flow management system aims to more thoroughly monitor cross-border capital flows and prudentially regulate foreign exposure of banks and institutional investors according to global best practices. Moreover, reinforcing co-operation between relevant authorities is expected to further mitigate risks to the country’s tax and investment base such as base erosion and profit shifting, illicit financial flows (IFFs) and tax evasion. This approach should also further foster South Africa’s attractiveness as an investment destination and a financial hub more generally.

When the global financial crisis hit in 2008/09, South Africa had been running small budget surpluses. The debt-to-GDP ratio was under 30% (Figure 2.5). This allowed for increased government spending, part of which was initially justified as countercyclical stimulus, but which was not subsequently reversed. Persistent fiscal deficits have since caused a strong increase in the debt-to-GDP ratio. Some attempts at fiscal consolidation have been made over the last decade. These were supported primarily by tax increases, while aggregate spending kept growing or failed to decline as a share of GDP. The main drivers of these spending increases were above-inflation growth in the public sector wage bill, rising debt-service costs, and liquidity support for SOEs (OECD, 2020[3]). The fiscal position was thus already challenging prior to the COVID-19 pandemic, with the fiscal deficit in 2019 standing at 4.9% of GDP and the debt-to-GDP ratio at 56.3%.

South Africa belonged to the top 10 global economies in terms of outstanding external debt by the end of 2019. Its external debt stock rose by 9% during 2018-2019, largely driven through its USD 5 billion sovereign issuance, its largest ever issued international bond. This bond alone accounted for 25% of all bond issuance in Sub-Saharan Africa (World Bank, 2021[11]). Largely resulting from its well-developed domestic capital market, South Africa has about 90% of its public debt denominated in its domestic currency, while 10% is held in foreign currency. The continuing depreciation of the Rand since the global financial crisis has thus had a more limited effect on the value of outstanding foreign debt. However, a large proportion of this debt is held by foreigners (South African Reserve Bank, 2021[12]). South Africa lost its investment-grade credit rating from all major rating agencies in March 2020, raising debt service costs even higher. As of April 2020, Standard & Poor’s has lowered the rating further into non-investment grade. However, recent efforts to switch out of shorter-term bonds into longer-dated debt have prolonged the maturity profile and should allow South Africa to better manage refinancing risks.2

National Treasury projections of South Africa’s debt-to-GDP trajectory for the medium term expect a continuation of this challenging fiscal environment. Despite scenario updates, in light of the already challenging environment before the pandemic, implemented policy initiatives to support the economy and resulting contractions in GDP due to protracted lockdowns have put further upward pressure on the debt ratio (National Treasury of South Africa, 2021[5]). Due to recent windfall revenues from the commodity sector, however, the most recent revision of the forecast projects debt reaching stabilisation in 2024/2025 at a level of 75% of GDP (Figure 2.6). This outlook, however, remains contingent on the envisaged restraints in expenditure growth and supporting measures to raise economic growth.

South Africa’s tax-to-GDP ratio has been constantly well above comparable developing and middle-income economies but lower than the OECD average. In 2018, South Africa’s tax-to-GDP ratio stood at 24%, which is lower than the OECD average of 34%, but considerably higher than other African countries or the average of large emerging economies such as in Brazil, China, India or South Africa (BRICS) (Figure 2.7). During the period of 2009 to 2018, the ratio increased from 21% to 24% of South African GDP, exceeding the growth rates in the BRICS, other African countries and also the OECD, moving South Africa closer to the tax-to-GDP levels of advanced economies. South Africa’s tax system is discussed in more detail in Chapter 4.

In light of increasing spending needs, the government announced several tax policy changes in the 2022 budget for both firms and households. In an effort to simultaneously alleviate the tax burden for companies and broaden the income tax base, the corporate income tax rate will be lowered from 28% to 27% as of 1 April 2022. This will be accompanied by a limitation in interest deductions and assessed losses. The personal income tax brackets and rebates will be increased by 4.5%, in line with the inflation rate.

The government has also started to rebuild the tax administration following several challenging years associated with corruption and state capture charges. Following the recommendations of the SARS Commission, a body inquiring into past governance failures at the institution, SARS has started to renew its focus by expanding specialised audit and investigative skills (SARS Commission, 2018[13]). For instance, enhanced assessment by the re-established Large Business Centre includes the abuse of transfer pricing, tax base erosion and tax crime. The agency also started to deepen its technological capacity as well as data analytics and artificial intelligence capabilities (SARS, 2020[14]). In February 2020, following the recommendations of the Davis Tax Committee, SARS established a dedicated unit to better enforce compliance of high and ultra-high net wealth individuals with regards to complex financial arrangements (discussed further in Chapter 3). These measures are expected to facilitate improved tax collection and enhanced tax compliance. To fund increased responsibilities and technological implementation, additional spending of ZAR 3 billion has been allocated to SARS (National Treasury of South Africa, 2021[5]). These efforts to strengthen the tax administration come amid increasing public debate around the importance of successfully tackling illicit financial flows (IFFs) in their various forms and strengthening domestic resource mobilisation, as will be discussed below.

The COVID-19 pandemic has worsened the economic and fiscal outlook in South Africa. Due to the rapid spread of the virus as of early 2020 and the subsequent stringent lockdown introduced at the end of March, South Africa’s economy suffered a sharp contraction in the second quarter of 2020. Relative to the fourth quarter of 2019, GDP contracted by just over 16% during the first and the second quarter, dwarfing the impact of the global financial crisis and any other contraction period in South African historical data.3 The economic contraction has also been more severe compared to the OECD or the average of emerging market economies (Figure 2.8). Nearly all industries experienced a significant drop in activity in the second quarter. While service and finance industries showed some resilience and suffered an average reduction in growth of 30.7%, the primary and secondary sectors were most affected due to a decline in global demand, a disruption of global supply chains, and a drop in commodity prices. Output in mining, tourism, construction and manufacturing fell by up to 75% (South African Reserve Bank, 2021[12]). Despite a relatively speedy recovery following the interim lifting of restrictions through the third quarter, growth has since been uneven across sectors as restrictions have been put in place again amid subsequent waves of COVID-19. As a result, a full economic recovery to pre-pandemic levels is expected to take between 3 and 5 years (OECD, 2021[15]).

In an attempt to alleviate its impact, South Africa responded to the pandemic with a series of decisive fiscal policy measures. The government remained committed to supporting firms and households despite limited fiscal space. All available social grants were augmented and new schemes were implemented to provide support to workers including those in the informal sector. Specific schemes were activated targeting businesses in the hardest-hit sectors such as tourism. Programmes such as the COVID-19 loan guarantee scheme, initially implemented in early 2021 (ZAR 18.1 billion or 0.4% of GDP guaranteed by the end of March), were extended until June 2021. Eligibility to the COVID-19 social relief of distress grants for low-income households and the temporary employment relief scheme have been extended to up to six months, both programmes ending in March 2023. Funding for the public employment initiative and for provincial hospitals was increased by ZAR 11 billion (0.2% of GDP) in 2021/22. Up to ZAR 10.3 billion had been provided for the vaccination rollout over the next two years, adding potentially ZAR 7 billion in supplementary contingency funding given uncertain vaccination campaign expenses.

Emergency provision of liquidity has further been accompanied by tax measures to temporarily reduce the tax burden for companies and citizens. The tax policies implemented on an immediate basis range from tax deferrals and more flexible tax debt repayment or tax refunds to tax rate cuts (OECD, 2021[16]). South Africa allowed large businesses to apply directly to the tax administration to defer tax payments without incurring penalties if they could prove that they were unable to pay their tax liability as a result of the COVID-19 crisis. There were temporary increases to tax deductions for charitable donations. Changes to the corporate tax base to provide liquidity support included the following measures: South Africa postponed the decision to limit net interest expense deductions to 30% of taxable income and to limit the use of assessed losses carried forward to at least January 2022. Companies could also profit from accelerated tax refunds. Moreover, households were granted an increase in the annual contribution limit to tax free savings accounts by ZAR 3 000 from 1 March 2020 to increase savings. Overall the government mobilised over 10% of GDP (around ZAR 500 billion, with ZAR 200 billion as contingent liability) for new spending, reprioritisation, tax relief and loan guarantees. Despite the implementation of these supportive policy measures, the impact of the pandemic on the tax base has nonetheless led to significantly diminished tax revenues and the largest tax shortfall on record (National Treasury of South Africa, 2021[5]).

The implementation of emergency tax measures and the accompanying shortfall in tax revenues has resulted in further challenges for South Africa’s debt situation. Debt sustainability has significantly deteriorated as the debt-to-GDP ratio grew from about 53% in early 2019 to over 70% in late 2020 and is expected to continue to increase further. Amid falling tax revenues, debt-service costs as a share of total tax revenues have surged from a 14% in 2019 to 19% in 2021 and are projected to increase further following a slight reduction in 2022 (Figure 2.9). Debt-service costs have thus turned into the fastest growing expenditure item in the budget and may result in crowding-out of social and economic public investments.

In addition, South Africa’s response to the economic challenges arising from the pandemic involved an aggressive easing in monetary policy. Between July 2019 and July 2020, SARB gradually lowered the repurchase (“repo”) rate, the policy rate of the central bank, from 6.75% to 3.5%, an easing of 325 basis points. The strong monetary policy response to the pandemic was shaped primarily by the clear disinflation that started in 2017 and by 2020 had opened up policy space. The repo rate was kept constant for most of 2020 and 2021 to alleviate the contraction and support the recovery (Loewald, 2021[17]). However, due to rising inflation, SARB has started to raise the repo rate with two consecutive 25 basis point increases reaching 4% with further gradual increases expected to follow. In addition, the Reserve Bank increased its interventions in the money market to provide more liquidity to financial institutions and ease lending conditions. SARB has also initiated a program to buy government bonds in the market, ensuring the liquidity of the debt market.

Despite the strong policy response, the pandemic hit South Africa’s labour market hard, creating strong cyclical underemployment. Largely a result of containment measures during the first two quarters in 2020, the employment rate fell by about 6%. As people dropped out of the labour force, the participation rate declined by 13% (Figure 2.10, Panel A). Moreover, people temporarily stopped looking for work, which caused the unemployment rate to fall temporarily amid an increasing trend (Figure 2.10., Panel B). Although the labour market showed signs of recovery from the third quarter of 2020 onwards, largely driven by the public sector, both the employment and the participation rate remained significantly below their pre-crisis levels. Also unemployment bounced back to an even slightly higher rate than before the crisis-induced drop. The flattening of all curves after the interim recovery points to potentially protracted negative effects of the pandemic for the quarters to come. This lack of labour market resilience, however, is not unique to the current pandemic (Duval, Ji and Shibata, 2021[18]). Unemployment in South Africa is more responsive to business cycle movements than in other emerging and advanced economies, partly reflecting inflexible labour market institutions, relatively low prevalence of informality and high cyclicality of youth unemployment.

The pandemic also had a significant impact on capital flows to the African continent and South Africa in particular. FDI flows to Africa declined from USD 47 billion in 2019 by 16% in 2020 to USD 40 billion – a level last seen 15 years ago. FDI inflows to South Africa declined by 39% in 2020 on a year-on-year basis, facing the largest slump by an individual country on the continent during the early phase of the pandemic. Cross-border mergers and acquisitions, although forming a relatively small part of total inflows, took the largest hit and dropped by 52% (UNCTAD, 2021[19]).

The COVID-19 crisis further illustrated the dynamics at work during sudden stops of more volatile portfolio flows. Compared to the global financial crisis, similar factors have been identified as the main triggers for the sharp reversal in non-resident capital flows to emerging economies. The sudden outflow in February 2020 had largely been triggered by a sudden shift in investors’ risk appetite towards safe-haven assets as well as country-specific factors such as a decline in economic activity, also putting pressure on the currency (Figure 2.11) (de Crescenzio and Lepers, 2021[20]). Scale and speed, however, have been about four times larger than during the global financial crisis. South Africa, as a commodity exporter, was also hit by a second, parallel exogenous shock when commodity prices fell sharply (though these have risen recently). As a result, non-resident capital flows into South African assets switched from a net inflow of about USD 10.6 billion in 2019 to a net outflow of about USD 6.6 billion in 2020 (South African Reserve Bank, 2021[12]). Later in 2020, when capital flows again picked up substantially across many emerging market economies, domestic pull factors such as the decisive macroeconomic policies to alleviate the crisis impact played an important role. However, given the outlook of a relatively slow economic recovery, a full recovery in investment flows may lag behind other large emerging economies.

Like in many other advanced and emerging countries, the pandemic has brought South Africa’s economic and structural challenges to the forefront. South Africa’s difficult situation of subdued growth, rising debt levels, socio-economic challenges of high inequality, poverty and unemployment rates leaves the country with limited fiscal space. While the situation was already challenging prior to the pandemic, COVID-19 has exacerbated these issues and the risks to a speedy recovery and the medium-term economic growth outlook have become more pronounced.

Fiscal support by the government has been rapid and comprehensive to alleviate the effects of the pandemic. However, while additional measures have been designed to underpin the economic recovery, they may further jeopardise debt sustainability and raise debt-service costs. Existing socio-economic challenges are likely to remain and may turn worse as past pandemics have been shown to often widen inequality further and may have ripple effects on poverty (Furceri et al., 2020[21]).

Curtailing IFFs and combatting tax evasion are thus important to reinforce South Africa’s fiscal position and increase its potential for revenue growth. The need to return to a sustainable fiscal path amid spending pressures to alleviate ad hoc pandemic and long-term structural challenges will demand continued financial efforts from the government. Moreover, achieving the SDGs will require mobilising additional funding, in particular domestic resources, to finance public goods and services. While liberalising the capital account may attract important investment flows, more work is needed to ensure IFFs can be kept in check by capable and well-funded tax and financial authorities. This will help broaden the tax base and strengthen domestic resource mobilisation to raise much needed tax revenues and build greater confidence in public administration.


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[20] de Crescenzio, A. and E. Lepers (2021), “Extreme capital flow episodes from the Global Financial Crisis to COVID-19: An exploration with monthly data”, OECD Working Papers on International Investment, No. 2021/05, OECD Publishing, Paris, https://dx.doi.org/10.1787/d557b9c4-en.

[18] Duval, R., Y. Ji and I. Shibata (2021), Labor Market Reform Options to Boost Employment in South Africa.

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[21] Furceri, D. et al. (2020), “Will Covid-19 affect inequality? Evidence from past pandemics”, Covid Economics, Vol. 12, pp. 138-157, https://cepr.org/file/9050/download?token=R4U7P5E8.

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[5] National Treasury of South Africa (2021), Budget Review 2021, http://www.treasury.gov.za/documents/National%20Budget/2021/review/FullBR.pdf.

[22] National Treasury of South Africa (2020), Budget Review 2020, http://www.treasury.gov.za/documents/national%20budget/2020/review/FullBR.pdf.

[16] OECD (2021), COUNTRY TAX MEASURES IN RESPONSE TO COVID-19 PANDEMIC, https://www.oecd.org/tax/covid-19-tax-policy-and-other-measures.xlsm (accessed on 7 September 2021).

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[3] OECD (2020), OECD Economic Surveys: South Africa, OECD Publishing, Paris, https://dx.doi.org/10.1787/2218614x.

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[14] SARS (2020), Strategic Plan: South African Revenue Service, 2020/21 - 2024/25, https://www.sars.gov.za/wp-content/uploads/Enterprise/Strat/SARS-Strat-24-SARS-Strategic-Plan-2020-2021-2024-2025-11-May-2020.pdf.

[13] SARS Commission (2018), Commission of Inquiry into Tax Administration and Governance by SARS - Final Report, http://www.thepresidency.gov.za/download/file/fid/1462.

[12] South African Reserve Bank (2021), Quarterly Bulletin March 2021, https://www.resbank.co.za/content/dam/sarb/publications/quarterly-bulletins/quarterly-bulletin-publications/2021/march-2021/01Full%20Quarterly%20Bulletin%20March%202021.pdf.

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[9] Wang, J. et al. (2007), The Common Monetary Area in Southern Africa: Shocks, Adjustment and Policy Challenges, https://www.imf.org/external/pubs/ft/wp/2007/wp07158.pdf.

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[2] World Bank (2021), South Africa Economic Update, Edition 13 : Building Back Better from COVID-19 with a Special Focus on Jobs, World Bank, https://openknowledge.worldbank.org/handle/10986/35987.


← 1. The countries comprising the Common Monetary Area are Eswatini, Lesotho, Namibia and South Africa.

← 2. According to National Treasury of South Africa (2020[22]), government bonds worth ZAR 247 billion have been switched into longer-term debt since 2015.

← 3. Data available online at the South African Reserve Bank, historical macroeconomic time series information since 1960, gross domestic product at market prices (KBP6006D).

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