SOUTH AFRICA ECONOMIC UPDATE EDITION 13 back better Building back better COVID-19, from COVID-19, special focus with a special focus on jobs SOUTH AFRICA ECONOMIC UPDATE EDITION 13 Building back better from COVID-19, with a special focus on jobs © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Cover design: Piotr Ruczyński, London, United Kingdom and Wojciech Wolocznik, Cambridge, United Kingdom Interior design and typesetting: Piotr Ruczyński, London, United Kingdom Contents vi Acknowledgements vi This Work vii Abbreviations and Acronyms 1 Executive Summary 7 PART 1  Recent Economic Developments 8 Real Sector Developments 13 Labor Markets and Poverty 13 Fiscal Developments 17 Monetary Policy and Financial Sector Developments 18 External Sector 20 Outlook and Risks 31 PART 2  South Africa’s Labor Markets and Impacts of the COVID-19 Pandemic 32 South Africa’s labor market has performed poorly in the past decade 34 The pandemic exerted a heavy toll on the labor market 36 COVID-19 widened inequalities in the labor market 39 Government’s Response to the Pandemic and Policy Options Going Forward 41 Rebuilding South Africa’s labor market after the pandemic 45 Conclusion 47 References 49 Appendix 1 Boxes 8 BOX 1.1 Structural constraints to growth 21 BOX 1.5 South Africa’s economy benefits in South Africa from high commodity prices 9 BOX 1.2 COVID-19 infections in South Africa 27 BOX 1.6 South Africa’s public finances are 10 BOX 1.3 The impact of the pandemic vulnerable to stress in global financial markets on micro-, small, and medium enterprises 33 BOX 2.1 Measuring the labor market impact 15 BOX 1.4 Public expenditure allocation: of the COVID-19 pandemic in South Africa A cross-country comparison 44 BOX 2.2 Unlocking entrepreneurship and self-employment in South Africa Figures 2 FIGURE E.1 South Africa’s contraction in 2020 was 20 FIGURE 1.12 The post-pandemic rebound deep, and recovery in 2021 will be moderate may be moderate 4 FIGURE E.2 Richer workers lost earnings, but poorer 21 FIGURE B1.5.1 Notable improvement in terms workers lost more jobs of trade from 2020 8 FIGURE 1.1 South Africa is falling behind its peers 21 FIGURE B1.5.2 Higher mining exports were driven 10 FIGURE B1.3.1 Early in the pandemic, South African by prices rather than volumes firms saw the largest decreases in sales 22 FIGURE 1.13 Household savings are decreasing 10 FIGURE B1.3.2 South Africa’s MSMEs increasingly after rising during the pandemic use digital technologies 22 FIGURE 1.14 Vaccination is lagging 12 FIGURE 1.2 COVID caused the largest economic 25 FIGURE 1.15 2021 Budget path requires a significant contraction in 25 years reduction in the primary deficit 12 FIGURE 1.3 Investment declined sharply 27 FIGURE B1.6.1 Public debt is mostly domestic 13 FIGURE 1.4 Labour market challenges persist 27 FIGURE B1.6.2 Local yields remain relatively high 13 FIGURE 1.5 Despite the lower cost of debt, weak 32 FIGURE 2.1 A decade of poor labor market outcomes growth now affects fiscal sustainability 32 FIGURE 2.2 Over the last decade, jobs growth was 14 FIGURE 1.6 Public debt dynamics modest in almost all categories 14 FIGURE 1.7 Interest payments were already rising 33 FIGURE 2.3 South Africa is experiencing a before 2020 amid a rising stock of debt demographic opportunity 34 FIGURE 2.4 Young people face acute unemployment 15 FIGURE B1.4.1 Fiscal deficit widened markedly over rates the last decade 34 FIGURE 2.5 More than 4 million young people are not 15 FIGURE B1.4.3 Wage bill is comparatively high working or studying 15 FIGURE B1.4.2 Interest payments on government 35 FIGURE 2.6 The COVID impact: Employment declined debt are comparatively high fast and recovers slowly 15 FIGURE B1.4.4 Public gross fixed capital formation is 35 FIGURE 2.7 South Africa’s labor market did worse comparatively low than most of its peers during the crisis 17 FIGURE 1.8 Policy rate is at historically low level 35 FIGURE 2.8 The size of the labor market keeps 18 FIGURE 1.9 Current account dynamics were shrinking favourable in 2020 36 FIGURE 2.9 The share of workers who worked zero 19 FIGURE 1.10 Yield spread on government bonds has hours spiked in Q2 2020 widened 36 FIGURE 2.10 Poorer workers were much more likely 19 FIGURE 1.11 Financial account was in deficit in 2020 to lose jobs 36 FIGURE 2.11 Among people who kept their jobs, 38 FIGURE 2.13 Unequal impacts of job losses across higher-wage workers suffered bigger earnings losses labor market subgroups 38 FIGURE 2.12 Unequal impacts of job losses across 43 FIGURE 2.14 Self-employment — South Africa’s demographic subgroups biggest opportunity to create jobs Personal Perspectives 11 PERSONAL PERSPECTIVE 1.1 Managing guest houses 38 PERSONAL PERSPECTIVE 2.2 Small-scale farmer during the pandemic benefits from emergency funding 35 PERSONAL PERSPECTIVE 2.1 From cleaner 40 PERSONAL PERSPECTIVE 2.3 Restaurants — 86 Public to cakemaker Tables 14 TABLE 1.1 Evolution of consolidated expenditure 40 TABLE 2.2 Summary of the social protection 16 TABLE 1.2 COVID-19 relief package in FY2020 response 20 TABLE 1.3 Baseline forecasts 46 TABLE 2.3 Time horizon, beneficiary population, and fiscal costs of suggested policy measures 23 TABLE 1.4 Main risks and opportunities to the outlook 49 TABLE A.1 Employment composition, by labor market category, 2019 39 TABLE 2.1 Simulated welfare losses in 2020 for the typical South African vi  |  Building back better from COVID-19, with a special focus on jobs Acknowledgements This report was prepared by a team led by Benedicte Baduel (Senior Economist), Facundo Cuevas (Senior Economist), and Wolfgang Fengler (Lead Economist). The core team also included Haroon Bhorat, Wendy Cunningham, Indermit Gill, Dumisani Sihle Ngwenya, Alexandra Soininen and Benjamin Stanwix. Excellent research support was provid- ed by Osman Kaan Inan. Mariam Isa Alkhalifa researched the personal perspectives of South African stakeholders. The work was carried out under the guidance of Marie Francoise Marie-Nelly (Country Director, Southern Africa), Mathew Verghis (Practice Manager), and Pierella Paci (Practice Manager). Lolette Kritzinger-van Niekerk (Consultant) acted as an advisor for the report. The team is grateful for the contribution of Elwyn Davies, Peter Lohmus, Thulani Matsebula, Claudia Meek, Zandile Ratshitanga, and Marc Schrijver. The team also benefitted from valuable feedback from Sebastien C. Dessus, Shantayanan Devarajan, Michael Sachs, Max Alier, Cesar Calderon, and Kevin Warui Njiraini. Piotr Ruczyński designed and typeset the report. The report was edited by Peter Milne and Janine Thorne. The team also thanks Mmaserole Magdeline Mabuela and Barbara Skwarczyńska for administrative support. This Work This is the 13th edition of the South Africa Economic Update (SAEU) report — a biannual World Bank flagship publica- tion on the state of South Africa’s economy. The report series forms an important aspect of the World Bank’s ana- lytical program in various middle-income client countries. Each SAEU comprises two sections: the first summarizes the recent economic developments and outlook, and the second takes a deeper analytical look at a topic of special interest and relevance to the country. This report, which comes after an interruption of two years, focuses on the impact of the COVID-19 crisis on South Africa, particularly on the job market, where it has exposed severe structural weaknesses. The labor market had been marked by high levels of unemployment and inactivity even before the crisis; these have been exacerbated by the pandemic. Inequality is widening because of significant and unequal job losses, which affected low-wage workers almost four times as badly as high-wage ones. The report suggests a sequenced set of interventions to strengthen job recovery. These include temporary support programs, more permanent changes in government finances, and a redi- rection of government policies to support job creation and entrepreneurship. The COVID-19 pandemic created an op- portunity to accelerate the reforms needed for a higher growth trajectory and a more inclusive and resilient economy. We sincerely hope that the analysis in this SAEU will contribute to the national debate on this important topic and help inform policy decisions that can re-energize South Africa’s economy and labour market. vii Abbreviations and Acronyms ALMP Active Labor Market Programs ETI Employment Tax Incentive GDP Gross domestic product ILO International Labour Organization MTEF Medium-Term Expenditure Framework NEDLAC National Economic Development and Labour Council NEET Not in Employment, Education, or Training NIBUS National Informal Business Upliftment Strategy QLFS Quarterly Labour Force Survey PMI Purchasing Managers’ Index SARB South African Reserve Bank SARS-CoV-2 Severe acute respiratory syndrome coronavirus 2 TERS Temporary Employee/Employer Relief Scheme 1 Executive Summary Main messages The government’s crisis response has been sound. South Africa is set to emerge from the crisis weaker than it had been going into it. Howev- er, this Economic Update argues that the reasons for low growth and high unemployment do not lie in the government’s crisis response, which has generally been sound. Economic growth is expected to rebound in 2021, but the medi- um-term outlook is uncertain. Growth is expected to reach 4 percent in 2021, slowing to 2.1 percent in 2022 and 1.5 by 2023. The global recovery is helping South Africa, especially given strong performance by China and the United States, two of its main trading partners. With deeper economic reforms, South Africa could benefit even more from the high growth in its trading partners. The COVID-19 crisis is widening inequality by contributing to severe and unequal job losses. Low-wage workers suffered almost four times more job losses than did high-wage ones. Although a modest job recov- ery has started, it is at risk from the severe third wave of the pandemic. Young entrepreneurs are one of South Africa’s best hopes of solving the jobs crisis. Self-employment represents only 10 percent of all jobs, as against 30 percent in most upper-middle-income economies, such as Turkey, Mexico, and Brazil. The emerging start-up sector in South Africa could help close this gap. In response to COVID-19, the Government of South unfolding as this report is being published. Only a rap- Africa implemented one of the most severe lockdowns id increase in vaccinations could help contain the pan- on the continent. By the end of June 2021, the coun- demic in South Africa. try had recorded more than 1.9 million COVID-19 cases and over 60,000 deaths in two waves of the pandem- The government also enacted a significant relief pack- ic. Without the government’s robust response, the hu- age to counter the adverse impacts of the lockdown on man costs of the pandemic could have been even higher. economic activity, especially for low-wage workers and However, like many other countries, South Africa could poorer households (Bhorat and Kohler, 2020). Despite not avoid a third wave of COVID-19 infections, which is these measures, the economy shrank by 7 percent in 2020, 2  |  Building back better from COVID-19, with a special focus on jobs a decline exceeded by only three major emerging econ- despite two quarters of employment growth, the num- omies — Argentina, India, and Mexico, all of which are ber of employed people had fallen by nearly 1.5 million, expected to recover strongly in 2021. and the wages of workers who still had jobs had fallen by 10 – 15 percent. With the combined loss of employ- For 2021, the World Bank projects growth in the gross ment and earnings, the average South African of work- domestic product (GDP) of 4 percent, followed by 2.1 ing-age was about 18 percent worse off at the end of the percent in 2022 and 1.5 percent in 2023. The global re- year than at its start. covery is helping South Africa, especially given strong performance by China and the United States — two of Young entrepreneurs are one of South Africa’s best its key trading partners. However, other emerging mar- hopes for solving the jobs crisis. There are an increas- kets are recovering faster (Figure E.1) which suggests that ing number of start-ups, especially in the digital sector, South Africa’s economy would benefit from being inte- which are growing fast and could in future become an grated even more effectively into global value chains. engine of jobs growth. But for the entrepreneurship eco- system to realize its full potential, its key weaknesses Among other concerns, the crisis is exposing struc- need to be resolved. A vibrant start-up sector could also tural weaknesses in the job market. Even at the best help close the relative gap in self-employment (own-ac- of times, South Africa’s labor market had been marked count workers with own businesses, freelancers). Self- by high levels of unemployment and inactivity. The cri- employment represents only 10 percent of jobs in South sis has made a bad situation worse. By the end of 2020, Africa, as against about 30 percent in most upper-mid- FIGURE E.1 South Africa’s contraction in 2020 was deep, and recovery in 2021 will be moderate COVID-19-related contractions and projected recovery rates, 2020 and 2021 2021 Recovery (projected) Weak Moderate or strong (worse than +4%) (better than +4%) Relatively resilient Forging ahead Moderate or none Saudi Republic United Nigeria Kenya Australia China Vietnam Arabia of Korea States (better than -4%) Sub-Saharan Africa average World average 2020 Contraction (preliminary) Left behind Quick recovery Severe Brazil Canada Germany Argentina India France South (worse Africa than -4%) United Italy Japan Russia Mexico Spain Kingdom Source: World Bank Global Economic Prospects. Note: 2020 GDP growth rates better than -4% are defined as moderate and worse than -4% as severe. For 2021, projected recovery rates below 4% are regarded as weak and above 4% as strong. Executive Summary  |  3 dle-income economies, including Turkey, Mexico, and zation for Economic Co-operation and Development Brazil. If South Africa were to match the self-employ- (OECD) and Asia. ment rate of its peers, it could potentially halve its un- employment rates. However, South Africa remains vulnerable to rising global yields, given its high financing requirements. South Africa is set to emerge from the crisis weaker Favorable commodity prices and weak domestic demand than it had been going into it; however, this Economic should continue to support the current account balance Update argues that the reasons for this do not lie in the in 2021. This, along with the country’s flexible exchange government’s crisis response, which has been general- rate and low foreign currency-denominated debt, would ly sound. Instead, the pandemic has exposed long-stand- help reduce its vulnerability to the type of “taper tan- ing structural weaknesses that have progressively wors- trum” that occurred in 2013. However, although the gov- ened since the global financial crisis of 2008 – 09. For ernment reduced its financing needs for 2021 because of this reason, as the economy recovers, South Africa would better-than-expected revenues last year, public sector bor- benefit most if the government would simultaneously rowing requirements will remain elevated over the medi- implement structural reforms. These include temporary um term. This makes South Africa vulnerable to chang- support programs, more permanent changes in govern- es in financial market sentiment, given that more than ment finances, and a redirection of government poli- one-quarter of its domestic debt is held by foreigners. cies to support job creation and entrepreneurship. The Domestic saving levels are high, which could substitute COVID-19 pandemic created an opportunity to accelerate for foreign investment, but this would inevitably crowd the reforms needed for a higher growth trajectory and a out resources for private investment and translate into more inclusive and resilient economy. weaker economic growth. For the South African economy to create prosperity, A fragile macroeconomy generate jobs, and improve public finances and debt dynamics, there is only one path — higher growth. COVID-19 has brought the deepest recession since the South Africa’s peers have been showing the way. Since end of apartheid. South Africa’s GDP shrank by 7 percent 2000, the typical middle-income economy had almost in 2020, more than in almost all other emerging econo- doubled its per capita income before the COVID-19 pan- mies. Falling GDP and fiscal revenues, combined with a demic. South Africa’s economy grew relatively more slow- sizeable relief package, saw the fiscal deficit growing to ly in the past two decades, its labor market outcomes 12.9 percent of GDP and public debt to 78.8 percent of worsened in the last decade, and its public finances had GDP. Unlike advanced economies that can service debt been deteriorating rapidly before the pandemic. The at low interest costs, South Africa faces high debt costs; country now faces three main, interconnected challenges: its debt service burden is now close to 5 percent of GDP. This crowds out resources for much-needed developmen- • Growth. Should South Africa not use the crisis as an tal spending, including public investment. inflection point, it risks suffering another lost decade. After a decade of low growth that left the average South In 2021, South Africa benefited from better global mar- African poorer in 2019 than in 2010, the pandemic has ket conditions, which reversed the risk aversion at the made things even worse for workers and their families. beginning of the pandemic. In the first half of 2020, Broad-based structural reforms could unlock growth the worsening global outlook and the loss of South Af- and competitiveness and support sound public fi- rica’s last investment grade rating in March 2020 led to nances. Recent examples include the opening of the significant capital outflows, a widening of government energy sector to private sector electricity generation bond spreads, and a depreciation of the currency. How- and regulatory changes in the transport sector to im- ever, since the end of 2020, global financial market con- prove freight rail and ports. Such reforms are need- ditions have improved, benefiting emerging countries ed to restart private sector investment, create more such as South Africa. Even though the country is yet to jobs for the growing working-age population, sup- scale up its vaccination program, it has already bene- port fiscal sustainability, and take advantage of ex- fited from improved market sentiment in the Organi- ternal growth drivers. 4  |  Building back better from COVID-19, with a special focus on jobs • Jobs. The economy suffers not only from weak eco- another economic shock, it could enter a very diffi- nomic growth on the back of weak private invest- cult macroeconomic terrain. ment but also from persistently high inequality, large- ly because the worsening labor market has kept more young people out than it has allowed in. South Africa Rising inequality has a working-age population of almost 40 million people, of which only 15 million are employed, in- The crisis is widening already high levels of inequali- cluding 3 million in the public sector. The pandemic ty. A welfare loss of this magnitude is to be expected in has increased unemployment by more than 1 million a severe crisis. More worrying in a country that is already to 7 million, which means that South Africa now has the most unequal in the world is the differential impact a record high unemployment rate of 33 percent. Of of the crisis on the poorer half of the population. Most equal importance are the 17 million South Africans notably, the differential sectoral and occupational effects who are not playing an active part in the labor mar- of the lockdowns and demand contractions have trans- ket. Of these, about 3 million appear to have stopped lated into greater job losses among poorer workers than searching for work altogether. among those who are better off (Figure E.2). In contrast, among people who kept their jobs, wages fell more for • Debt. By straining public finances, COVID-19 also weak- those with higher earnings. However, since employment ened the country’s macroeconomic position. South losses have wider income implications, the pandemic has, Africa entered the global financial crisis in 2008 with overall, increased the extent of inequality in the country. a reputation for fiscal conservatism and prudent debt management. In contrast, it entered the COVID-19 crisis To strengthen job recovery, a sequenced set of inter- with a fragile fiscal framework, a public debt-to-GDP ventions would combine time-bound emergency sup- ratio of 63 percent, and growing contingent liabilities port for poorer workers with reforms to increase the from state-owned enterprises, including the energy size of the labor market. This report proposes measures utility, Eskom. These debt levels are not yet destabi- in four categories (see Part 2 for details): lizing, especially as the country benefits from a deep domestic financial sector. Exchange rate risks are also • Strengthen the labor market linkages of temporary limited, as South Africa issues only 12 percent of its government programs. First, expand and deepen the debt internationally. However, should it encounter employment tax incentive to enhance access to jobs, FIGURE E.2 Richer workers lost earnings, but poorer workers lost more jobs a. Only 40% of jobs lost have been b. Earnings fell more for richer c. Poor workers have lost more than recovered workers others Number of employed (millions) Real monthly wage (Jan 2021 R, thousands) Employment relative to 2020Q1 (percent) 16.5 25 100 16.0 20 90 15.5 15 80 15.0 10 70 14.5 5 14.0 0 60 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2019 2020 2019 2020 Poorest 20% Quintile 2 Quintile 3 Quintile 4 p10 p25 p50 Richest 20% p75 p90 Source: World Bank staff. Executive Summary  |  5 particularly for those facing more constraints to integra- Third, give employers access to funds in the Unem- tion into the labor market, such as young people and ployment Insurance Fund to supplement the wages women. Second, continue the Temporary Employee/ of part-time workers. Fourth, develop institutions for Employer Relief Scheme (TERS) for lockdown-damaged active labor market programs, especially monitoring sectors until a sizeable share of firms are once again and evaluation systems to improve the targeting and operational. Both measures should be time-bound. efficiency of the currently fragmented system. • Consider a moratorium on measures that have neg- ative employment implications. The government In summary and its National Economic Development and Labour Council (NEDLAC) partners could consider a tempo- A sequenced set of policy measures aimed at preserv- rary suspension of regulations that increase the real ing macroeconomic stability, revitalizing the jobs mar- cost of labor and make job recovery more difficult. ket, and improving the investment climate is needed The moratorium should be strictly time-bound (12 – 18 to build a better and more inclusive economy after months) and linked to the pandemic and its econom- the pandemic. There is a risk that the recovery leaves be- ic consequences. It should be used primarily to ben- hind most of the potential economically active popula- efit vulnerable people, who have disproportionately tion, particularly young job seekers, which would mean lost their jobs during the last year. that the pandemic permanently impaired the country’s long-term development prospects. Conversely, if South • Revisit the approach to entrepreneurship, self-em- Africa were to engineer a broad-based recovery, this dec- ployment, and micro and small businesses. First, re- ade could bring new prosperity. lax legal constraints and rules that prevent the devel- opment of these economic activities. Second, scale up Addressing structural constraints to growth behind programs that provide both entrepreneurial training and at the border could support exports and higher and start-up grants to address other barriers to entry. growth, and so preserve the sustainability of public fi- Partly for historical reasons, South Africa has strin- nances. The experience of major emerging economies, gent regulations that constrain entrepreneurs and free- including South Africa, shows that the two most potent lance and own-account workers more than in other factors for reducing public debt-to-GDP ratios are eco- upper-middle-income countries. As noted, self-em- nomic growth and primary surpluses. The implied pri- ployment in South Africa constitutes just 10 percent orities are self-evident: a better climate for investment of total employment, as against about 30 percent in and trade, and prudent fiscal policy. the average upper-middle-income country. Thus, if South Africa were to raise its self-employment ratios To generate employment, South Africa would have to to the average of upper-middle-income countries, un- address three chronic problems in its labor market: employment rates could potentially be halved. extremely high rates of inactivity, high rates of unem- ployment, and low levels of self-employment. Along • Improve the governance of active labor market pro- with enacting carefully chosen regulations to improve the grams. First, systematically incorporate job search and business climate and investing in the workforce through training modules into active labor market programs, better education, the government can implement reforms such as the Expanded Public Works Programme and to encourage self-employment and support the growth the Presidential Employment Stimulus, to help pre- of micro- and small enterprises. Moreover, active labor pare beneficiaries for entering the labor market. Sec- market polices could help match job seekers with em- ond, incentivize labor intermediation services to help ployment opportunities aligned with their abilities (see firms re-engage workers and quickly resume business. Part 2 of this report). PART 1  Recent Economic Developments Main messages 1. The global economic outlook offers an opportunity for South Africa. Favorable commodity prices and the global recovery support the recovery of the local economy in 2021. The external sector could be a driver of growth after the pandemic at a time when domestic drivers remain weak. This would also support public finances and might smooth the adjustment needed to achieve the government’s fiscal targets. 2. Better growth prospects over the medium term require addressing long-standing structural constraints. Broad- based structural reforms would unlock growth and competitiveness and support sound public finances. Such reforms are needed to restart private sector investment, create more jobs for the growing working-age population, and take advantage of the external drivers of growth. 3. Fiscal policy priorities are to preserve macro-stability and increase the impact of budget spending. This requires improving the allocation and efficiency of budget resources while containing overall spending. This would be critical for restoring investor confidence and would avoid the growing interest payments crowding out much- needed economic and social expenditure even further. It would also reduce the vulnerability of public finances to changes in the global financial conditions. 8  |  Building back better from COVID-19, with a special focus on jobs Real Sector Developments FIGURE 1.1 South Africa is falling behind its peers GDP per capita before and after the global financial crisis, South Africa entered the pandemic 1999 – 2020 in a weak position Real terms, index 220 South Africa’s economic growth has been slowing since 210 the 2008 global financial crisis. After increasing on av- 200 erage by 4 percent per year between 1999 and 2008, an- 190 nual growth in the gross domestic product (GDP) decel- erated to 1.7 percent over 2010 – 19. With the population 180 increasing by about 1.5 percent a year, per capita GDP has 170 contracted since 2015 in real terms. Real per capita in- 160 come is now almost back to its 2005 level. This contrasts 150 with South Africa’s middle-income peers — although they 140 had also been affected by the global financial crisis, most 130 have recovered and continued to see growth in real GDP 120 per capita in the past decade (Figure 1.1). 110 100 South Africa’s low growth is predominantly structur- 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 al. Many factors contributed to the country’s lack of eco- nomic dynamism over the past decade. Some are exter- South Africa nal, such as the end of the commodity super cycle that Lower Middle Income Countries (simple average) lasted from the early-2000s to the aftermath of the glob- Upper Middle Income Countries (simple average) al financial crisis. However, domestic constraints have High Income Emerging Markets (simple average) played a significant role (Box 1.1). Source: World Bank staff calculations based on World Economic Outlook data. BOX 1.1 Structural constraints to growth in South Africa South Africa faces a range of constraints to a higher growth • High cost of non-tradable inputs. The energy, information trend (World Bank 2018). These constraints have affected the and communication technology, and transport sectors are productivity and competitiveness of local firms — both internal dominated by state-owned enterprises. Inefficiencies, a lack (leading to weak profitability, growth, and job creation) and ex- of competition, and the absence of a level playing field have ternal (leading to a loss of market share in global trade). Over contributed to high costs. Power outages have been a fea- the past decade, they have also eroded business confidence ture of electricity supply over the past 14 years. and, hence, private investment. These constraints include: • Limited competition in product markets. Corporate owner- • Skills scarcity in the labor force. Despite slow and steady ship across the economy is skewed toward a few large firms progress, the legacy of “bantu education” continues to de- that have conglomerate-style structures or are vertically in- prive South Africa of the skills its economy needs. The coun- tegrated. This created high barriers to entry in product mar- try’s weak economic prospects and policy uncertainty have kets, which put smaller and new firms at a disadvantage. contributed to the emigration of skilled workers, whereas • Policy uncertainty and deteriorating state capacity. South its immigration regulations have hampered the inflow of Africa has strong institutions, a vibrant democratic system, skilled migrants. and a generally capable civil service. Yet institutional quality • Skewed distribution of land and productive assets. The has been eroded. A perceived rise in corruption, associated ownership of wealth and land is still highly concentrated, with “state capture” in the last decade, contributed to policy uncertainty and declining business confidence. Public ser- although some progress has been made. Weak property ti- vice capacity has been weakened, as the number of politi- tling, especially in poor and informal areas, limits the value cal (rather than merit-based) appointments has grown. This, of land, including as collateral for accessing finance. Calls combined with a lack of skills, has affected service delivery. for land expropriation without compensation and certain aspects of the third Mining Charter have fueled concerns The government’s Economic Reconstruction and Recovery about property rights. Plan recognizes these constraints and aims to address them. PART 1  Recent Economic Developments  |  9 South Africa was hit hard by the COVID-19 crisis with domestic constraints, such as recurring electricity outages, this led economic activity to contract by 0.4 per- South Africa has been severely affected by the COVID-19 cent on a quarterly basis in January – March. The strict pandemic. Between the first confirmed case in early lockdown that followed brought domestic production March 2020 and June 2021, 1.9 million South Africans to a standstill (Box 1.3), and real GDP fell by 16.6 percent have been infected with COVID-19, and over 60,000 peo- quarter-on-quarter in April – June. The gradual easing of ple have lost their lives (Box 1.2). restrictions from May 2020 helped GDP growth rebound to 13.7 percent quarter-on-quarter in July – September. The economy contracted by 7 percent in 2020. The de- Despite some restrictions during the ‘second wave’ of the mand and supply shocks from the pandemic severely pandemic, economic activity continued to normalize in affected economic growth in the first half of 2020. The the fourth quarter (October – December). Supported by contraction in global demand already started to affect a rebound in global activity, GDP growth reached 1.4 per- economic activity in the first quarter of 2020. Combined cent quarter-on-quarter in the last quarter of 2020. BOX 1.2 COVID-19 infections in South Africa South Africa’s first case of COVID-19 was announced on March Notwithstanding the country’s strong measures to contain 5, 2020, after being confirmed by the National Institute for the pandemic, the health impact has been severe, as in oth- Communicable Diseases. The country entered a strict lock- er emerging countries (Figures B1.2.1 and B1.2.2). By end- down from March 27 to April 30, 2020, in part to give the June 2021, over 13 million tests had been conducted, and health system enough time to prepare. As the economy grad- over 1.9 million positive cases had been identified. The recov- ually reopened, infections increased sharply, peaking at over ery rate was 88.6 percent at that time, but over 60,000 peo- 10,000 cases per day in July 2020. The death toll, howev- ple have lost their lives to the virus since the beginning of the er, remained limited. Following the emergence of the more pandemic. Over half of these deaths have occurred since early contagious Beta variant of SARS-CoV-2 towards year-end, the December 2020. The vaccination program has been slow and country experienced a second wave in December 2020 and at the end of June, a little over 3 million vaccinations have been January 2021. Daily infections spiked above 20,000 cases. administered. Of these doses, only 470,000 are confirmed South Africa has since entered a third wave of the pandemic complete vaccinations mainly for health care workers through in June 2021 and confirmed daily infections have once again the Sisonke trial which was carried out using the single-dose spiked above 20,000 cases and have exceeded the peak Johnson and Johnson vaccine and the rest are mostly first dos- reached during the second wave. es of the BionTech Pfizer vaccine which requires two doses. FIGURE B1.2.1 Daily new confirmed COVID-19 cases FIGURE B1.2.2 Total deaths per million people, per million people June 30, 2021 Cases per million people (7-day rolling average) Brazil 800 United Kingdom 700 United States 600 Mexico 500 Chile 400 300 South Africa 200 Russia 100 Turkey 0 India Indonesia 04/2020 05/2020 06/2020 07/2020 08/2020 09/2020 10/2020 11/2020 12/2020 01/2021 02/2021 03/2021 04/2021 05/2021 06/2021 Japan South Africa Brazil Indonesia 0 500 1000 1500 2000 2500 India Mexico Turkey Deaths per million people Sources: National Institute for Communicable Diseases, National Treasury, ourworldindata.org, www.gov.za 10  |  Building back better from COVID-19, with a special focus on jobs BOX 1.3 The impact of the pandemic on micro-, small, and medium enterprises The COVID-19 pandemic and the associated lockdown have The collapse in MSME activity translated into wage cuts, re- profoundly affected micro-, small, and medium enterprises duced hours, and layoffs. In the May 2020 survey, 43 percent (MSMEs) in South Africa. This partly reflects the large share of firms reported having laid off workers. By November, one- of MSMEs in sectors such as hospitality or social and per- third of firms reported layoffs and almost half reported hav- sonal services, which were among the worst affected by the ing to cut wages or hours. lockdown. Survey data from May 2020a showed that 47 per- The use of digital technologies increased during the crisis. cent of surveyed firms were closed, with informal firms being In the November 2020 survey, 91 percent of firms with more the most affected. Among firms that remained open, sales than five employees said they used digital platforms for sales, dropped by close to 70 percent year-on-year (Figure B1.3.1). and 47 percent reported having invested in digital solutions, Because of the operating constraints, the financial position an increase from May (Figure 1.3.2). Businesses led by young of the MSMEs deteriorated — about two-thirds of firms in the people were more likely to use digital solutions, whereas infor- survey either were already in or expected to fall in arrears. As mal firms were less likely to use such technology. the lockdown eased, their situation improved, but many still experienced multiple shocks. By November 2020, 14 percent Access to government support programs improved between of MSMEs in the survey remained closed, with food services May and November 2020, but many needs remained un- (32 percent) and transportation (29 percent) being the most met. About 28 percent of MSMEs reported accessing gov- affected. MSMEs also reported sales to be half to one-third ernment support by November, up from only 15 percent in lower than before the pandemic; microenterprises reported May. Microenterprises were least likely to have obtained gov- the largest declines. ernment support. FIGURE B1.3.1 Early in the pandemic, South African FIGURE B1.3.2 South Africa’s MSMEs increasingly use firms saw the largest decreases in sales digital technologies Average change in sales, May 2020 survey Share of firms using digital platforms, May 2020 survey Turkey Brazil Vietnam South Africa Ghana Indonesia Indonesia Nigeria Vietnam Brazil Turkey Zimbabwe Nigeria India Kenya Kenya South Africa Zimbabwe -70 -60 -50 -40 -30 -20 -10 0 0 10 20 30 40 50 60 70 80 Percent Percent Source: South Africa Business Pulse Survey; global comparison from Davies et Source: South Africa Business Pulse Survey; global comparison from Davies et al. 2021 based on Business Pulse Survey and Enterprise Surveys conducted in al. 2021 based on Business Pulse Survey and Enterprise Surveys conducted in sub-Saharan Africa. sub-Saharan Africa. Note: Conditional average, controlling for size, sector, and timing of the survey. Note: Conditional average, controlling for size, sector, and timing of the survey. Conditional averages might differ from unconditional averages reported in Conditional averages might differ from unconditional averages reported in country reports. country reports. a. The World Bank conducted a survey of 2,200 firms in May 2020 and a follow-up survey with a smaller sample of 600 firms in November, with the Department of Small Business Development. Both surveys are part of a World Bank effort to measure the impact of COVID-19 on the private sector through the Business Pulse Surveys. Among the economic sectors, only agriculture and gen- demic-related restrictions on farming. General govern- eral government services showed positive growth in ment services increased by 0.7 percent year-on-year, af- 2020. Supported by a bumper harvest and good weather, ter growth of 1.7 percent in 2019. the gross value added by the agricultural sector increased by 13.1 percent on an annual basis (year-on-year) after a Mining activity remained depressed, despite favora- 6.9 percent decline in 2019. Other positive factors were ble global commodity prices. The real gross value add- growing external demand and a smaller impact of pan- ed by mining and quarrying contracted by 11.2 percent PART 1  Recent Economic Developments  |  11 in 2020, although rising commodity prices meant that it half of the year, these sectors recovered to some extent. declined by only 1.2 percent in value. The need to imple- However, the recovery was limited by ongoing restrictions, ment social distancing in mines exacerbated the existing especially on international tourism, and persistently weak constraints in the sector (e.g., electricity shortages, weak domestic demand. The next box, Personal Perspective 1.1, investment, and high operating costs), which had con- shows how the collapse in tourism affected the hospital- tributed to three consecutive years of negative growth. ity business of one South African entrepreneur. Manufacturing, construction, transport and commu- Finance, real estate, and business services — a major nication, and trade and hospitality were severely af- driver of growth in the past — also contracted. Lower fected by the lockdown restrictions. They contracted by banking activity, a reduction in certain transactions be- 25 – 30 percent quarter-on-quarter in the second quarter cause of the lockdown measures (e.g., property registra- of 2020. When the lockdown was eased in the second tion), and spillovers from declines in other sectors nega- PERSONAL PERSPECTIVE 1.1 Managing guest houses during the pandemic Grace Sibara is doing her best to keep her two guest houses in not go very far. Like most other small businesses, Grace did Limpopo Province afloat, after tourism collapsed almost com- not try to take out a loan, because she was afraid of accumu- pletely following the lockdowns and social distancing imposed lating debt. But she has large overdrafts on her bank account last year to curb the spread of COVID-19. Most of her business and a backlog of credit card bills. was generated by corporate travel, which looks least likely to Catering for funerals and small functions is generating some recover — the segment was dominated by demand from gov- income, as is interest from local people looking for short week- ernment employees on official business, which has dried up end breaks away from the crowds. But the future is very uncer- because the government has slashed spending. tain. “I don’t want to be discouraged because I am a hands-on Part of the demand for accommodation in her guest houses person, and this is what I love. I can’t see myself doing any- came from overseas, a market that will remain constrained be- thing else,” she said. “I don’t want to even think of selling now. cause of the more contagious Beta variant of the virus identi- That would depress me too much.” fied in South Africa. Some of the top source countries for inter- national visitors banned or discouraged travel to South Africa to prevent the spread of the Beta variant within their own bor- ders. The slow pace of the country’s vaccine rollout will also deter foreign visitors for the foreseeable future. “We are not doing well, that is the honest truth,” Grace said. “The govern- ment is not procuring, and our private clients work from home and are also less likely to travel.” “I’ve been in this business for 17 years, and we are trying to do what we can to survive. I am always positive, but if it’s go- ing to be like this until the end of the year, I don’t know. We’ll cross that bridge when we come to it.” Grace had to retrench half of her permanent staff soon after the stringent lockdown began. There is also no work for the extra people she used to employ in busy periods. The conference and wedding facilities at both of her business- es, Hayani Guest House and Hayani Manor, stand idle most of the time. “We still have some walk-ins looking for accom- modation. But they want to negotiate prices, and we do give them better rates because we understand that people don’t have money,” she said. Grace received a grant from the government’s Tourism Relief Fund. The fund was established in 2020 to mitigate the im- pact of the pandemic on the industry, which employed an es- timated 1.2 million people. She said the money helped but did Source: World Bank staff interviews. 12  |  Building back better from COVID-19, with a special focus on jobs tively affected the sector. Its gross value added shrank by quarter-on-quarter (–3.2 percent year-on-year), down 4.4 percent in 2020 (the first contraction on record), which from 1.4 percent in the last quarter of 2020. On the pro- reduced overall GDP growth by 0.9 of a percentage point. duction side, finance, mining, and trade services support- ed growth, respectively contributing 0.4, 0.3 and 0.2 of a Domestic demand declined sharply because of COVID-19 percentage point to overall GDP growth. The finance, real (Figure 1.2). The lockdown, along with the economic toll estate, and business services sector grew by 1.8 percent of the pandemic on jobs and incomes, severely affect- quarter-on-quarter, driven by a rise in mortgage advanc- ed another key driver of past growth — household con- es, bond registrations, and credit extension. After con- sumption, which declined by 5.4 percent overall in 2020. tracting in the last quarter of 2020, the mining sector re- Investment, which has long been affected by low confi- bounded by 4.2 percent quarter-on-quarter, on the back dence, contracted for the third year in a row by 17.5 percent of solid external demand for platinum group metals, (Figure 1.3). The decline was broad-based: private sector iron ore, gold, and chromium. On the expenditure side, investment fell by 19.3 percent and public investment by the growth in household consumption remained impor- 13 percent. On the back of its COVID-19 relief package, gov- tant — it grew by 1.1 percent quarter-on-quarter (against ernment consumption rose by 0.5 percent in real terms. 1.8 percent in the last quarter of 2020) and contributed 0.7 percentage points to overall GDP growth. However, in- The external sector, which traditionally contributed vestment remained depressed, contracting by 0.6 percent negatively to growth, supported GDP growth in 2020 quarter-on-quarter (13 percent year-on-year). The exter- because imports declined relatively more than exports. nal sector also contributed negatively to growth (1.7 per- Weak domestic demand meant that imports volumes con- centage points), as real exports stagnated whereas real im- tracted by 16.6 percent. The fall in exports was less severe ports rose by 6.1 percent quarter-on-quarter. The change (10.3 percent), as external demand started to recover in in inventory remained negative (because of destocking), the second half of the year. As a result, net exports con- but this was less pronounced than in the fourth quarter tributed to growth by 2.1 percentage points. of 2020 (–R53.2 billion in real terms, seasonally adjust- ed and annualized, as against –R117.5 billion in the pre- The economic recovery that started in late 2020 con- vious quarter). Thus, the change in inventory contribut- tinued into Q1 2021. Real GDP increased by 1.1 percent ed to GDP growth by 2.1 percentage points. A major sector FIGURE 1.2 COVID caused the largest economic FIGURE 1.3 Investment declined sharply contraction in 25 years Percentage point contributions to investment growth Percentage point contributions to year-on-year growth 15 10 8 10 6 5 4 2 0 0 -2 -5 -4 -10 -6 -8 -15 -10 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Household Consumption Private investment Government Consumption Public investment Private sector GFCF General Government Change in inventories Net exports Public Corporations GFCF GDP Source: Statistics South Africa; World Bank staff calculations. Source: Statistics South Africa; World Bank staff calculations. Note: GFCF: gross fixed capital formation. PART 1  Recent Economic Developments  |  13 to destock was mining; likely to respond to favorable external demand while production gradually increases. Fiscal Developments The pandemic further damaged the weak public finances Labor Markets and Poverty South Africa’s fiscal situation has weakened over The COVID-19 crisis brought significant the last decade. After averaging 0.6 percent of GDP in job losses 2000 – 08, the fiscal deficit rose to 3.1 percent in 2010 – 18 and reached 5.7 percent in 2019, just before the pandem- South Africa suffers from structurally high levels of un- ic. Fiscal revenues have suffered because of weak eco- employment and inactivity. The unemployment rate has nomic growth, despite relatively high and stable reve- exceeded 25 percent since 2016 and reached 29 percent at nue collection (at over 29 percent of GDP). At the same the start of the COVID-19 crisis (Figure 1.4). To make matters time, spending has increased sharply, driven by rising in- worse, the share of people of working age who were not in terest payments and other committed expenditures. Be- employment, education, or training (NEET) was also high, cause revenue projections and spending commitments as- at 24 percent. This meant that even before the pandemic, sumed that economic growth would again become more two in every five people of working age were NEET. South dynamic, the budget has not adjusted to the declining Africa’s employment ratio is much lower than its peers’. fiscal space, leading to widening deficits. FIGURE 1.4 Labour market challenges persist Public debt has been rising rapidly. It increased from Unemployment rate, 2000 – 19 35 percent of GDP in 2010 to about 63 percent in 2019. Over the same period, interest payments grew from 2.3 percent Percent to 4 percent of GDP. Because real GDP growth has been de- 30 clining, South Africa’s average effective interest rate (in- 25 terest payments divided by the debt stock) started to ex- 20 ceed its nominal GDP growth from 2017, in contrast to its peers (Figures 1.5 and 1.6). These unfavorable debt dy- 15 namics, in turn, made it more difficult to stabilize debt 10 and improve fiscal outcomes, despite the containment of 5 primary deficits (0.6 percent of GDP over 2016 – 18 against 1.7 percent of GDP over 2010 – 15) 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 FIGURE 1.5 Despite the lower cost of debt, weak growth South Africa now affects fiscal sustainability Lower Middle Income Countries Percent Upper Middle Income Countries 18 High Income Emerging Markets 16 Source: World Economic Outlook; International Labour Organization; World Bank. 14 12 The pandemic weakened the labor market even more. 10 8 A record 2.2 million jobs had been lost by mid-2020, and 6 fewer than 40 percent of these had been recovered by the 4 end of the year. In net terms, 1.4 million jobs have been 2 lost since March 2020, more than twice the number the 0 country lost during the global financial crisis. The un- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 employment rate reached 32.6 percent by March 2021. Part 2 presents a granular analysis of the impact of the Implicit effective interest rate (nominal) pandemic on South Africa’s labor market and the gov- Nominal GDP growth ernment’s response. Source: National Treasury; World Bank staff calculations. 14  |  Building back better from COVID-19, with a special focus on jobs FIGURE 1.6 Public debt dynamics TABLE 1.1 Evolution of consolidated expenditure 2015 – 19 average, nominal Change (percentage Percent Percent of GDP 2009/10 2019/20 points of GDP) 12 Total 30.7 34.5 3.9 10 Compensation 9.7 11.0 1.3 8 Debt service cost 2.3 4.0 1.7 6 Goods and services 4.2 4.1 -0.1 4 Higher education transfers 0.6 0.8 0.2 2 Transfers to households 4.8 5.4 0.6 0 South Africa Lower Middle Upper Middle High Income Other transfers 6.5 7.0 0.5 Income Countries Income Countries Emerging Markets Capital spending 1.3 1.0 -0.3 Implicit interest rate Nominal GDP growth Real GDP growth Transfers to SOEs 1.3 1.2 -0.1 Source: World Economic Outlook; World Bank staff calculations. Source: National Treasury; World Bank staff calculations. South Africa has a large social protection system. At compensation, and interest payments, to the detriment 3.3 percent of GDP, the country is among the biggest of capital spending (Box 1.4). About one-third of this spenders on social protection (World Bank forthcom- increase is due to spending on compensation (1.3 per- ing). Social transfers are generally well targeted, reach- centage points of GDP). Transfers also grew — to house- ing many poor people. They help alleviate poverty and holds (0.6 of a percentage point), other governmental reduce income inequality, which remains the highest in and nongovernmental institutions (0.7 of a percentage the world because of the legacy of the apartheid system point, in part due to significant policy shifts, such as the (Inchauste et al. 2015). While social assistance can pro- tertiary education subsidy), and to SOEs (from R47 bil- tect the most vulnerable members of society, it cannot lion in fiscal 2005 – 09 to R135 billion in fiscal 2015 – 19). substitute for growth and jobs to sustainably lift people Debt service costs increased by 1.7 percentage point over out of poverty. Given the shrinking fiscal space, recent the past decade, driven by the rising financing needs. This policy choices attempted to contain the growth of the so- coincided with slower economic and revenue growth. To cial assistance budget. The government adjusted social contain the primary deficit (Figure 1.7), spending was re- grants by less than inflation in fiscal year 2021, highlight- ing the difficulty of sustaining the social protection sys- FIGURE 1.7 Interest payments were already rising before tem when public finances are weak. 2020 amid a rising stock of debt Percent of GDP, +=deficit The growing public spending has not supported eco- 14 nomic growth over the last decade. Despite an increase 12 in total consolidated expenditure of about 4 percentage 10 points of GDP between fiscal 2009 and 2019 (Table 1.1), 8 GDP growth weakened throughout the decade. Recent 6 literature (Kemp 2020; Janse van Rensburg 2021) shows 4 that fiscal multipliers (the impact of higher public spend- 2 ing on economic growth) have declined over the last 10 0 years. The reasons behind this trend include the alloca- -2 tion of resources to consumption rather than investment, -4 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 the growing share of interest payments, and large trans- fers to underperforming state-owned enterprises (SOEs). Interest Payments Primary Deficit Fiscal Deficit Indeed, compared with its peers, South Africa’s public spending has been tilted toward transfers, public sector Source: National Treasury; World Bank. PART 1  Recent Economic Developments  |  15 BOX 1.4 Public expenditure allocation: A cross-country comparison South Africa’s fiscal position has deteriorated markedly over (Figure B1.4.2). Public sector compensation has persis- the past decade. While the same has happened in many oth- tently grown faster than the economy and now represents er countries since the global financial crisis, South Africa’s 42 percent of revenue. This makes South Africa’s public sec- fiscal metrics have weakened more than those of its peers tor wage bill one of the largest among its peers, in terms of (Figure B1.4.1). The composition of its spending might also both GDP and total expenditure (Figure B1.4.3). In contrast, have been relatively less conducive to growth because much capital spending has been relatively low — it represents only of it was on interest payments and public sector compen- 10 percent of the budget and 3 percent of GDP, about half sation, rather than capital spending. Interest payments now of the ratios for countries such as Malaysia and Thailand represent almost 5 percent of GDP, higher than in peers (Figure B1.4.4). FIGURE B1.4.1 Fiscal deficit widened markedly over the FIGURE B1.4.2 Interest payments on government debt last decade are comparatively high Percent of GDP Percentage of GDP, 2020 5 5 4 4 3 3 2 2 1 1 0 0 South Africa Lower Middle Upper Middle High Income South Africa Brazil Mexico Colombia Argentina Indonesia Philippines Turkey Malaysia Thailand Income Income Emerging Countries Countries Countries 2000–08 2011–19 Source: World Bank staff calculations based on World Economic Outlook data Source: IMF WEO (April 2021), World Bank FIGURE B1.4.3 Wage bill is comparatively high FIGURE B1.4.4 Public gross fixed capital formation is Wage bill (% Public expenditure) comparatively low 40 Percent of GDP, 2019 10 35 South Africa Brazil 8 Indonesia 30 Argentina 6 Peru Chile 4 25 Philippines 2 Mexico Turkey 20 Colombia 0 Jordan Egypt Thailand Peru Malaysia Pakistan Mexico South Africa 15 2 4 6 8 10 12 14 16 Wage bill (% GDP) Source: World Development Indicators, World Bank Source: World Development Indicators, World Bank duced on categories such as capital expenditure (0.3 of a Spending inefficiencies contributed to weaken the im- percentage point of GDP) and goods and services (0.1 of a pact of fiscal policy on economic and social outcomes. percentage point). This was accompanied by tax increas- The efficiency of public spending was reduced by the es, which partially offset the impact of the rising expend- weak public administration capacity, state capture, poor iture on aggregate domestic demand. interagency coordination and integration, and fragment- 16  |  Building back better from COVID-19, with a special focus on jobs ed procurement, which contributed to wastage, leakages cal 2020 to reach 12.9 percent of GDP. The debt-to-GDP ra- (e.g., irregular and overpayments for goods and services, tio is estimated at 78.8 percent of GDP in fiscal 2020, and as identified by the Auditor-General (AGSA 2019, 2021)), interest payments at 4.9 percent of GDP. and the high costs of public services. Thus, higher expend- iture was not systematically associated with better public In these tight financial conditions, the government ad- service delivery; this reduced the impact of fiscal policy justed its borrowing strategy. With yields on govern- on the economy (National Treasury 2020). ment bonds rising at the height of the pandemic, the gov- ernment increased its net international borrowing from The COVID-19 crisis has further weakened South Africa’s an average R 27 billion in fiscal 2017 – 19 to R 77.5 billion fiscal position. Overall, consolidated expenditure in fis- in fiscal 2020; this represents 12 percent of the financ- cal 2020 is estimated to have been about 4 percent higher ing raised, all from international financial institutions. than anticipated in the 2020 Budget Review. During the Considering the steeper yield curve, it also issued more pandemic, the government increased spending to sup- treasury bills (17 percent of net domestic borrowing, up port the health sector, businesses, and households in the from 12 percent on average over the previous three fis- lockdown (Table 1.2), funded in part by a reallocation of cal years). However, the bulk of its financing remained budget resources. At the same time, the economic col- long-term domestic bonds (about R 500 billion, up from lapse — and lost tax revenues — created a significant reve- R 230 billion on average over the previous three years), nue gap. Revenue is estimated to have been about 12 per- with an average maturity of 12.4 years. Because revenue cent lower than projected in the February 2020 budget. outcomes were better than expected, the government in- World Bank estimates suggest the deficit doubled in fis- creased its cash balances in fiscal 2020. TABLE 1.2 COVID-19 relief package in FY2020 Announced package a Estimate for FY20/21 (Rand, billions) (Rand, billions) Credit guarantee scheme 200.0 18.0 Wage protection (TERS) 40.0 65.0 Revenue-side support measures (tax deferrals, skills development levy holiday and extension of employment tax incentive) 70.0 40.0 Main budget expenditure 142.0 140.3 Support to vulnerable households 40.9 52.2 Health 21.5 21.5 Support to municipalities 20.0 20.0 Other frontline services 13.6 13.6 Basic and higher education 12.5 12.5 Job creation and support for small, medium and informal businesses 6.1 12.6 Support to public entities 6.0 6.0 Other COVID-19 interventions 1.8 1.8 Provisional allocation for COVID-19 fiscal relief package 19.6 0.0 TOTAL 452.0 263.3 TOTAL, net of budget reallocations and adjustments 343.0 152.8 Source: National Treasury; World Bank calculations. a. April 2020 “Economic Measures for COVID-19” and June 2020 Supplementary Budget, National Treasury PART 1  Recent Economic Developments  |  17 Monetary Policy and Financial to lend at the repo rate and borrow below the repo rate, raised the size of the main weekly refinancing operations, Sector Developments and extended the maturities of the main refinancing in- struments. It also announced a program to purchase gov- Monetary policy was countercyclical ernment bonds on the secondary market, effectively buy- to ease the COVID-19 shock ing R 32.6 billion in government securities between April and December 2020. All these measures — except the gov- The South African Reserve Bank (SARB) has eased mone- ernment bond purchase program — have now been rolled tary policy to support the economy during the pandem- back, as liquidity in the financial markets improved from ic. Inflation was low before COVID-19, averaging 4.1 per- the second half of 2020 and government bond yields have cent in 2019 and anchored in the lower part of the target returned to pre-pandemic levels. At end-May 2021, SARB range of 3 – 6 percent. It declined even further, averag- holding of government securities stood at R 41.6 billion. ing 3.3 percent in 2020, as fuel prices fell, and domestic demand collapsed during the lockdown. This allowed Prudential regulations have also been eased. In response the SARB to cut the repo rate by a cumulative 2.75 per- to the pandemic, the SARB provided regulatory relief to centage points between January and July 2020 to sup- the banking system to support lending to the private sec- port the economy (Figure 1.8). By early 2021, inflationary tor. It allowed temporary relief of bank capital require- pressures were still contained. Inflation reached 5.2 per- ments, reduced the liquidity coverage ratio from 100 to cent in May because of a low-base effect, but average in- 80 percent, and relaxed capital charges and provision- flation is well inside the target band, at 3.8 percent in ing requirements on COVID-19-related credit exposures. January – May 2021. Monetary policy remains accom- modative; at its last Monetary Policy Committee meet- ing on May 20, the SARB kept its policy interest rate un- The financial sector remains sound changed at 3.5 percent. The financial sector is well capitalized and liquid. All FIGURE 1.8 Policy rate is at historically low level prudential ratios are above the minimum requirements. Percent The capital-to-asset ratio is around 7.6 percent, and the 12 Tier 1 capital adequacy ratio stood at 16.6 percent at end- 2020. Nonperforming loans rose from 3.9 percent to 10 5.2 percent from end-2019 to end-2020 but remain mod- erate. Profitability in the banking and life insurance sec- 8 tors has declined significantly. While the full extent of 6 the deterioration in the loan portfolio in the pandemic is not yet known, and the banks are not expected to re- 4 turn to pre-pandemic profitability before 2022, their cap- 2 ital buffers appear adequate. 0 Credit to the private sector has slowed significantly. To- tal loans and advances grew by 2.7 percent in 2020, against 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 6.4 percent in 2019. Although low real interest rates sup- Repo rate Headline inflation ported household demand for mortgage and instalment Source: Statistics South Africa, SARB. sale credit, lower consumer confidence on the back of de- pressed economic growth and job losses saw growth in The SARB’s credibility and policy measures helped to credit to households slowing from 6.4 percent in 2019 to limit financial market stress. In addition to easing the 3.9 percent in 2020. Weak business confidence, combined monetary policy stance, the central bank introduced var- with lockdown restrictions, meant growth in bank lending ious measures to ensure liquidity in the domestic finan- to corporations slowed to 1.6 percent in 2020 (down from cial system. After March 2020 it increased the number of 6.3 percent in 2019). Total claims on the domestic pri- repo auctions, reduced the limits of the standing facility vate sector increased by 4.9 percent in 2020 (down from 18  |  Building back better from COVID-19, with a special focus on jobs 6.8 percent in 2019). The monetary easing transmission FIGURE 1.9 Current account dynamics were favourable was mostly through a reduction in banks’ prime lending in 2020 rates, which are tied to SARB repo rates rather than through Percent of GDP new credits. Private sector credit extension remains weak 6 thus far in 2021: total loans and advances to households grew by 3.9 percent in January – May, and those to corpo- 4 rations contracted by 2.7 percent. 2 The government launched a COVID-19 loan guarantee scheme to promote lending to the private sector, but 0 the uptake has been low. This initiative aimed to provide substantially guaranteed loans to help businesses affected -2 by the pandemic meet their operational expenses. It had an initial envelope of R 100 billion, with a provision to double -4 it if required. However, the uptake of the scheme has been low: by March 2021, only R 18 billion had been approved -6 by banks and disbursed to small and medium enterpris- 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 es. Factors cited for the weak uptake include stringent con- ditions (e.g., banks requesting personal surety from busi- Trade in goods Trade in services Primary Income ness owners), the delayed rollout of the scheme (which Secondary Income Current Account meant that many banks and debtors had already nego- Source: SARB. tiated urgent debt relief measures), and weak credit de- mand because of depressed economic growth and the un- 2.2 percent of GDP in 2020. Favorable price dynam- certain business environment, even before COVID-19 (BASA ics supported exports of goods: net gold exports in- 2021). In view of the low uptake, the government decided creased by 61.2 percent and other merchandise ex- to close the scheme at the end of July 2021. ports by 4.1 percent. Merchandise imports contracted by 12.2 percent because of the collapse in domestic demand and lower crude oil prices (the Brent crude External Sector oil spot price fell by 33.1 percent year-on-year). The services trade balance worsened from 0.3 percent of The pandemic brought the first current account GDP in 2019 to 0.8 percent in 2020, mainly because of surplus in 18 years the devastating impact of the pandemic on the tour- ism sector. The primary income balance likewise re- South Africa’s structural current account deficit is driv- mained negative, albeit smaller (1.9 percent of GDP, as en by the large and negative primary income balance. against 2.8 percent in 2019), driven by lower gross div- The current account was in deficit in 2003 – 19, averag- idend payments. The secondary income balance was ing 3.6 percent of GDP over the past decade (Figure 1.9). also negative, at 0.9 percent of GDP. The trade balance has been positive since 2016, as weak growth reduced the demand for merchandise imports. Current account dynamics remain favorable at the However, the primary and secondary income balances beginning of 2021. The current account balance reg- remained negative, respectively at 2.7 and 0.8 percent of istered a surplus of 5 percent of GDP in the first three GDP, in 2010 – 19. These balances reflect dividend and in- months of 2021, because of the surplus on the merchan- terest payments to nonresidents and transfers to neigh- dise trade balance and a smaller deficit in the primary boring countries under the Southern African Customs income balance. Goods exports increased by 25.9 per- Union agreement. cent year-on-year in value terms, supported by high ex- port prices, whereas goods imports grew by only 6.6 per- Driven by weak imports and favorable export pric- cent year-on-year, benefiting from the appreciation of es, the current account registered a large surplus in the rand. South Africa’s terms of trade improved for the 2020. South Africa’s current account surplus reached seventh quarter. PART 1  Recent Economic Developments  |  19 Global market volatility tested FIGURE 1.10 Yield spread on government bonds the robustness of the financial sector has widened Basis points spread, relative to 0-3 year yields South Africa was badly affected by the loss of market 600 confidence in early 2020. The combination of a deteri- 500 orating global outlook and the loss of the country’s last 400 investment grade rating in March 2020 led to significant 300 capital outflows, a widening of government bond spreads, 200 and the depreciation of the rand to a record low of R 19/ 100 US$ in April. The generic 10-year bond yields, which were below 9 percent in February 2020, surged to over 12 per- 0 cent at the end of March. The Johannesburg Stock Ex- -100 change (JSE) All Share Index lost more than 20 percent -200 of its value between January and March. Although most -300 emerging markets suffered from rising global risk aver- 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 sion, South Africa saw more capital outflows than most of its peers. The SARB’s government bond purchase pro- 3–5 years 5–10 years 10 years+ gram helped restore some investor confidence, with the Source: SARB; JSE. 10-year government bond yield falling by 100 basis points on the day of the announcement (Arslan et al. 2020). FIGURE 1.11 Financial account was in deficit in 2020 R billion Global financial market conditions have improved 200 since late 2020, broadly benefiting emerging econ- 150 omies such as South Africa. Progress in the rollout of vaccines, higher global growth forecasts, and high glob- 100 al liquidity have all contributed, but the markets remain 50 volatile. Thus far in 2021, the rand has outperformed oth- 0 er emerging currencies; in fact, it has appreciated to its pre-pandemic level, supported by favorable trade balance -50 dynamics and a benign global financial environment. -100 Having risen since late 2020, the JSE All Shares Index is -150 now above its pre-pandemic level. Nonetheless, in a cli- -200 mate of high uncertainty, portfolio investment flows are still volatile and vulnerable to shifts in global risk sen- -250 timent. South Africa’s yield curve remains steep because -300 av. 1999–2004 av. 2005–19 2020 of the weak fiscal situation (Figure 1.10). Reserves change (-=increase) Net other investment For South Africa, 2020 was characterized by net finan- Net financial derivatives Net portfolio investment cial outflows. For the first time since 2003, its financial Net FDI Financial Account Balance account balance was negative, at 3.8 percent of GDP, ex- Source: SARB. cluding variation in reserves (Figure 1.11). Foreign invest- ment outflows from bond and equity markets reached net outflows of US$0.7 billion, slightly higher than the US$9.7 billion in 2020, whereas South Africans repatri- year before (US$0.4 billion). Other investment saw out- ated US$2.8 billion. Net inflows of foreign direct invest- flows of US$8.9 billion, as domestic banks increased their ment decreased from US$5.1 billion in 2019 to US$3.1 bil- deposits at nonresident banks. The SARB’s international lion; however, the net foreign direct investment balance reserves amounted to US$55 billion, broadly unchanged increased, driven by residents’ divestments from foreign from 2019. The net international investment position subsidiaries of US$2 billion (as against investments of remained largely positive at about US$110 billion as of US$3.1 billion in 2019). Financial derivatives registered December 2020. 20  |  Building back better from COVID-19, with a special focus on jobs Outlook and Risks national standards, especially considering the magnitude of the output contraction in 2020 (Figure 1.12). Recovery in 2021 will be supported by the favorable global environment FIGURE 1.12 The post-pandemic rebound may be moderate 2021 GDP growth (Percent) The World Bank projects South Africa’s GDP growth to 12 rebound to 4 percent in 2021 (Table 1.3), supported by the global recovery, the vaccination rollout, and favora- 10 ble commodity prices (World Bank 2021b, Zeufack et al. 8 2021). On the domestic front, the ongoing normalization of economic activity and base effects will mean higher 6 GDP growth, despite the potential dampening effect of an 4 South Africa increase in COVID-19 cases over the winter months and re- newed restrictions on economic activity. But growth will 2 still be hampered by longstanding structural constraints. 0 The depressed labor market and tighter fiscal policy may -20 -15 -10 -5 0 5 also limit household consumption. This suggests that 2020 GDP growth (Percent) South Africa’s rebound will remain moderate by inter- Source: World Bank. TABLE 1.3 Baseline forecasts Annual percent change unless indicated otherwise   2017 2018 2019 2020 e 2021 f 2022 f 2023 f Real GDP growth, at constant market prices 1.4 0.8 0.2 -7.0 4.0 2.1 1.5 Private Consumption 2.1 1.8 1.0 -5.4 3.8 3.1 2.4 Government Consumption 0.2 1.9 1.5 0.5 -0.3 -1.7 -1.4 Gross Fixed Capital Formation 1.0 -1.4 -0.9 -17.5 -2.7 3.9 3.7 Exports, Goods and Services -0.7 2.6 -2.5 -10.3 9.7 2.8 2.8 Imports, Goods and Services 1.0 3.3 -0.5 -16.6 9.0 5.0 4.2 Real GDP growth, at constant factor prices 1.5 0.7 0.2 -6.8 4.0 2.1 1.5 Agriculture 21.1 -4.8 -6.9 13.1 0.8 2.5 2.5 Industry 1.1 -0.1 -1.5 -12.0 5.5 1.6 1.2 Services 1.0 1.3 1.2 -5.4 3.6 2.2 1.5 Inflation (Consumer Price Index) 5.2 4.5 4.1 3.3 4.2 4.5 4.5 Current Account Balance (% of GDP) -2.5 -3.5 -3.0 2.2 1.5 -0.8 -1.9 Net Foreign Direct Investment (% of GDP) -1.5 0.4 0.6 1.7 0.2 0.3 0.4 Fiscal Balance (% of GDP) -4.1 -4.0 -5.7 -12.9 -8.4 -7.1 -6.1 Primary Balance (% of GDP) -0.4 -0.1 -1.5 -8.0 -3.4 -1.8 -0.5 Revenue (% of GDP) 28.7 29.4 29.7 28.2 28.5 28.5 28.6 Interest Payments (% of GDP) 3.7 3.9 4.2 4.9 4.9 5.3 5.6 Non-Interest Expenditure (% of GDP) 29.1 29.5 31.2 36.1 31.9 30.2 29.1 Debt (% of GDP) 53.0 56.6 63.3 78.8 80.0 84.3 87.3 Unemployment rate (%) 27.1 27.0 28.2 29.4 32.6 31.9 29.9 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. e = estimate, f = forecast. PART 1  Recent Economic Developments  |  21 Higher growth in its trade partners and favorable glob- China and the United States, which are among South al commodity prices will support growth in South Africa’s main trading partners, are expected to grow by Africa. Globally, the COVID-19 pandemic continues to 8.5 and 6.8 percent, respectively, in 2021, and the econo- spread, but vaccination programs have made substantial my of the Euro Area is projected to grow by 4.2 percent. progress in several countries. South Africa should bene- Global commodity prices are expected to remain high, fit from stronger external demand. According to the June translating into favorable terms of trade that will sup- 2021 Global Economic Prospects (World Bank 2021b), port the external sector (Box 1.5). BOX 1.5 South Africa’s economy benefits from high commodity prices Commodity prices have increased substantially from end- look are related to the evolution of the pandemic. For metals, 2020 and are now above their pre-pandemic levels, sup- faster-than-expected withdrawal of the stimulus in China would ported by better global growth prospects and in some cas- pose significant downside risks, while the United States infra- es, supply-side factors. Metal prices are expected to rise by structure bill would present an upside risk. Over the medium 36 percent in 2021, before falling back in 2022. The demand term, the rebalancing of China’s growth from investment- to for base metals is likely to remain strong, given the push to- consumption-driven implies that its growth will be less com- ward greener growth (e.g., electric vehicles). Oil prices are pro- modity-intensive than before. jected to average US$62/bbl in both 2021 (+35.6 percent Favorable terms of trade will benefit growth but will not ad- year-on-year) and 2022. Agricultural prices are expected to dress structural constraints to a higher growth trend. The fa- rise by 16 percent in 2021, before stabilizing in 2022 (World vorable global environment will support South Africa’s growth Bank 2021a, 2021b). and macroeconomic stability through its impact on the fiscal Commodities play a big role in South Africa’s economic tra- and external accounts. However, if the cycle is misinterpreted jectory. The mining sector accounts for only 7 percent of GDP as a new trend, this could mean a delay in much-needed re- but for over half of all merchandise exports (mostly platinum forms, as happened before (Amra et al. 2019). Also, the im- group metals, gold, iron ore, and coal). Economic growth out- pact on mining production may be limited by structural con- comes have long been linked to commodity cycles. The most straints and operational adjustments after the pandemic dynamic periods of growth in South Africa have been associ- (Figure B.1.5.2). Investment in the sector remains weak, on ated with the discovery of diamonds, gold, and more recent- the back of policy uncertainty related to both some elements ly, the 2000s commodity super cycle (Havemann and Kerby of the Mining Charter and operating costs (electricity, trans- 2021). Commodity cycles also affect financial variables, such port, logistics, etc.). In this context, to ensure that South Africa as investment flows, the exchange rate, and the performance fully benefits from the favorable commodity cycle and set the of the stock market (Sachs 2021). base for sustainable growth, it will be critical to deliver on re- There are uncertainties around current commodity price in- forms to improve business confidence as well as reforms to creases. South Africa’s terms-of-trade gains (Figure B.1.5.1) foster exports (e.g., trade facilitation, logistics, and transports are likely to moderate after this year. The main risks to the out- costs, notably in rail and ports). FIGURE B1.5.1 Notable improvement in terms FIGURE B1.5.2 Higher mining exports were driven of trade from 2020 by prices rather than volumes Index, base 100 = 2010 Year-on-year percentage change 130 30 120 20 110 10 100 0 90 -10 80 -20 70 -30 60 -40 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Terms of Trade including Gold (SA, 2010=100) Export Price Index Mining Production Source: SARB; Statistics South Africa; World Bank. Source: SARB; World Bank. 22  |  Building back better from COVID-19, with a special focus on jobs However, the potential for recovery is limited by do- Africa, infections picked up strongly in June, prompt- mestic constraints. Economic growth momentum con- ing the government to declare a ‘third wave’ of the pan- tinued in the first quarter of 2021, and early indicators demic. It announced a return to alert level 3 lockdown (e.g., Purchasing Managers’ Indices) point to sustained on June 15, with some restrictions to social and econom- recovery into the second quarter. However, constraints ic interactions. Any rebound in economic activity over such as weak investment, electricity shortages, and trans- the coming months will be closely linked to the path of port and logistical costs and bottlenecks will continue to the pandemic and progress with vaccinations. The vac- weigh on economic activity. Private sector investment is cination program has lagged so far (Figure 1.14), and as still depressed, contracting by 15.1 percent year-on-year of end-May, approximately one million South Africans in the first quarter. It is unclear if household consump- had been vaccinated. tion will remain robust in a context of weak labor mar- kets and limited fiscal support once savings return to FIGURE 1.14 Vaccination is lagging pre-pandemic levels (Figure 1.13). Finally, the long-term India impact of the pandemic on sectors such as tourism, avi- ation, and hospitality could yet hamper the growth re- United States bound. On the other hand, the recent increase of the li- Brazil censing threshold for embedded electricity generation UK from 1 MW to 100 MW could have a significant positive ef- Germany fect on confidence and investment. This could support France growth in the short run and help to alleviate the electric- Italy ity supply constraint in the medium term. Turkey Mexico FIGURE 1.13 Household savings are decreasing after rising during the pandemic Indonesia Spain Percent, seasonally adjusted and annualized 2.5 Russia Chile 2.0 Morocco 1.5 UAE 1.0 Israel … 0.5 South Africa 0.0 0 50 100 150 200 250 300 350 -0.5 Millions, June 30, 2021 -1.0 Source: Our World in Data. Note: Counted as single dose and may not equal the total number of people -1.5 vaccinated 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018 4Q2018 1Q2019 2Q2019 3Q2019 4Q2019 1Q2020 2Q2020 3Q2020 4Q2020 There are other risks, and opportunities, to the short- Gross household savings to GDP ratio term growth outlook. Domestically, fiscal slippages Households savings to disposable income ratio could undermine business confidence and slow the re- Source: SARB covery. On the other hand, a moderate third wave, com- bined with a continued favorable external environment, A severe third wave of the pandemic would put any re- would support a stronger rebound. Globally, a tight- covery at risk. As happened elsewhere, the road to recov- ening of financial conditions or weaker-than-expect- ery after COVID-19 is volatile — there are still major uncer- ed growth would negatively affect South Africa’s out- tainties around the evolution of the pandemic. In South look (Table 1.4). PART 1  Recent Economic Developments  |  23 TABLE 1.4 Main risks and opportunities to the outlook Risk/Opportunity Potential impact Policy measures Opportunities Contained third wave of the pan- South Africa would be able to benefit fully from the fa- Use increased policy space to strengthen macroeconom- demic, with a short peak of daily vorable global environment, with a strong economic re- ic stability, while supporting the growth recovery. infections and hospitalizations. bound over the next three quarters translating into high- Improve public expenditure allocation and efficiency to er growth in 2021. maximize its impact on growth. Higher growth would support better labor market out- Implement structural reforms to raise competitiveness comes (as economic activity continues to recover) and and growth in the medium run. better fiscal and debt outcomes (as pressures for relief spending fade). Fiscal revenue overperformance, This would ease the fiscal adjustment needed on the Maintain fiscal policy path as planned in the 2021 driven by higher exports and expenditure side to achieve the government’s fiscal and Budget. stronger growth in the short term. debt path over the MTEF and could support domestic Use temporary fiscal space, balancing between develop- demand over the medium term. ment expenditure and deficit reduction. Acceleration of the structural re- Taking concrete steps to address long-standing con- Use higher growth to restore fiscal and debt sustainabili- form agenda, with early and deci- straints to growth would have an immediate signaling ty, while improving the impact of fiscal policy on growth. sive measures to implement key effect that could boost investor confidence and raise Support policies to increase the job intensity of growth planned policy reforms. growth in the short term, while reforms would support (see part 2). higher growth over the medium term. Risks Weaker-than-expected global re- Weaker external demand would translate into smaller Implement structural reforms to increase competitive- covery, with a constrained vaccine economic rebound and smaller-than-anticipated con- ness and promote private investment. rollout or limited vaccine effica- tribution of net exports to growth, while domestic driv- Allocate fiscal resources to programs with the high- cy against new variants result- ers of growth are weak. est developmental impact and increase the efficiency of ing in new infection waves, or sup- Lower export receipts because of lower global prices public expenditure to support recovery. ply-side bottlenecks potentially would translate into weaker current account balance Maintain monetary policy space consistent with infla- translating into lower commodi- and fiscal revenues. tion target. ty prices. Increased global risk aversion Higher yields on government bonds would raise public Implement adequate policy mix (budget plans, structur- driven by tightening financial con- debt service, increasing the fiscal effort needed to sta- al, monetary policy) to maintain investor confidence. ditions (e.g., faster monetary poli- bilize debt. Consider increased financing from international financial cy tightening in the United States) Higher holdings of government securities in domestic fi- institutions, which tend to be less burdensome on the translating into net portfolio in- nancial sector as portfolio investment outflows intensify budget and domestic financing. vestment outflows and rising risk would crowd out resources for private investment. premia in emerging economies. Stronger-than-anticipated third Stubbornly high infection rates would stress the health Roll out vaccine more aggressively. wave of the pandemic as winter system and require stricter containment measures, Take the necessary containment and relief measures conditions make it harder to con- negatively affecting growth and job creation. to limit the impact of the pandemic on people and the trol infections relative to the sec- Worsening economic and social conditions would cre- economy. ond wave (December – January). ate pressure to extend COVID-19-related relief meas- Implement structural reforms as the pandemic is brought ures, translating into a larger fiscal deficit. under control to pave the way for a quicker recovery. Fiscal slippages: Both scenarios would likely lead to a weaker fiscal posi- Implement budget as planned. Short term — spending pressures tion over the MTEF and would put at risk debt stabiliza- To the extent possible, address slippages through budget from realization of fiscal risks tion by 2025/26 as targeted by the government. reallocations. identified in budget (wage bill, Higher deficits translating into higher debt service costs Implement structural reforms to boost growth and SOE SOE contingent liabilities, local would lead to public resource allocations that do not governance and support improvements in fiscal balanc- government finances) support higher growth. es and debt. Medium term — short-lived reve- nue overperformance from favora- ble external conditions reduces appetite for fiscal reform. Weak implementation of struc- Weak implementation of the structural reforms planned Frontload key structural reform plans. tural reforms, driven by weaken- in the Economic Reconstruction and Recovery Plan/ ing political leadership or lack of Operation Vulindlela would undermine confidence and capacity translate into persistently weak investment and low growth as seen over the last decade. 24  |  Building back better from COVID-19, with a special focus on jobs South Africa’s medium-term growth outlook is insuf- These reforms would also support external competi- ficient to improve economic and social outcomes. The tiveness, which could enhance growth. In addition to World Bank projects GDP growth of 2.1 percent in 2022 reforms behind the border (e.g., electricity supply, busi- and 1.5 percent in 2023. This suggests that real GDP per ness regulations, and competition), public policies to im- capita in 2023 would still be below its 2019 level. Such prove firms’ competitiveness at the border (e.g., logistics moderate growth would not reverse the impact of the and transports costs, trade facilitation, and trade policy) pandemic on the labor market, and the unemployment would support economic growth. The global outlook is rate is projected to stay around 30 percent in the me- driven by a strong recovery in the country’s trading part- dium run. With persistent low growth, South Africa’s ners; thus, increasing its participation in trade and glob- nominal growth would likely remain below or close to al value chains would allow South Africa to benefit from effective interest rates over the medium term. Such debt global growth. A larger role for the external sector in driv- dynamics would increase the fiscal effort needed to pre- ing the economic recovery would be especially important, serve debt sustainability. as the traditional drivers of growth (household and gov- ernment consumption) are hampered by a depressed la- bor market and tighter fiscal policy, which constrains the Better growth prospects require addressing government’s ability to boost aggregate domestic demand. long-standing structural constraints Structural reforms are needed to boost private sector Fiscal policy priorities are to preserve competitiveness and productivity and support high- macro-stability and increase the impact er growth. The recent World Bank Enterprise Survey for of budget spending South Africa (World Bank 2020) shows that access to elec- tricity remains the most severe constraint to private sec- The government has committed to making public ser- tor activity, with 55 percent of surveyed firms reporting it vices sustainable and stabilizing public debt. It recog- as the biggest obstacle to their business. This needs to be nizes that the trajectory of fiscal policy and debt has been addressed by reforming the electricity sector. The reforms increasingly unsustainable and has worsened during the to improve costs and efficiency in network industries pandemic. As the COVID-19 shock subsides and the recov- (electricity, digital communications, transport, and logis- ery gathers speed, the government plans to withdraw tics, etc.) described in the Economic Reconstruction and COVID-19 relief measures, contain expenditure commit- Recovery Plan and supported by Operation Vulindlela ments, and improve the impact of fiscal policy on eco- should be fully implemented. Implementing reforms to nomic and social outcomes (the fiscal multiplier) over increase private sector competitiveness (such as those the medium term. discussed in Box 1.1) will also be necessary to improve business confidence, increase private investment, and The government’s strategy rests on rebalancing expend- catalyze private funding for infrastructure needs, as en- iture toward investment and development. It plans to visaged by the Infrastructure Fund. Stimulating private support the recovery by improving the composition of investment will be essential to restart growth after the public expenditure. According to the 2021 Budget Review pandemic, especially as public finances are constrained. (National Treasury 2021b), the bulk of budget spending South Africa’s potential needs to be unlocked to support is allocated to learning and culture, health, and social de- fiscal consolidation and mitigate its impact on econom- velopment. Capital spending is budgeted to be the fast- ic growth. Although structural reforms take time, the est-growing category among non-interest expenditure, signaling effect of reform can immediately boost con- increasing by about 12.5 percent annually in 2021 – 23 (ex- fidence. In this context, as noted, the recent announce- cluding COVID-19-related spending), after contracting by ment of the increase in the licensing threshold for em- 6.1 percent per year in 2015 – 19. However, a more granu- bedded electricity generation from 1 MW to 100 MW is a lar analysis reveals trade-offs between programs. For ex- very important and encouraging first step. It could both ample, social grants are to contract in real terms, and this improve business confidence and raise economic poten- would affect the most vulnerable people at a time when tial in the medium run. the economic outlook remains difficult. PART 1  Recent Economic Developments  |  25 Based on the government’s plans, the World Bank FIGURE 1.15 2021 Budget path requires a significant projects fiscal deficits to decrease gradually over the reduction in the primary deficit medium term. The consolidated government deficit is Average annual change in the primary deficit expected to decrease to 8.4 percent in 2021 and to 6.1 per- Percentage points of GDP cent by 2023. Achieving this would require a significant 4.0 slowdown in expenditure growth over the government’s Medium-Term Expenditure Framework (MTEF). The pri- 3.5 mary balance (the budget balance excluding interest pay- 3.0 ments) is projected to improve by 4.5 percentage points of GDP in 2021 with the withdrawal of the COVID-19 meas- 2.5 ures, and by a further cumulative 2.9 percentage points 2.0 by 2023. As a result, public debt is projected to grow to 80 percent of GDP in 2021 and to 87.3 percent by 2023. 1.5 Interest payments will continue to be the fastest-grow- 1.0 ing expenditure category: they are projected to increase from 4.9 percent of GDP in 2021 to 5.6 percent by 2023, 0.5 or about 20 percent of revenue. Stabilizing public debt 0.0 in fiscal 2025, as envisaged in the 2021 Budget Review, Historical Short-Term Medium-Term would require further adjustments in the primary bal- Trend Adjustement Adjustment ance beyond the MTEF. (2011–19) (2021) (2022–23) Source: National Treasury; World Bank. Realizing the government’s ambitious fiscal path will be challenging. The planned reduction in the prima- Fiscal slippages would put debt sustainability at risk. ry deficit is substantial. It is based in part on projected For example, the National Treasury estimates that grow- improvements in social security fund balances once the ing the wage bill by (consumer price index) inflation Temporary Employee/Employer Relief Scheme (TERS) would add total spending of 1.9 percentage points of has been withdrawn. The overall reduction appears am- GDP by fiscal 2023. In the short term, a longer-than-ex- bitious, especially compared with the trend over the last pected pandemic and associated economic crisis would decade (Figure 1.15). Also, most of the expected contain- increase pressure on health and social expenditure in ment of spending presented in the 2021 Budget Review 2021. Finally, a reallocation of resources to accommo- relies on restraining the growth of the public sector com- date spending pressures on certain categories (e.g. SOEs) pensation bill through adjustments to wage increases may result in a budget allocation that is less support- and nonwage benefits, along with a reduction in head- ive of growth and development than envisaged in the count through attrition. The budget assumes compen- Budget Review. sation growth of about 1.5 percent annually (excluding COVID-19 expenditures) over the MTEF, much lower than Improving the allocation and efficiency of budget the average annual growth of 7.4 percent in 2015 – 19. expenditure is critical to increasing the effect of fis- The position of the National Treasury over the unaf- cal policy on South Africa’s economy and its people. fordability of wage increases has been supported by the Resources must go where they can have the highest de- decision of the Labor Court of Appeals over the com- velopmental impact and help to mitigate the effect of pensation increase in fiscal 2020. However, trade un- expenditure restraint on economic and social outcomes. ions strongly resist the budgeted compensation enve- Improving transparency, accountability, and capacity (es- lope over the MTEF. The 2021 Budget Review identifies pecially at subnational levels of government); strength- the main fiscal risks as a departure from compensation ening procurement processes to avoid overpaying for budget ceilings, the financial position of public entities goods and services; and reducing duplication of work and local government, and the medium-term debt re- across different agencies would all help reduce waste demptions of SOEs. and increase the impact of public expenditure on the 26  |  Building back better from COVID-19, with a special focus on jobs economy (Burger 2021; OECD 2020; National Treasury But South Africa’s fiscal position makes it vulnerable 2020; AGSA 2019, 2021). Linking budget allocation more to changes in sentiment in global financial markets. As systematically to program outcomes (based on the noted, South Africa issues most of its debt domestically Treasury’s expenditure reviews) would also help to pri- in rand. However, an important share is held by foreign- oritize budget spending and inform the difficult choices ers. Currently, about 30 percent of its public debt is held needed to restore fiscal sustainability. The government’s by nonresidents, a share that has declined from a peak planned move towards zero-based budgeting recogniz- of 42.8 percent in early 2018. The country seems vulner- es the need to preserve service delivery and protect pro- able to persistent foreign portfolio investment outflows, grams with high economic and development impacts which would mean higher yields at a time when debt-ser- (National Treasury 2021a). vicing costs are already crowding out non-interest budget spending (Box 1.6). In case of a shock to global portfolio The current global outlook could translate into better flows, South Africa’s significant domestic savings could revenue outcomes. Higher external demand and com- substitute for foreign investment. However, this would modity prices could translate into higher-than-expected inevitably crowd out funds for private investment, which fiscal revenue. Should this materialize, there could be would likely translate into weaker economic growth. It pressure on government to increase spending. Higher would also deepen the sovereign–bank nexus (the link revenue could help smooth the fiscal trajectory; however, between the health of the banking system and the level it would not substitute for the structural reforms needed of sovereign debt). for fiscal policy to play a more countercyclical role and to increase the effect of budget spending on economic Public sector financing needs are expected to remain and social outcomes. In this context, any decision to in- high during the next few years. The government has re- crease expenditure should be driven by its expected eco- duced its borrowing requirements for 2021. Fiscal reve- nomic or social impact and not by the perception of re- nues outperformed estimates in fiscal 2020, and week- newed fiscal space. Better-than-expected revenue could ly issuances were left unchanged for most of the fiscal also allow the government to reach its fiscal and debt tar- year, resulting in the National Treasury accumulating gets faster. Lower public sector borrowing requirements cash balances of about R 91 billion instead of a project- would free up (or reduce the cost of) resources for pri- ed decrease of R 48 billion. The Treasury now plans to vate sector investment and reduce the burden of inter- use R 113 billion from its cash balances in fiscal 2021 to fi- est payments on the budget over time. nance the deficit, reducing the financing need from debt securities in the current year. In fiscal 2022 – 23, howev- er, gross borrowing requirements are expected to remain South Africa is vulnerable to stresses high, pointing to persistent pressures on debt manage- in global financial markets ment and financing. In addition, SOEs financing needs are projected to average around R55 billion annually over South Africa has generally been resilient to changes in the next three years. the global environment. Favorable commodity prices, accompanied by weak domestic demand, will continue Risks to the financial sector stem from the sovereign– to support the current account balance. The World Bank bank nexus and the weak economic environment. The projects that the current account will reach a surplus of financial sector’s exposure to sovereign risk has increased 1.5 percent of GDP in 2021 before slipping back into defi- during the pandemic. Bank holdings of government debt cit in 2022. From this point of view, South Africa is now grew substantially from March to December 2020, as non- less vulnerable to a “taper tantrum” than in 2013, when resident investors reduced their relative exposure to do- the current account deficit exceeded 5 percent of GDP. mestic debt and government issued more debt. At the end Other important strengths are the country’s long-stand- of the year, domestic banks accounted for about 22 per- ing flexible exchange rate regime, a relatively strong in- cent of total government bond holdings, up from 16.7 per- ternational investment position, and low external debt; cent in December 2019, while pension funds and insurers these would contribute to reduce external sector vulner- accounted for 29 percent. Rising household debt and re- ability should capital flows become more volatile. cord-high unemployment are key sources of banking sec- PART 1  Recent Economic Developments  |  27 BOX 1.6 South Africa’s public finances are vulnerable to stress in global financial markets Rising inflation expectations have led to some tightening of confidence in the country’s macro fundamentals even before global financial conditions, with yield curves steepening in the pandemic (Figure B.1.6.2). As a result, its 10-year govern- major advanced economies and, to varying degrees, in lo- ment bond benchmark rate is around 9 percent. Substantial cal currency- and dollar-denominated bonds in emerging foreign portfolio investment outflows would likely translate market and developing economies. Portfolio flows to these into rising yields, putting additional pressure on public fi- countries have also weakened, with many currencies slip- nances. The National Treasury’s fiscal risk statement in the ping. Supported by trade developments and favorable glob- October 2020 Medium-Term Budget Policy Statement esti- al financial conditions, South Africa’s exchange rate has mated that a 10 percent increase in interest rates (slightly strengthened, outperforming the country’s peers. However, below a 1 percentage point rise in the 10-year bond rate at it is vulnerable to a rise in yields in advanced countries — if the current rate) would translate into an increase in the in- this translates into a rise in domestic yields — given the large terest payment bill by 0.1 of a percentage point of GDP and public sector borrowing requirement. in the government debt stock of 0.5 points of GDP (National External debt is low (less than 10 percent of total government Treasury 2020). debt is in foreign currency), but a significant share of domestic So far, South Africa’s bond yields have remained broadly stable debt is held by foreign investors (about 30 percent or 22 per- relative to end-2020. Another mitigating factor is the long-term cent of GDP), making them the largest bondholder category. profile of its public debt: the average term to maturity is above This puts South Africa among the countries with the highest 12.7 years, higher than in most of its peers, including Chile share of external or foreign-held domestic debt (30 percent (10.2 years), Indonesia (8.6 years), the Russian Federation of GDP), together with Hungary (29 percent), Turkey (27 per- (6.5 years), or Turkey (5.1 years). In the event of a further cent), Poland (25 percent) and Colombia (24 percent), and steepening of the yield curve, South Africa could have some makes it vulnerable to changes in foreign investors’ senti- room in terms of debt management to issue shorter maturi- ment (Figure B.1.6.1). ty tenders while keeping an overall favorable profile. It could In addition, South Africa already has relatively high yields — es- also consider raising external borrowing, prudently, especial- pecially at longer maturities — because of the loss of investor ly from international financial institutions. FIGURE B1.6.1 Public debt is mostly domestic FIGURE B1.6.2 Local yields remain relatively high Percent of GDP, 2020 Percentage points, end-May 2021 110 16 100 14 90 12 80 70 10 60 8 50 6 40 30 4 20 2 10 0 0 -2 Brazil India South Africa Hungary China Malaysia Poland Colombia Turkey Mexico Thailand Czech Indonesia Russia Thailand Poland Hungary China Malaysia Chile Philippines India Indonesia Mexico Colombia Russia Brazil South Africa Kenya Nigeria Egypt Local Currency Debt, Domestically Held Local Currency Debt, Foreign Held Change since Dec 2020 Foreign Currency Debt 10-year benchmark bond yield Source: Institute of International Finance Source: Haver 28  |  Building back better from COVID-19, with a special focus on jobs tor risk: household debt as a share of disposable income higher domestic import tariffs, rising wage demands, rose from 73.2 percent at the end of 2019 to 75.3 percent and global oil prices. Nonetheless, the Monetary Policy a year later. This risk is mitigated by a lower debt service Committee still expects inflation to remain moderate in burden (7.7 percent of disposable income at end-2020, 2021, which should allow the SARB to maintain its accom- as against 9.4 percent at end-2019), because of the low modative monetary policy stance. Still, given structurally interest rate environment (SARB 2021). Though moder- weak investment and growth, the impact of accommo- ately high foreign currency-denominated corporate debt dative monetary policy in stimulating the economy may makes many South African companies vulnerable to ex- be limited. Also, the possibility of an early tightening of change rate shocks, they have both financial and natural the cycle in the United States could complicate mone- hedges (e.g., mining companies) to absorb such shocks. tary policy in emerging countries. In such countries, in- cluding South Africa, domestic conditions may warrant The SARB has policy space to continue to support the a continued accommodative monetary policy stance, but recovery. Inflation remains moderate, and inflation ex- global conditions may put pressure on central banks to pectations are stable and anchored towards the lower end raise interest rates. The SARB has room to mitigate mar- of the target band. The World Bank projects inflation to ket liquidity stress if global risk aversion rises — among average 4.2 percent in 2021, gradually rising to 4.5 per- other measures, it can again expand its secondary mar- cent in 2022 – 23. The SARB sees inflationary risks from ket purchases of government securities. PART 2  South Africa’s Labor Markets and Impacts of the COVID-19 Pandemic Main messages 1. The pandemic led to severe job losses, and jobs are only slowly coming back. At the time of writing, less than 40 percent of employment losses had been recovered. South Africa entered the COVID-19 pandemic with already relatively low levels of employment and a decade of weak job generation, far below the standards of most upper- middle-income countries. 2. Job losses are disproportionately concentrated among low-income workers, worsening already severe inequalities. Low-wage workers endured 4 times more job losses than high-wage workers. The government’s policy response was decisive, with pro-poor transfer programs that partially cushioned the negative impacts of the pandemic. 3. Going forward, a policy package that targets labor market outcomes can make a difference in the pace of employment recovery. This package could be built around four blocks: (1) strengthen labor market linkages of the social transfer system; (2) consider a moratorium on specific pieces of labor regulation; (3) relax constraints to entrepreneurship and self-employment; and (4) improve the effectiveness of active labor market programs through broader public-private partnerships and system enhancements. 32  |  Building back better from COVID-19, with a special focus on jobs South Africa’s labor market cially among small and medium firms. In 2010 – 19, has performed poorly public sector employment grew at an average rate of 3.7 percent, while private job growth only averaged in the past decade 2.3 percent. There was limited job generation in small businesses (1 – 9 paid employees), own-account work- The 2010s were a lost decade for both economic growth ers (no paid employees), and medium-sized firms (few- and the labor market. In 2010 – 19, economic activity and er than 50 employees). This sector would typically be a employment in South Africa stagnated (Figure 2.1). The country’s main engine of job creation, but in South Af- country entered the decade with an employment-to-pop- rica most job generation came from larger companies. ulation ratio of just over 40 percent and ended the dec- ade essentially where it started. Most of the working-age Finance and agriculture were the most dynamic sectors for population did not have regular employment either at job creation, whereas manufacturing jobs contracted dur- the beginning of the decade or at its end. Employment ing the decade. Jobs in the finance and agriculture sectors ratios for upper- and lower-middle-income countries av- grew at above-average rates, which contributed to employ- erage 63 and 49 percent, respectively. South Africa’s em- ment of high- and low-skilled workers, respectively. But even ployment absorption capacity lags far behind. after this growth, agriculture accounted for only 5 percent of total employment and finance for 15 percent. Given their FIGURE 2.1 A decade of poor labor market outcomes small share in employment, their growth could not offset Employment, labor force participation, the general weaknesses in the labor market. Manufacturing and unemployment rates, 2010 – 19 is the only sector that shed jobs in 2010 – 19; trade and re- Percent Percent tail saw limited growth, and the other sectors barely kept 60 35 up with the growth of the workforce (see Figure 2.2 and Appendix 1 for details of the labor market composition). 55 30 50 25 FIGURE 2.2 Over the last decade, jobs growth was modest in almost all categories 45 20 Employment growth rate, by labor market category, 2010 – 19 40 15 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Manufacturing Private H’holds Employment to population ratio (left axis) LFPR (left axis) Trade Unemployment Rate (right axis) Transport Main Construction Source: World Bank staff calculations based on QLFS 2010 – 19 (Statistics South Africa). Sector CSP Mining In the past decade, unemployment rose; labor force par- Agriculture ticipation improved but remained low by international Finance standards. Working-age South Africans increased their en- Formal/Informal Formal gagement with the labor market, but they mainly swelled Sector Informal Semi−Skilled the ranks of the unemployed, particularly in the second Skill Low−Skilled half of the decade. Of the 4.2 million new entrants to the Level High−Skilled labor market who started looking for jobs between 2009 Union Union and 2019, only 2 million (46 percent) found one. By 2019, Status Non Union unemployment affected 29 percent of the labor force. When Private/Public Private Sector Public the almost 3 million people that have been discouraged Small from searching for jobs are included, the expanded unem- Firm Medium ployment rate reached 39 percent. (See Box 2.1 for a sum- Size Large mary of the approach and definitions used in this section.) −1 0 1 2 3 4 5 Percent South Africa’s labor market is small and stagnant, be- Source: World Bank staff calculations based on data from PALMS v3.3 (DataFirst) cause job creation in the private sector is weak, espe- and QLFS 2010 – 19 (Statistics South Africa). PART 2  South Africa’s Labor Markets and Impacts of the COVID-19 Pandemic   |  33 BOX 2.1 Measuring the labor market impact of the COVID-19 pandemic in South Africa We examine the labor market impacts of the COVID-19 pan- b. Were available to work but are discouraged work-seek- demic by tracking the dynamics of the main labor outcomes ers or have other reasons for not searching. during the four quarters of 2020. To do so, we use publicly 5. Discouraged work-seeker: a person who was not employed available data from the Quarterly Labor Force Survey (QLFS), during the week before the survey interview, wanted to work, collected by Statistics South Africa. The data are well fitted for was available to work/start a business, but did not take ac- this analysis, as this survey is specifically designed to capture tive steps to find work during the past four weeks for one labor market dimensions, has a robust sample size, and has of the following reasons: no jobs available in the area; una- been collected for more than 10 years. ble to find work requiring his/her skills; or lost hope of find- We use the following definitions for key variables, consistent ing any kind of work. with the official approach of Statistics South Africa and the in- 6. Informal sector: The informal sector has two components: ternational standards of the International Labour Office (ILO): a. Employees working in establishments that employ fewer 1. Labor force participation: the working-age population (age than five people, which do not deduct income tax from 15 – 64), both employed and unemployed. their salaries/wages; and 2. Employment: people (age 15 – 64) who, during the week b. Employers, own-account workers, and persons provid- before the survey, did any work for at least one hour, or ing unpaid work in their household business who are had a job or business but were not at work (i.e., were tem- not registered for either income tax or value-added tax. porarily absent). 7. Informal employment: Persons who are in precarious em- 3. Unemployment (narrow): people (age 15 – 64) who were not ployment situations, not covered by legally mandated la- employed in the week before the survey and were bor protections, irrespective of whether the entity for which they work is in the formal or informal sector. They, there- a. Actively looking for work or tried to start a business in fore, comprise all persons in the informal sector, along with the four weeks before the survey interview; and avail- employees in the formal sector and persons working in pri- able for work (i.e., would have been able to start in the vate households who are not entitled to or receive basic week preceding the survey interview); or benefits (e.g., pension or medical aid contributions) from b. Not actively looking for work in the past four weeks but their employer and who do not have a written contract of had a job or business to start at a definite date in the employment. future and who were available to work. 8. Hours of work: the number of hours an employed individual 4. Unemployment (expanded): includes 15 – 64-year-olds who: usually works each week, from Monday to Sunday. a. Fall under the narrow definition of unemployment (i.e., 9. Wages: the monthly earnings that an employed person re- available and searching for work); or ceives in their main job before any deductions. Reference: Statistics South Africa. Reinvigorating the labor market is even more impor- FIGURE 2.3 South Africa is experiencing a demographic tant for capitalizing on the projected growth of the opportunity working-age population. The country’s demographic Population (millions) trendline is encouraging: the population is growing be- 50 cause South Africans live a longer and a healthier life 40 than their parents did, even though their life expectan- cy remains among the lowest in the world. As in most 30 emerging economies, South Africa’s population growth 20 is now driven by adults. Since the late 1990s, the number of adults of working age (18 – 65 years) kept rising, while 10 the number of children barely changed. These trends will 0 continue at least until 2050. This is a major opportuni- 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 ty, because the adult population could reach 60 million in 2050, while the number of children would stay stable Children (0–17) Working Adults (18–64) at just below 20 million (Figure 2.3). With a much-im- Seniors (65+) proved health system, South Africa could have an even Source: QLFS 2020 (Statistics South Africa). 34  |  Building back better from COVID-19, with a special focus on jobs larger population, reinforcing the current trend. More FIGURE 2.5 More than 4 million young people are not South Africans would live longer, and the country would working or studying keep adding adults to its population. Resuming job crea- Main activity, by age group tion is key to turning this demographic momentum into Millions a development opportunity. 0.4 To seize the demographic momentum, addressing 2.6 6.9 the labor market integration of young people is crit- ical. Young people face the highest unemployment 6.5 rates (Figure 2.4). Among 15 – 24-year-olds, 63 percent are unemployed and looking for work, whereas among 3.0 4.2 25 – 34-year-olds, this rate reaches 41 percent. The inci- dence of unemployment among young people is twice as high, or more, than among older age groups. More- 4.3 over, when the expanded definition (i.e., including dis- 1.7 couraged workers) is considered, unemployment rates 4.3 are as high as 74 percent for 15 – 24-year-olds and 51 per- 1.3 5.1 cent for 25 – 34-year-olds. 0.8 15–24 years 25–34 years 15–34 years FIGURE 2.4 Young people face acute unemployment rates Scholar/student Other not economically active Unemployment rates, strict and expanded definitions, Unemployed Employed by age group Source: QLFS 2020 (Statistics South Africa). South Africa 15–24 years The pandemic exerted a heavy toll on the labor market 25–34 years The labor market was badly affected by the COVID-19 35–44 years pandemic. In the second quarter of 2020 (which includes the level 5 lockdown, when most economic activity was halted), the economy lost 2.2 million jobs. In a country 45–54 years with a large population but limited employment oppor- tunities, such a shock was significant, representing a de- 55–64 years crease of 13.6 percent in overall employment. 0 10 20 30 40 50 60 70 80 After the initial shock, jobs started to recover, but most Percent have not yet returned. About half a million jobs were re- Strict definition Expanded definition covered in the third quarter of 2020, and another 300,000 Source: QLFS 2020 (Statistics South Africa). returned in the fourth quarter (Figure 2.6). However, com- pared with the first quarter, over 60 percent of the lost Most young people are jobless and out of school. About jobs were still missing. By the end of 2020, 1.4 million 5 million are working, and 7 million are studying. In jobs had been lost, representing an 8 percent contrac- contrast, about 8.5 million are either unemployed and tion in aggregate employment. To put this into perspec- looking for work (4.3 million) or just inactive (4.2 mil- tive, it took the country six years to add 1.4 million jobs lion) (Figure 2.5). to its pre-pandemic economy. PART 2  South Africa’s Labor Markets and Impacts of the COVID-19 Pandemic   |  35 FIGURE 2.6 The COVID impact: Employment declined fast FIGURE 2.7 South Africa’s labor market did worse than and recovers slowly most of its peers during the crisis Number of jobs by quarter, 2019 – 20 Employment ratios in upper-middle-income countries, Millions Q3 2019 and 2020 Percent Percent 16.5 80 5 16.0 70 0 15.5 60 15.0 50 -5 40 14.5 -10 30 14.0 20 -15 Q1 Q2 Q3 Q4 10 2019 2020 0 -20 Thailand Vietnam Romania Turkey Mexico Argentina South Africa Brazil Colombia Peru Chile Source: World Bank staff calculations based on QLFS 2019Q1 – 2020Q4 (Statistics South Africa). Notes: a. Estimates weighted using relevant sampling weights. b. Sample restrict- ed to working-age population (15 – 64 years). 2019Q3 (left axis) 2020Q3 (left axis) South Africa’s labor market was among the most se- Change in Employment to Population Ratio (right axis) verely affected by the pandemic. Among upper-middle Source: Labor Force Surveys. Countries selected based on data availability. and high-income emerging markets (including Chile, Note: Change in employment ratio calculated as percentage change relative to 2019. Mexico, Colombia, and Turkey), South Africa’s employ- ment losses are relatively large (Figure 2.7). The percent- FIGURE 2.8 The size of the labor market keeps shrinking age reduction in its employment ratios in the third quar- Q4 2020. Annual changes in parenthesis, relative ter of 2020 was not as large as in Brazil or Chile, but were to Q4 2019 worse than in Turkey, Mexico, and Argentina, for exam- ple. Among the group of countries with available data Population and comparable development, South Africa’s labor mar- 59m ket ranks as the fifth most severely affected. Non-Working Age Working Age (15–64) Thus, South Africa’s employment levels shrank even 20m 39m (up 0.5m) further, from an already low base. Out of a working-age population of 39 million, only 15 million people are Active Not Active Studying working (Figure 2.8). Had the country’s employment 22m (down 1m) 10.5m (up 1m) 6.5m (up 0.5m) rates been more similar those of upper-middle-income countries, its employment size would be 20 – 24 million. Unemployed Employed By the fourth quarter of 2020, South Africa had 7 mil- 7m (up 0.5m) 15m (down 1.4m) lion unemployed people; 3 million more were available to work but discouraged from searching for it. Private Sector Public Sector 12.3m (down 1.4m) 2.8m A reduction in hours worked played an important part in absorbing the shock of the pandemic and preventing Informal Sector Formal Sector Private HH’s further job losses. In the second quarter of 2020, about 2.6m (down 0.5m) 8.5m (down 0.8m) 1.2m (down 0.1m) 2.3 million workers had to reduce their working hours to zero, but they could keep their jobs and return to work Own Account >50 Employees <50 Employees once the lockdown eased (Figure 2.9). The overall share 0.2m 3.3m (down 0.3m) 4.5m (down 0.3m) of workers who were ‘locked out’ of their jobs and could Source: World Bank staff calculations based on QLFS 2020Q4 (Statistics South not work any hours reached 16 percent in the second quar- Africa). 36  |  Building back better from COVID-19, with a special focus on jobs ter of 2020, but quickly recovered back down to 5 percent FIGURE 2.10 Poorer workers were much more likely in the third quarter and 2 percent in the fourth quarter. to lose jobs Employment losses by quintile of wage distribution FIGURE 2.9 The share of workers who worked zero hours Employment relative to 2020Q1 (Percent) spiked in Q2 2020 100 Hours of work by quarter, 2020 Percent of worker 90 16 80 12 70 8 60 Q1 Q2 Q3 Q4 4 Poorest 20% Quintile 2 Quintile 3 0 Quintile 4 Richest 20% Q1 Q2 Q3 Q4 Source: World Bank staff calculations based on data from QLFS 2020Q1–Q4 2019 2020 (Statistics South Africa). Notes: a. Estimates weighted using computed bracket weights. b. Sample Source: World Bank staff calculations based on QLFS 2019Q1 – 2020Q4 (Statistics restricted to the employed (employee, employer, or self-employed) working-age South Africa). population (15 – 64 years). c. Wages expressed in January 2021 rand. d. Wage data Notes: a. Estimates weighted using relevant sampling weights. b. Sample restrict- adjusted for bracket responses and outliers. e. Zero working hours replaced with ed to working-age population (15–64 years). mean working hours for a given year and quarter. Wages were also adjusted downwards later in the year. Employment losses also differed among demograph- Relative to jobs and hours, wages were slower to respond ic subgroups. Young people, people with limited educa- to the crisis. The extensive and intensive margins of the tion, and black and colored workers endured larger loss- labor market cushioned most of the pandemic shock, as es. However, the impacts were not substantially different median wages remained broadly constant in the second between women and men, or between rural and urban quarter of 2020. Earnings started to respond later in the populations (Figure 2.11). year. When compared with the first quarter of 2020, the monthly median wage fell by 10 percent between the first FIGURE 2.11 Among people who kept their jobs, high- and fourth quarters. er-wage workers suffered bigger earnings losses Real monthly wages by percentile of wage distribution and by quarter of 2019 – 20 COVID-19 widened inequalities Real monthly wage (Jan 2021 R, thousands) in the labor market 25 20 Pandemic-related job losses widened already high earn- 15 ings inequalities. Among low-wage workers (i.e., in the 10 bottom 20 percent of the distribution), employment col- lapsed by 35 percent between the first and second quarters 5 of 2020 (Figure 2.10). In sharp contrast, for those in the 0 top 20 percent of the wage distribution, it declined by less Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 than 10 percent. In other words, low-wage workers suffered 2019 2020 almost four times more job losses than did high-wage p10 p25 p50 p75 p90 ones (see Personal Perspective 2.1 below for Davy Tsopo’s Source: World Bank staff calculations based on QLFS 2019Q1 – 2020Q4 (Statistics inspirational story of how the pandemic prompted him South Africa). to start his own business). Also, while the third quarter Notes: a. Estimates weighted using computed Statistics South Africa sampling weights. b. Sample restricted to the employed (employee, employer, or self-em- brought a moderate job recovery to low-wage workers, ployed) working-age population (15 – 64 years). c. Wages expressed in January the recovery did not continue into the fourth quarter. 2021 rand. d. Wage data adjusted outliers. e. Data excludes bracket responses. PART 2  South Africa’s Labor Markets and Impacts of the COVID-19 Pandemic   |  37 PERSONAL PERSPECTIVE 2.1 From cleaner to cakemaker When South Africa’s first strict lockdown began in March Davy’s transition from cleaner to self-employed baker is an ex- 2020, Davy Tsopo lost his job as a cleaner at a restaurant in ample of the experiences of other people who developed new Johannesburg. His first child was one month old, his wife was interests, worked hard, and were supported by the goodwill of on maternity leave, and he had no idea how he would feed other South Africans. His advice resonates with the features of his family or pay his rent in the tiny flat on the fourth floor of a post-COVID-19-pandemic world, where connectivity, commu- their apartment block. nication, and online networking are essential skills. “Respect social media. If you abuse it, it will abuse you. But if you treat A sympathetic friend shared a Wi-Fi password and told it well, things will change. Look at where I am now,” he said. Davy to “keep his mind busy” by watching funny videos on YouTube. Instead, Davy began watching podcasts on baking cakes. He wrote down recipes even though the electric oven in the kitchen he shared with four other families was not con- nected. When restrictions were eased, the electrician came, and Davy started baking muffins, which he advertised on his Instagram profile. A female friend at his previous place of work asked him to bake her a cake. “I was puzzled, because she is diabetic,” he said. “But she posted a picture of the cake on her Instagram account with a request for support and tagged me.” People began sharing the post and ordering cakes. Requests came in from South Africans overseas, who wanted to send cakes to relatives back home. Davy’s friend arranged a Zoom meeting with a baker in the United Kingdom, who taught him how to improve his icing tech- niques. “Life started to change. Every day I was learning new things and gaining confidence,” he said. Davy’s wife went back to work early to get her full salary, while he stayed at home to babysit their son during the day and bake cakes in the evening. He won competitions for entrepreneurs, was interviewed on radio and television, and received prizes ranging from comput- ers to a year’s supply of cake ingredients. A year later, Davy was earning more than double his previ- ous salary, and he no longer needed to work regular shifts of over 12 hours, seven days a week. He escaped the fate of many South Africans in 2020, when 1.5 million people — main- ly low-income earners — lost their jobs. Source: World Bank staff interviews. Finally, the pattern of job losses was also unequal ic. The earnings reduction was disproportionately larg- across labor market sectors and occupations. Employ- er for workers in the top half of the wage distribution. ment in manufacturing, construction, and mining is still For example, the monthly wage for the 90th percentile below 90 percent of levels in the first quarter of 2020 (Fig- (workers with wages higher than 90 percent of all work- ure 2.12). People working in low- and semi-skilled occu- ers) decreased by 15 percent, and the monthly wage for pations, in non-unionized arrangements, and in smaller 75th percentile went down by 17 percent between the first firms were more likely to lose their jobs, as were those in and fourth quarters of 2020 (Figure 2.13). This adjust- the informal and private sectors. ment partially offsets the widening effects of job loss- es on inequality. In contrast, high-wage workers faced disproportionate- ly larger reductions in wages. This market also started to With deteriorating employment prospects and wag- adjust through earnings a few months into the pandem- es, Covid-19 brought sizeable monetary welfare loss- 38  |  Building back better from COVID-19, with a special focus on jobs FIGURE 2.12 Unequal impacts of job losses across demographic subgroups Employment levels indexed to Q1 2020 a. Gender b. Geo Type c. Age Category Percent Percent Percent 100 100 100 95 95 95 90 90 90 85 85 85 80 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Men Women Rural Urban 15−34 35−49 50−64 d. Education Category e. Population Group f. Province Percent Percent Percent 100 100 100 90 95 90 90 80 80 85 70 80 70 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Primary or less Incomp. Second. African Coloured WC EC NC Comp. Second. Post−Second. Indian/Asian White FS KZN NW GP MPM LMP Source: World Bank staff calculations based on data from QLFS 2020Q1 – Q4 (Statistics South Africa). FIGURE 2.13 Unequal impacts of job losses across labor market subgroups Employment levels indexed to Q1 2020 a. Industry b. Sector c. Skill Level Percent Percent Percent 100 100 100 90 90 95 90 80 80 85 70 70 80 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Agri. Construc. CSP Formal Informal High Skilled Semi Skilled Finance Mining Trade Low Skilled Transport Pvt H’holds Manufacturing d. Union Status e. Firm Size f. Contract Type Employment levels indexed to Q1 2020 Employment levels indexed to Q1 2020 Employment levels indexed to Q1 2020 110 100 100 100 95 90 90 90 80 80 85 70 70 80 60 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Union Non-Union 0−9 workers 10−49 workers Written Contract 50+ workers Verbal Contract Source: World Bank staff calculations based on data from QLFS 2020Q1 – Q4 (Statistics South Africa). PART 2  South Africa’s Labor Markets and Impacts of the COVID-19 Pandemic   |  39 es for the typical adult South African. For an average the grant amounts: the older persons and disability adult South African, welfare — as measured by a com- grants were increased by R 250 monthly for six months posite index of employment and wages — decreased by (May – October 2020) for their 4.7 million beneficiaries. 18 percent between the first and fourth quarters of 2020 More than 12.8 million child social grant beneficiaries (Table 2.1). The synthetic welfare measure was construct- received a one-month top-up of R 300 per beneficiary ed by weighting median wages by the employment rate.1 in May. The 7.1 million caregivers to children receiving the child grant, who were registered in the child social TABLE 2.1 Simulated welfare losses in 2020 for the typical grant database in February 2020, received monthly top- South African ups of R 500 from June to October 2020, under the tem- Quarter First Second Third Fourth porary child social grant caregivers allowance program. Employment rate 42.1 36.3 37.5 38.2 (%) The contributory social insurance system, which in- Median wage cludes the unemployment insurance fund (UIF), was 4,432.90 4,308.60 4,037.70 4,018.20 (R/month) also mobilized. Before the pandemic, about 8 million Expected earnings individuals (or 54 percent of employed people) were for average South 1,866.30 1,564.00 1,514.20 1,535.00 contributing to the fund. In response to the pandem- African ic, the UIF paid out R 7.5 billion in 1.3 million payments Welfare change (relative to before 1 -16% -19% -18% by February 2021.2 The authorities also introduced TERS the pandemic) to provide wage support in cases where employers had fully or partially closed operations. It covered a portion Source: World Bank staff calculations (38 – 60 percent) of a firm’s wage bill, with a maximum salary threshold of R 17,712 per worker per month, for up to three months. Initially, TERS was only available for Government’s Response those who contributed to the UIF, but this restriction was to the Pandemic and Policy waived at the end of May 2020. By February 2021, TERS had paid out about R 57 billion in over 13 million pay- Options Going Forward ments to more than 4.5 million unique individuals. This is equivalent to about one in every three individuals em- South Africa had a comprehensive social protection ployed in the formal sector, or half of all UIF contributors. system before the COVID-19 pandemic, with a strong pro-poor impact. At the time, 30 percent of the popula- COVID-19 highlighted the absence of social protection tion — about 18 million people — received poverty-based for informal workers, and the COVID-19 social relief social assistance in the form of at least one social grant of distress program was launched to fill this gap. In payment per month. The three largest grant programs a swift response, social relief of distress grants provided cover 97 percent of all grant recipients: the child sup- R 350 monthly of emergency-relief grants to informal sec- port grant (71 percent), the older persons grant (20.3 per- tor workers and unemployed people who were not eli- cent), and a disability grant (5.9 percent). Most beneficiar- gible for other social grants (Table 2.2; also see Personal ies were in the poorest quintiles, and the transfers were Perspective 2.2 below for the story of a small-scale farm- equivalent to nearly 30 percent of their consumption. er). As of December 2020, 6 million people had received at least one payment of the social relief of distress grant. The social protection system was leveraged effectively The grant was extended until January and then again to to provide emergency support to vulnerable people. April 2021. This expanded the coverage of the social as- In response to the pandemic, the government increased sistance system to 40 percent of the population. 1. Several assumptions underlie this simple approach, including the use of the employment rate as a proxy for the probability that an average South African can access the median wage. The employment rate decreased from 42 to 38 percent and median wages decreased by 10 percent, making the typical working-age person in South Africa clearly worse off. Before the pandemic, the average working-age person faced an employment rate of 42% and a median wage of R 4,400/month, implying “expected earnings” of R 1,900 (4.4 x 0.42). By the fourth quarter of 2020, they faced an employment rate of 38% and a median wage of R 4,000/month, implying expected earnings of R 1,500 (4 x 0.38). 2. It is not clear from available data how many unique individuals received transfers within those 1.3 million payments. Preliminary information suggests the scheme reached 650,000 unique beneficiaries. 40  |  Building back better from COVID-19, with a special focus on jobs TABLE 2.2 Summary of the social protection response Pre-Covid-19 grant Total beneficiaries Covid-19 top-up Social protection (rand/month) (millions) (rand/month) Periodicity Social assistance Older persons grant 1,860 4.8 250 May – October 2020 and disability grant 300 per beneficiary (May) Child support grant 440 12.7 May – October 2020 500 per caregiver (June – October) COVID-19 social relief - 6 350 May 2020 – April 2021 of distress grant Social insurance UIF - 0.65 (TBC) - Permanent TERS - 4.5 Variable May 2020 – March 2021 Source: World Bank staff calculations based on National Treasury 2020 and SASSA 2020. PERSONAL PERSPECTIVE 2.2 Small-scale farmer benefits from emergency funding Like many other South African small-scale farmers and entre- “It was a very sad occasion, and tears dropped. What was so preneurs, Nomhle Nhlapho, a single mother, had a tough year tough was that everyone wanted to help revive the business. in 2020. She had to close one of the two bakeries that she It was a collective thing,” she says. There were no other op- ran in the heart of Johannesburg, and she battled to find out- tions, as landlords tried to give relief by removing levies, but lets for the vegetables that she grew on her 2.4-hectare plot the rent still stood, she adds. 70 km away from the city. Business is still not what it used to be, as universities are “It was myth-busting time. People argue that you can’t go wrong mainly teaching online, and there are fewer people on the with agriculture; people will always need food. Well, sales and streets. School attendance is also lower. “I had to dip into my prices went down. We had to adjust outputs so we could mini- savings, and go into debt,” Nomhle says. mize the damage. Overall, it was a year of big losses,” she says. Agriculture was one of the few sectors that grew strongly dur- ing the year, as rainfall was good in many areas, and food pro- duction and transport were exempt from the tough lockdown restrictions imposed at the end of March 2020. But the country’s 2 million small-scale farmers suffered, partly because outlets appeared to be “fixed” in favor of commercial farmers and partly because they had fewer resources to deal with unexpected shocks from extreme weather. Many would not have survived without emergency funding from the govern- ment, which focused on young, female, and disabled farmers. “For me, it was very helpful. Of my inputs, excluding labor, wa- ter, and salaries, I can estimate that 60 percent were covered as a result of the grant,” Nomhle says. “I also shifted what I was growing to okra and spinach from watermelons, baby mar- row, and squash.” Nomhle was less fortunate with her bakeries. She had to close the one that she operated in the city center, which is less af- fluent than the surrounding suburbs. This meant she had to retrench eight people. Source: World Bank staff interviews. PART 2  South Africa’s Labor Markets and Impacts of the COVID-19 Pandemic   |  41 Rebuilding South Africa’s labor women. The employment tax incentive (ETI) has been shown to incentivize short-term employment by the market after the pandemic private sector in South Africa. The international evi- dence finds that this program is particularly effective While the pre-pandemic structural reform agenda is in crisis and rebound periods, but less so when the still of the utmost importance, South Africa could also economy is healthy; this would suggest expanding the consider a complementary package of policy actions program until the economy recovers. to support the economic recovery. Addressing structur- al constraints to inclusive growth, as described in Box 1.1, • Second, continuing TERS for lockdown-damaged sec- remain a priority, and policies in this regard could per- tors until a sizeable share of firms are operational haps be accelerated because of the pandemic. Addressing again. The TERS program has helped to maintain the the high costs of nontradeable inputs, SOE reform, low link between workers and employers, which is expect- competition in product markets, and skills scarcity, how- ed to facilitate firms’ return to business and people’s ever, would take time to bear fruit, even if action is taken return to work. If TERS is cut short, the link might be now. It is, therefore, opportune to consider actions that broken, which would increase both unemployment can complement this agenda and ease the jobs recovery and the cost to firms as they search for and train a in the shorter term. new workforce. The program would need to be time- bound, ending when the economy reaches a prede- A policy package to support the labor market could termined level of activity. While TERS has been ex- provide a mix of time-bound emergency employment tended several times, another extension should be programs and measures to spur entrepreneurship and considered. If targeted to the sectors most affected by self-employment. Time-bound emergency programs the lockdown (e.g., tourism, hospitality, and restau- would offer programs and policies that would not be rants), it should be financially viable for the UIF (see appropriate in the long run because of fiscal costs or job Personal Perspective 2.3 below for an insight on how quality issues but could temporarily help people transi- restaurants have struggled). tion into the labor market. They shift the focus away from emergency aid for households and toward incentives for employers to hire people and for workers to enhance Consider negotiating a moratorium their employability. There are also areas such as entrepre- on specific regulations with social partners neurship and self-employment where South Africa lags other upper-middle-income countries and could make The government could consider a temporary suspen- gains in the short to medium run. Finally, the country’s sion of regulations that increase the real cost of labor approach to active labor market programs could yield ef- and make job recovery more difficult. A moratorium ficiencies for this and future crises. These suggestions are should be considered on specific pieces of the existing discussed in turn in the next subsections. and future legislative and regulatory architecture that are likely to hinder re-employment outcomes. Such a mor- atorium should be used primarily to benefit vulnerable Strengthen labor market linkages people, who have disproportionately lost their jobs dur- of the social transfer system ing the deep economic crisis triggered by the pandemic. To improve the labor market effects of social transfers, The specific policies that should be subject to a mora- existing programs could be adjusted to focus on integrat- torium could be negotiated at the National Economic ing people into the labor market in a fiscally sustainable Development and Labour Council (NEDLAC) for common way. This could be done through two channels: agreement and adoption to boost hiring as the econo- my is rebuilding. The moratorium should be strictly time- • First, expanding and deepening the employment tax bound and linked to the pandemic and its economic con- incentive to encourage hiring in the private sector, sequences. For example, it could last 12 – 18 months, with particularly for those who face more constraints to an agreement among social partners that the relevant leg- labor market integration, such as young people and islative processes would resume at the end of that period. 42  |  Building back better from COVID-19, with a special focus on jobs PERSONAL PERSPECTIVE 2.3 Restaurants — 86 Public Mwezi Macingwane’s business, like many other entrepreneurs “We didn’t think we’d manage. We thought we’d default on in South Africa’s restaurant industry, was battered by alcohol our lease,” Mwezi said. “We managed to renegotiate that, but bans, curfews, and social distancing restrictions during the 30 percent of the shops in the complex where we operate are pandemic. To keep their business afloat, he and his business still shut.” Mwezi said he is not angry at the government for partners dipped into a ‘rainy day’ fund they had started to build trying to stop the loss of life. By end-June 2021, South Africa for 86 Public, the large, high-end bar and pizzeria they estab- had recorded over 60,000 COVID-19-related deaths. lished in Johannesburg in the middle of 2018. The spacious lower floor of his restaurant, where the bar is lo- Restaurants make most of their money from alcohol sales. cated, is well ventilated when the windows are open. There is an When restaurants were allowed to reopen without serving outdoor patio dining area upstairs, which Mwezi said “saved us” drinks, the partners opted to keep their restaurant shut. When when people started to avoid indoor spaces. What also worked their fund was depleted, Mwezi and his main business partner, in their favor were the games, quiz, and speed-dating nights Henry Cock, started an online fundraising campaign: Henry they had held before the pandemic struck, which helped to ran 100 km in the 6-meter passage in his home during the deepen the restaurant’s relationship with its regular customers. 5-week period when people were not allowed to go outdoors. Many others in the restaurant business were unable to weath- Like many other South African restaurants, they also raised er the storm. No hard figures are available, but the Restaurant money with an appeal to loyal customers, bolstered by a net- Association of South Africa estimates that one-third of the 11,000 work of friends overseas. establishments in its database were forced to close in the 12 Their efforts were successful — 86 Public is operating, albeit months after the imposition of first lockdown at the end of March with 70 percent of its pre-pandemic turnover. All 45 of its per- 2020. This was devastating for the estimated 330,000 employ- manent staff kept their jobs, although the structure of their ees in the restaurant and hotels sector. Most had low-paying jobs, salaries changed. and the loss of even that income has left many families destitute. Source: World Bank staff interviews. Help people create jobs in self-employment and ployment in South Africa would be about half its current micro and small businesses rate. A rate of self-employment of 30 percent (without de- creasing the other forms of employment) would increase In South Africa, it is relatively more difficult for peo- the number of workers by about 3.5 million, or about half ple to start their own business or work as own-account of people who are currently unemployed. workers. Only 10 percent of employed workers are self-em- ployed, against about 30 percent in upper-middle-income Legislative reforms and well-designed programmatic countries on average (Figure 2.14). A rough but striking il- interventions could grow the class of entrepreneurs, lustration is that if self-employment were to reach levels micro and small businesses, and self-employed peo- more typical of upper-middle-income countries, unem- ple in South Africa. Two deserve serious consideration: PART 2  South Africa’s Labor Markets and Impacts of the COVID-19 Pandemic   |  43 FIGURE 2.14 Self-employment — South Africa’s biggest opportunity to create jobs Employment levels indexed to Q1 2020 60 50 40 30 20 10 0 United States Norway Russia Canada Germany Australia Sweden Japan South Africa Hungary Latvia Lithuania France Austria Israel Finland Slovenia Belgium Switzerland Ireland United Kingdom Spain Netherlands Czech Republic Portugal New Zealand Poland Italy Korea Chile Costa Rica Turkey Greece Mexico Brazil Colombia Denmark Luxemburg Source: OECD and STATS SA. • First, relaxing legal constraints and rules. The regu- and 23 percentage points more likely to have a firm latory constraints on entrepreneurship, micro and with 10 or more workers. Winners tended to innovate small businesses, and self-employment in South Af- more and earned higher sales and profits. Grants al- rica are well documented (Box 2.2). Softening licens- lowed firms to acquire more inputs (capital and la- ing and registration requirements, strict policing, bor) without changes in business networks, mentors, zoning laws, and industry-specific protections, and self-efficacy, or uses of other sources of finance (Mc- harmonizing overlapping approaches between na- Kenzie 2017). South Africa’s programs that offer this tional, provincial, and local governments are initia- suite of services could be scaled up. tives worth considering. The objective is to get people working — the opportunity cost and human capital loss of unemployment are significant. This is even Strengthen active labor market programs more important when considering the demograph- through public-private partnerships ic opportunity and the acute rates of unemployment among young people. South Africa makes extensive use of active labor mar- ket programs, but there is much room for systemic • Second, facilitating entrepreneurial training and improvement. A review of more than 100 active labor contests and lotteries for start-up grants. A rich in- market programs (including entrepreneurial develop- ternational literature finds that programs that pro- ment, public works programs, training, work readiness, vide low-skilled entrepreneurs with business skills, placement, and labor intermediation services) offered at socio-emotional competencies, and access to grant the national level (with a combined budget of R 100 bil- financing have much higher success rates in launch- lion) finds that the constellation of programs may not ing sustainable self-employment endeavors than loan be the right ones to address the employment challeng- programs or financing alone. For example, the You- es facing the country. Although most unemployed peo- WIN! competition in Nigeria, which attracted 24,000 ple are vulnerable youth, programs are largely designed applicants who wanted to start a new business or ex- for better-off entrepreneurs or young people with more pand an existing one, awarded each winner about skills. Few explicitly include vulnerable young people; in- US$50,000 on average and offered them a 4-day busi- stead, the initial eligibility conditions effectively crowd ness plan training course. After 3 years, entrepreneur- them out. This is due in part to the decentralized ap- ial activity, including entry, survival, employment, proach — the 20 departments in the review offer pro- and profits, had increased sharply. For instance, win- grams to meet their departmental mandates rather than ners who had wanted to start new firms were 37 per- working together to help resolve the national unemploy- centage points more likely to be operating a business ment challenge. 44  |  Building back better from COVID-19, with a special focus on jobs BOX 2.2 Unlocking entrepreneurship and self-employment in South Africa For most of the 1990s and 2000s, formal policy documents a. Licensing and registration requirements. The allocation neglected the informal sector, which tends to be the entry of licenses and requirements for business registration for point for entrepreneurs, start-ups and own-account work- various types of informal business activities is a well-docu- ers. However, in the past decade this has gradually changed. mented area of concern. For example, a survey of informal Strategy documents such as the National Development Plan businesses in Diepsloot revealed that one in every three envision that 2 million more informal sector jobs will be cre- owners felt that formal permits and regulations were a sig- ated by 2030 — a 66 percent increase on current numbers. nificant constraint (World Bank 2014). The Department of Small Business Development developed b. Zoning laws. Land-use zoning laws place undue restric- a policy plan called the National Informal Business Upliftment Strategy (NIBUS). Launched in 2014, NIBUS was the first na- tions on business operations in townships and poorer ur- tional policy document focused directly on the sector. It sug- ban settings where workplaces, public spaces, and private gested a more coherent and supportive government approach homes often overlap. In addition, trading is currently re- that aimed to “create an enabling regulatory environment and stricted in many public places, including parks, at nation- thriving informal sector” (DSBD 2016, 7), which is key to un- al monuments, near government buildings, and at large lock entrepreneurship and self-employment. public events where temporary trading could take place. At present, however, the main problem appears to be one of c. Industry-specific regulations that exclude informal firms. implementation. The department’s 2017 annual report noted The informal sector is treated as a homogenous set of activ- that NIBUS had not been taken up with much effort because ities largely defined by trade. However, the sector includes of a “lack of leadership, lack of ownership of the project, un- an array of activities by entrepreneurs in a range of sec- der-capacity, and poor planning and execution of the project” tors where regulatory constraints create barriers to growth. (DSBD 2017, 16). It also revealed that R 53.6 million of the For example, small, local construction companies in town- funds allocated to NIBUS had gone unspent in the previous ships could be better linked into procurement plans to up- year. According to the ‘Implementation Roadmap’ that accom- grade and maintain infrastructure. Other industries that panied NIBUS, there was a plan to set up a national task team could benefit from linking informal firms to state procure- to coordinate the rollout of its strategy, with support at the pro- ment and services include waste picking, light manufactur- vincial and municipal level. However, it is unclear whether this ing, and various personal services. has taken place. d. Sector-specific regulations that include informal firms. For A range of policy issues still needs to be addressed to foster example, sector-specific bargaining councils determine sec- entrepreneurship. One of the most accessible avenues in the toral wage rates. The practice of extending bargaining coun- short term is to ease restrictive regulations that deter entry cil agreements to nonparties raises the costs of informal into self-employment. As noted by Turok and others (2017, firms and threatens their viability. In terms of harmonizing 37), “regulatory obstacles are the primordial, predominant, regulatory approaches, there is very little communication essential obstacles for informal enterprise growth”. Among and policy coordination on the informal sector between na- the regulatory changes worth highlighting are: tional, provincial, and local government. In the absence of a Policing of informal traders. Street traders form the majori- national strategy, provinces, municipalities, and cities have ty of self-employed workers, yet most cities appear to restrict devised their own piecemeal regulatory frameworks. These their ability to operate through fines and even the confisca- frameworks are reactive and haphazardly enforced, with tion of goods. Unnecessarily punitive sanctions are strong lim- little or no monitoring of the impacts. In the short term, it iting incentives for those who work, or may look to begin work, may be possible for the department to use NIBUS to guide in the sector. the regulatory agenda and ensure increased coherence. The lack of coordination of active labor market pro- with the private sector to identify how to leverage labor grams and the absence of a strong private sector voice and product markets. As a result, there are significant contribute to significant inefficiencies. Different depart- overlaps, gaps, and general inefficiencies in serving un- ments offer similar programs for similar target groups or employed people. Four changes should be considered. offer potentially complementary programs without ex- ploiting such complementarities; some programs under- • Leverage temporary employment programs to guide perform in terms of their potential to support jobseekers; workers toward sustainable job opportunities. and synergies are not exploited to create a net of support Workers who participate in large public employment for jobseekers. Many active labor market programs place programs — including the Expanded Public Works the public sector at the center of employment creation, Programme and the Presidential Employment Stimu- which is costly and unsustainable, rather than working lus — could be incentivized to systematically incorpo- PART 2  South Africa’s Labor Markets and Impacts of the COVID-19 Pandemic   |  45 rate well-developed career orientation and skills train- ing modules into the program. Many of these tools Conclusion are online, and access could be facilitated while young The proposed policy measures are complementary to people are at work. Continuing in the program could the broader structural reforms needed to unlock in- be conditional on workers submitting evidence of hav- clusive growth in South Africa. Addressing the struc- ing engaged in these employability efforts. tural bottlenecks that hold back the resumption of a dynamic growth path, as described in Box 1.1 and cap- • Incentivize private labor intermediation organiza- tured in government strategy documents, remains crit- tions to assist firms in restaffing as they resume busi- ical. However, as their impact will only materialize in ness. Both non- and for-profit organizations provide the longer run, and given the urgency of the pandem- job-matching services. Financial incentives (e.g., tax ic crisis, the policy package discussed in this section breaks or vouchers for each jobseeker placed) could would serve as a value-added complement to the struc- be used to encourage these firms to create results (job tural agenda. matches) more quickly, with particular attention to vulnerable young people who may have trouble find- It is useful to consider the proposed measures in terms ing their own jobs. These intermediation firms should of their coverage or target population, fiscal costs, and also work more intensively with employers to explore time horizon of impacts. The four suggested policy ac- how to diversify the composition of their labor force tions differ in reach, cost and timeline, and these dimen- toward more vulnerable populations. sions are important to consider for prioritization purpos- es. The measures on employment-linked transfers (the • Employers will benefit from incentives to increase employment tax incentive and TERS) and the NEDLAC- the duration of work shifts offered. Although the negotiated moratorium would be time-bound, with a continuation of TERS is recommended while firms re- short time horizon of impacts. The transfers could sup- sume business, funds in the UIF could also be used to port the jobs of about 2.3 million people at a fiscal cost supplement the incomes of workers who are rehired of about R18 billion per year. The moratorium would in a part-time capacity. have a negligible fiscal cost, and its coverage would de- pend on the specific sectoral focus of the negotiation • South Africa needs to develop the institutions for among social partners. a system of active labor market programs and col- laborate with private sector solutions. The mix of The benefits of the more systemic measures — self-em- programs is not a problem per se. Instead, the lack of ployment regulatory barriers and active labor market vision for the system, coordination across programs, programs — would emerge in the medium to long run, private sector engagement, and results management and their fiscal cost would be low to medium. Lifting leads to inefficiencies, high spending, and gaps in legislative and regulatory bottlenecks to self-employ- the net of programs. An immediate step is to identi- ment would have a marginal fiscal cost, with benefits to fy, empower, finance, and hold accountable an agency be reaped in the short to medium term. The intended to take on the strategic and coordinating role. Ideal- beneficiary population of these measures would be the ly, the agency would lead one of the larger active la- more than 10 million unemployed or discouraged peo- bor market programs that work with more vulnerable ple of working age. The number of adults who decide (young, rural, female, black, or other excluded groups) to engage in self-employment would depend on sever- or unemployed people. It could begin to align other al other considerations but based on the experiences of programs and actors around its program focus and other upper-middle-income countries, could be as many engage the private sector to identify mechanisms for as 3 million individuals. The revamping of active labor labor absorption via the real economy. Crucially, the market programs could bring benefits in the medium to agency would be responsible for developing a mon- long tun; their fiscal cost does not necessarily have to be itoring and evaluation system to allow it to use re- high relative to the resources already allocated to such sults management for better targeting and efficiency. programs in South Africa. 46  |  Building back better from COVID-19, with a special focus on jobs TABLE 2.3 Time horizon, beneficiary population, and fiscal costs of suggested policy measures Policy area Time horizon of impacts Target population Estimated fiscal cost per year 1. Temporary transfers Employment tax incentive Immediate 1.1 million individuals Low (R 4.9 billion) TERS Immediate 1.2 million individuals Medium (R 13 billion) 2. Moratorium on legislation to ease recovery Immediate Depends on sectoral focus Low 3. Self-employment Short to medium term 3 million individuals Low 4. 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South Africa: Social Assistance Programs and Systems Review. Washington, DC: World Bank. 49 APPENDIX 1 TABLE A.1 Employment composition, by labor market category, 2019 Subgroup Employment Share of total employment (%) Gender Male 9,153,273 56.0 Female 7,196,582 44.0 Age 15 – 34 5,954,388 36.4 35 – 49 7,248,619 44.3 50 – 64 3,138,160 19.2 Population group African/Black 12,269,465 75.0 Colored 1,699,135 10.4 Indian/Asian 528,164 3.2 White 1,853,090 11.3 Education Primary or less 1,857,866 11.4 Secondary incomplete 5,348,882 32.7 Secondary complete 5,402,275 33.0 Post-secondary 3,538,760 21.6 Geotype Urban 12,482,427 76.3 Rural 3,858,740 23.6 Province Western Cape 2,507,115 15.3 Eastern Cape 1,370,415 8.4 Northern Cape 319,777 2.0 Free State 797,787 4.9 KwaZulu-Natal 2,642,676 16.2 North West 959,958 5.9 Gauteng 5,096,542 31.2 Mpumalanga 1,232,526 7.5 Limpopo 1,423,060 8.7 Source: World Bank staff calculations based on QLFS 2019 (Statistics South Africa). Notes: a. Sample restricted to the working-age population (15 – 64 years). b. All estimates account for complex survey design and are weighted using relevant sampling weights. c. The ‘utilities’ sector has been omitted because of its small sample size.