Summary: Feb 26 IMF Staff Report on South Africa

IMF Country Report No. 26/34 (February 2026)

The latest IMF staff report’s core message is that South Africa’s near-term recovery has strengthened, but medium-term living-standards gains will depend on faster structural reform—especially in electricity, logistics and the broader investment climate.

Recent Macroeconomic Performance & Growth Outlook

• Growth momentum improved through 2025 after a weak 2024. Following 0.5% growth in 2024 and a flat outcome in 2025 Q1, activity rebounded in 2025 Q2–Q3 (0.9% and 0.5% quarter-on-quarter), led by robust private consumption supported by lower inflation, lower interest rates and rising real wages. Net exports weighed on growth amid falling export volumes linked to US tariff measures and trade-policy uncertainty, although investment recovered in 2025 Q3 after several weak quarters.

• The IMF’s baseline projects modest but improving growth: real GDP of about 1.3% in 2025 and 1.4% in 2026, rising gradually toward roughly 1.7% by 2028 (with staff appraisal also framing a gradual lift toward about 1.8% over the medium term if reforms deepen). The output gap remains slightly negative/near closed, implying limited slack.

• Disinflation created space for easing and a major policy signal. Average inflation fell to 3.2% in Jan–Nov 2025 (from 4.4% in 2024), while the policy rate was reduced by 150 bps since September 2024 to 6.75%. National Treasury confirmed a new 3% inflation point target with a ±1 percentage point tolerance band (to be implemented over the next two years), which the report notes was welcomed by markets.

  
  

Labour Market Conditions & Jobs Outlook

• Labour market conditions improved modestly but remain structurally weak. The unemployment rate declined to 31.9% in 2025 Q3, supported by hiring in construction, trade, and community/local services. However, non-farm employment declined even as total employment and the labour force rose modestly, signalling that job creation remains insufficient for a young and growing population.

• Youth unemployment is still exceptionally high despite a small improvement: 58.5% in 2025 Q3 (down from 60% at end-2024). Real wages rose 0.7% year-on-year in 2025 Q3, driven largely by public-sector wage increases.

• The report argues that durable, employment-rich growth requires labour-market and spatial reforms alongside infrastructure fixes. It highlights how spatial inequality and costly commuting constrain job matching and labour mobility, citing very high transport costs (40–85% of labour income) for low-income households. Proposed measures include better-located affordable housing (supported by zoning and permitting reforms), expanded high-capacity urban public transit and formalisation of informal transport, improved rural connectivity (including road upgrades), and labour-demand reforms such as shortening dispute-resolution timelines, streamlining dismissal processes for some categories of workers/new hires, and allowing targeted exemptions for SMEs from collective agreements.

  
  

Structural Reform Progress & Infrastructure Outlook

1. Public infrastructure investment pipeline and financing tools

   The IMF frames infrastructure investment as a key lever for both growth and employment. Public investment is expected to exceed R1 trillion over three years, supported by the reconfigured Budget Facility for Infrastructure, infrastructure bonds, a new credit-guarantee vehicle, strengthened PPP reforms with streamlined regulations, and improved management of contingent liabilities.

2. Electricity: concrete milestones reached, next steps still critical

   Electricity market reform reached a major implementation milestone in November 2025, when NERSA approved the Market Operator licence for the National Transmission Company of South Africa (NTCSA), enabling the formal establishment of the South African Wholesale Electricity Market. The market code and supporting rules are progressing (grid-capacity allocation rules issued by end-2025; electricity trading rules scheduled for early 2026).

   The report also notes remaining gaps: a revised market code was released for public comment, pre-qualification for Independent Power Transmission (ITP) projects was launched, and Eskom reported a profit for the six months to September 2025 due to improved performance—but a fully independent transmission system operator is still pending.

3. Logistics: initial private access steps, but regulatory and SOE constraints persist

   On rail/logistics, eleven private companies qualified (August) to access Transnet’s freight rail network across 41 routes, expected to add 20 million tons of freight annually. However, the introduction of fully independent transport and ports regulators is still pending, and Transnet required substantial additional government guarantees (R94.8 billion, plus R51 billion earlier in 2025) to support operations and debt—underscoring both progress and the fiscal/contingent-liability risk.

4. Water sector and other “network industries”

   Water-sector reforms remain pending in the report’s scorecard (including establishing an independent economic regulator and strengthening governance of the National Water Resources Infrastructure Agency). The report also flags reforms aimed at modernising payments infrastructure (opening the national payment system to non-banks/fintechs) as part of broader economic infrastructure upgrades.

   
   

Overall

The IMF Staff Report No. 26/34 is explicit that entrenched bottlenecks—especially inadequate infrastructure and structural rigidities—still constrain South Africa’s ability to achieve its growth potential. It argues that accelerating reforms in electricity and logistics is central to unlocking private investment, raising economic growth and enabling private sector-led job creation. The report reinforces that delays in electricity and transport reforms could renew shortages and disruptions, erode confidence, worsen unemployment/inequality, and raise financing costs—while faster reform implementation is presented as the key upside scenario for stronger growth and jobs.

Link to full staff report here:

IMF Staff Report_Feb26.pdf

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