South Africa ’s 1994 transition from apartheid to constitutional democracy has been one of the most astonishing political achievements of our time. It is a powerful demonstration that a peaceful, negotiated path from conflict and injustice to cooperation and reconciliation is possible. Since 1994, the African National Congress (ANC) has won landslide victories in each democratic election held. Elections are well managed and fair, and the press unrestrained. Opposition parties, among them the recently formed Congress of the People, enjoy full political freedom.

In April 2009, the country held its fourth general elections since the end of apartheid. The ANC won the elections for the fourth consecutive time and obtained a 65.9% majority, and H.E. Jacob Zuma was sworn in as President of South Africa in May 2009. A new cabinet was announced reflective of the ANC-led Tripartite Alliance. This Alliance includes the ANC, the Congress of South African Trade Unions and the South African Communist Party. The cabinet was expanded from 28 to 34 ministries to strengthen service delivery and better meet development outcomes.

South Africa is a country with extreme differences in incomes and wealth. Robust economic growth in the post-apartheid period has enabled a dramatic decline in income poverty. At the same time, inequality increased across race, gender and location. For example, inequality between racial groups as measured by the Gini coefficient rose from 0.64 to 0.69 in the period 1995-2005. Despite a 6 percentage point drop over the last six years, the country’s unemployment rate of 23.6% remains very high and poor people have limited access to economic opportunities and basic services.

Government initiatives to meet these challenges have had encouraging results. The pro-poor reorientation of spending has contributed to improved social development indicators in a range of areas, particularly relating to access to services and education, and progress has also been made toward meeting some of the other Millennium Development Goals (MDGs). However, HIV/AIDS-prevalence MDGs are at risk unless progress is significantly accelerated. For example, 17 percent of South Africans between the ages of 15 and 49 were living with HIV in 2009.

Economy

Economic Performance

The South African economy seemed well-poised before the onset of the global economic crisis, although with some emerging signs of vulnerability. GDP growth exceeded 5 percent for the third year running in 2007, bolstered by strong domestic demand, robust construction activity, and a marked pick-up in services and manufacturing. The private investment rate picked up to 15.1 percent in 2007; up from 10.9 percent in 2002. The budget balance was in surplus for the second straight year in 2007, allowing national government debt to GDP ratio to decrease by almost 3 percentage points to 28 percent. External debt was at a reasonable 26 percent of GDP by end-2007, and the banking sector showed solid balance sheet positions with limited exposure to foreign currency debt and interest rate fluctuations. South Africa’s revenue collection and fiscal and debt management are considered international best practice, as demonstrated by a balanced budget until recently.

SA Real GDP Growth, Inflation and Unemployment

Greater integration with the rest of the world has resulted in a sharp turnaround in productivity performance over the past fifteen years. Exchange controls have been liberalized, and the average (un-weighted) tariff on imports into South Africa was reduced from 22 percent to around 11 percent, while virtually all quantitative restrictions were removed. This has led to more diversified exports, reducing, in particular, the dominance of mining.

The economic outlook has worsened considerably because of the impact of the global financial/economic crisis. Following a 1.8 percent decline in the fourth quarter of 2008, GDP shrank by an annualized rate of 6.4 percent in the first quarter of 2009 and by 3.0 percent in the second quarter of 2009. The demand for South African exports, and commodity prices have fallen sharply. A large current account deficit, financed mostly through portfolio flows, is a particular source of vulnerability for South Africa. Growing global uncertainty about future prospects has also permeated South Africa, resulting in a slump in business and consumer confidence. Consumers and businesses have become reluctant to spend just as banks have become more averse to lend. An estimated half a million workers have lost their jobs since the beginning of 2009.

In efforts to attenuate the impact of the global economic slowdown while addressing the socio-economic challenges, the government introduced a countercyclical fiscal stance, projecting a sharp decline in revenues and scaled-up expenditure to cushion the economy and reinforce the social safety net for the poor. The fiscal stimulus built into the 2009/10 budget would push the budget deficit to 3.9% of GDP in 2009/10 and the public sector borrowing requirements to over 7.5% of GDP.

Challenges ahead and Government priorities

South Africa ’s development strategy faces the twin challenges of accelerating growth and sharing its benefits, extending opportunities to all and improving the impact of public service delivery. South Africa launched its Medium Term Strategic Framework (MTSF) for 2009 – 2014 in response. The ten priorities listed in the MTSF are (i) more inclusive economic growth, decent work and sustainable livelihoods; (ii) economic and social infrastructure; (iii) rural development, food security and land reform; (iv) access to quality education; (v) improved health care; (vi) the fight against crime and corruption; (vii) cohesive and sustainable communities; (viii) creation of a better Africa and a better world; (ix) sustainable resource management and use; and (x) a developmental state including improvement of public services.

World Bank Group Program

Program to date

Between 1951 and 1966, the Bank made 11 loans to South Africa, totaling US$ 242 million, largely for expanding the country’s rail and harbor systems and for generating and transmitting electricity. The Bank ceased lending operations to South Africa in 1966 and the loans from that earlier period have been fully repaid.

In 1991, the Bank resumed activities in South Africa through a comprehensive program of economic policy advice and capacity building. After 1994, the Bank Group continued to provide policy advice, but also limited lending and grants. In addition, the Bank resumed project lending through the Industrial Competitiveness and Job Creation Project in 1997, now closed and fully disbursed. A Technical Assistance Loan for the Municipal Financial Management Technical Assistance Project (MFMTAP) was approved in 2002 for an amount of US$15 million. The project closed recently. There are no IBRD loans at present although one operation for the electricity sector is currently under preparation.

South Africa and Lesotho have jointly implemented the Lesotho Highlands Water Project, with the South African side repaying the two World Bank loans associated with this project for a total disbursed amount of about US$90 million. The project transfers water from the highlands of Lesotho to the Gauteng region of South Africa.

Several capacity-building activities were funded through grants from the Institutional Development Fund and infoDev. In addition, the World Bank managed a number of technical assistance grants from the Cities Alliance for South Africa’s cities.

GEF program is one of the largest with a number of national and regional GEF grants for nature conservation and renewable energy, for a total of just under US$80 million.

IFC’s committed portfolio in South Africa is currently $577 million in 20 projects. This is IFC’s second largest portfolio in Sub-Saharan Africa, after Nigeria.

MIGA has actively engaged with South African investors to promote south-south investment, particularly in Africa. Consequently, South Africa is the Agency’s seventh largest investor country, accounting for $271.9 million, or 3.73%, of its gross exposure. The current portfolio sponsored by South African investors is diverse, consisting of seven projects in the agribusiness, infrastructure, manufacturing and oil and gas sectors in such countries as Afghanistan, Kenya, Mozambique, Swaziland and Syria. While MIGA views South Africa predominantly as an investor country, it continues to facilitate inbound investment in an effort to foster South African development. Currently, the Agency has issued guarantees for two projects, financed by Swiss and Mauritian investors, in support of the country’s financial services sector. The combined gross exposure for these investments is $12.6 million.

WBI, the capacity development arm of the World Bank Group, has been active in South Africa and recently South Africa became a focus country for WBI. A detailed capacity building program has been developed focused exclusively on specific demands from stakeholders in South Africa and building partnerships with local institutions.

Country Partnership Strategy (2008-2012)

The Bank jointly with IFC and MIGA, and the South African Treasury prepared the Country Partnership Strategy (CPS), which was presented to the Board of Executive Directors in January 2008. The CPS sets out a framework for engagement with South Africa for 2008-2012. It reflects, most importantly, South Africa's own development priorities as set out in Accelerated and Shared Growth Initiative-South Africa (ASGISA) and its unique position in the region. The Bank works closely with IFC, MIGA and all other development partners active in South Africa. Priority areas for World Bank engagement include: electricity sector, urban development; private sector development; building partnerships for Africa; land reform and agriculture; and public sector service delivery. The Bank will present a progress report for the CPS in January, 2010. The upcoming thrust area in the partnership would be IBRD investment in South Africa’s electricity sector.

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