Structural reforms required to encourage investment

October 2021 News

South Africa requires creative and innovative solutions to put the economy back on a sustainable financial path. Structural reforms are needed to enable a more business-friendly environment aimed at encouraging investment to grow the economy.

The country has benefited in recent months from a commodities boom which provided an unexpected tax windfall.

This has resulted in an unprecedented trade surplus – meaning that more capital has flowed into the country than out of it. This has helped to underpin the rand, contained inflation and kept interest rates at historical lows. The state’s finances have benefited from the mining sector’s stellar results through improved tax collections, which has, in turn, increased calls for a universal basic income grant.

No commodity boom lasts forever. What happens when the price of commodities inevitably cools and the state’s finances no longer benefit from improved tax collections? Any commitment to a universal basic income grant must be based on sustainable sources of revenue.

All indications are that the recent economic tailwinds are not enough to alleviate the tenuous position of the country’s debt to GDP ratio or avoid further future ratings downgrades unless government is able to reign in public sector expenditure.

South Africa’s economy was in trouble even prior to the Covid-19 pandemic, characterised by low levels of growth, growing unemployment and poor business confidence. The pandemic has exacerbated the challenges facing the country.

The fragile state of the economy is reflected in the disappointing month-on-month manufacturing output figures. According to Statistics South Africa, manufacturing production fell by 0,7% for the third consecutive month in June this year, indicating that a recovery in this sector has stalled and failed to reach pre-Covid levels.

There is extensive research available showing a strong correlation between economic growth and social stability. The former must urgently be prioritised with quick wins from low hanging fruit. These include the introduction of a business-friendly regulatory environment, which is aimed at restoring private sector confidence and encouraging investment into local operations.

Labour laws need to be amended so that they don’t dissuade businesses from hiring staff. We need to increase the beneficiation of extracted minerals into higher-value products and urgently increase the country’s manufacturing output. At the same time our country’s youth need to be armed with the necessary skills to ensure their employability in a rapidly approaching Industry 4.0 world.

South Africa requires creative but practical policies that enable inclusive economic growth, boost confidence and encourage investment. The country has the potential to create a more positive future for itself, fuelled by opportunities for greater levels of trade because of the African Continental Free Trade Agreement. The time is now ripe for meaningful reform.


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