Authors : Amarakoon Bandara, Mary Manneko Monyau
GDP growth declined from 3.8% in 2014 to an estimated 1.5% in 2015 but is projected to slightly increase to 1.6% in 2016. This improvement is due to an anticipated expansion in the tourism, construction and financial sectors. The poor performance of government revenue against the background of high recurrent expenditures continues to constrain the fiscal space.
The depreciation of the South African rand against the US dollar (USD) has resulted in a decline in prices of imports from South Africa. This trend, along with weak domestic demand, tight liquidity conditions and declines in crude oil and global food prices, resulted in negative inflation. Annual average inflation declined from -0.2% in 2014 to -2% in 2015. Inflation is projected to remain negative in 2016 and 2017.
The country remains in debt distress, exacerbated by the lack of a diversified export base and declining terms of trade that make it difficult for the country to adjust to changing world demand for tradable goods. These structural weaknesses have constrained the country’s ability to generate high and sustainable growth that is necessary to mitigate the debt distress. Moreover, the external position is projected to remain under severe pressure in the medium term on account of poor export and import performance on the back of an appreciating US dollar. The Public Debt Management Act, passed into law in September 2015, is expected to strengthen the legal and institutional framework for debt management.
The fiscal space remains constrained due to underperformance of domestic revenues, increase in public expenditures, depressed exports, limited foreign direct investment (FDI) and other capital inflows into the country. This has undermined development expenditure and social services provision in both urban and rural areas, exacerbating the incidence of poverty. Financing for urban development, both housing and transport, has been negatively affected.
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