2010.07.1912:52:00UTC+00South Africa Should Exit Stimulus Policy Gradually, OECD Says

The South African economy has returned to growth after experiencing its first recession in 17 years, an economic survey by the Organization For Economic Co-operation and Development showed Monday. However, the report cautioned that the macroeconomic policy stimulus should be withdrawn only gradually, as and when the fledgling recovery takes hold.

The OECD said, "The country's monetary policy framework is sound, but could be refined to bolster the credibility of the inflation targets and to exploit scope for limiting exchange rate fluctuations, to the extent this is compatible with achieving the primary goal of keeping inflation within the target range."

The report also pointed out that the South African Reserve Bank has always tended to accumulated reserves, amid strong appreciation pressures, while refraining from intervening to resist depreciation.

However, the organization suggested that a more active foreign exchange intervention, providing for a more rapid accumulation of reserves while allowing depreciation, could mitigate overvaluation.

The report also found that the country faces an extreme and persistent low employment problem and structural reforms are needed to improve labor market conditions.

While the unemployment rate fell steadily from 2002 through 2007, helped by the strong cyclical upswing, it never fell below 20% and by the first quarter of 2010 was back above 25%, near the levels of 2004. In South Africa, the problem is most extreme for black youth, for whom the unemployment rate exceeds 50%.

"South Africa should leverage the positive impact of the World Cup to improve living standards by boosting job creation and exports," OECD Secretary-General Angel Gurr?a said at the launch of the OECD of South Africa in Pretoria today. He added, "Fiscal policy can be tightened over the cycle and made more countercyclical, to help offset private capital inflow surges that accompany commodity price booms; foreign exchange intervention can be used more actively, as long as this is consistent with keeping inflation within the target band; and remaining controls on capital outflows can be removed." According to the survey, South African GDP may grow 3.3% this year and accelerate to 5% next year. The economy contracted 1.8% last year. The jobless rate is expected to be at 24.5% this year and may fall slightly to 24% in 2011.

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