- South Africa’s new inflation target is one of several actions helping to bolster macroeconomic stability; continued reforms, both macroeconomic and structural, can help maintain momentum and address longstanding vulnerabilities.
South Africa demonstrated remarkable economic resilience in the face of global turbulence in 2025, successfully maintaining macroeconomic stability and keeping inflation under control. Even so, the country still faces relatively slow economic growth, high public debt, and significant unemployment, especially among young people. There are also concerns about the reliability of key infrastructure—electricity, freight rail, ports, and water.
So, what can policymakers do? To help unlock South Africa’s significant economic potential, they should pursue policies that focus on low and steady inflation, a sound financial system, and healthy government finances, while stepping up reforms supporting stronger economic growth.
Following publication of the IMF’s recent Article IV economic report, Country Focus interviewed Delia Velculescu, the IMF’s mission chief for South Africa, to discuss the latest developments—as well as the distinctive contributions of its new inflation target.
How did South Africa’s economy navigate the global challenges in 2025, and what actions can help to preserve resilience going forward?
Despite the challenging global environment, South Africa’s growth picked up in 2025, inflation and interest rates fell, government bond yields narrowed, and both the stock market and Rand strengthened. This strong performance reflects the country’s sound institutions, flexible exchange rate, abundant natural resources, and credible monetary policy framework. A significant development was the adoption of a lower, 3 percent inflation target, which bolstered the credibility of policy actions. Furthermore, South Africa’s removal from the Financial Action Task Force (FATF) gray list and a credit rating increase from S&P Global boosted investor confidence.
To sustain and build on this resilience, the authorities should continue to implement prudent policies to maintain low and stable inflation, preserve financial stability, and secure fiscal sustainability, while advancing structural reforms that support inclusive, job-rich growth.
In what ways will the new inflation target support South Africa in addressing these challenges?
The new 3 percent inflation target marks an important policy milestone, aimed at strengthening South Africa’s economic framework and ensuring macroeconomic stability. Low inflation can help boost real incomes and purchasing power, with low-income households benefiting the most. It also helps relieve pressures on the Rand and lowers borrowing costs for individuals, businesses, and the government, ultimately encouraging investment, growth, and fiscal sustainability.
Recent staff analysis highlighted how crucial policy credibility is for achieving this lower inflation goal. The greater the central bank’s credibility, the more quickly inflation and inflation expectations fall, making it easier to reduce inflation without hurting growth.
Since the new target was announced—and thanks to the central bank’s strong credibility—inflation has stayed around 3 percent and inflation expectations have declined steadily. This has enabled the central bank to reduce policy rates, boosted investor confidence, and helped drive down government bond yields, lowering borrowing costs for the government.
What approach should the country adopt in managing its monetary policy stance given the favorable inflation dynamics, yet continued global uncertainty and heightened risks?
Given the current environment of subdued inflation and declining inflation expectations, the current monetary policy stance is suitably positioned to steer inflation expectations toward the new target. Should these conditions persist, the central bank would have room to continue to reduce gradually policy rates, thereby fostering investment and economic growth. Nonetheless, persistent global uncertainties and elevated risks necessitate a cautious approach that relies on robust economic data for informed decision-making.
Transparent communication regarding policy objectives and potential responses to shocks—exemplified by the South African Reserve Bank’s practice of publishing alternative scenarios—remains essential to uphold policy credibility and ensure that inflation expectations are firmly anchored and continue to converge to the new target.
What steps are authorities currently taking, and what further actions may be needed, to manage risks to macro-financial stability?
South Africa’s financial sector demonstrated resilience despite last year’s uncertain environment. This stability can be attributed in part to significant advancements by the authorities in strengthening banking resolution and safety-net frameworks, as well as the adoption of a proactive approach to ensuring banks maintain sufficient buffers to absorb shocks. Additionally, measures undertaken to exit the FATF gray list have contributed positively to market confidence.
Looking forward, the authorities should remain vigilant and continue to manage risks proactively. To safeguard financial stability, regulators should continue to closely monitor emerging risks and enhance supervisory practices. In addition, there is scope to help small and medium-sized enterprises gain better access to financing and to enhance payment system efficiency. All this will be critical to promote dynamic, inclusive growth.
What can the government do to strengthen public finances and put public debt on a declining path, while preserving needed public services?
To keep the economy stable and resilient, it is important to follow prudent fiscal policies that reduce public debt without hurting growth. The government’s fiscal strategy, as set out in its 2025 Medium-Term Budget Policy Statement, focuses on stabilizing public debt in the near term and lowering it to about 70 percent in the long run. This strategy will be underpinned by efforts to make spending more efficient while protecting support for vulnerable people and key priorities.
The 2026 budget will play a crucial role in reaching these goals. The authorities will need to deliver on their target of a primary budget surplus of 1.5 percent of GDP. Doing this will require credible reforms such as controlling the public-sector wage bill, making public procurement more efficient and transparent, maintaining close oversight of state-owned enterprises, and boosting administrative efficiency—including cutting programs that are ineffective or duplicated. By better targeting social grants and eliminating fraud, more resources can go toward those most in need. Making full use of digital and AI technology in tax collection can also help raise compliance and increase revenues.
Reaching the government’s long-term debt goal will take further fiscal action. Establishing a clear, well-designed fiscal rule—based on prudent debt targets—can help encourage discipline, build trust in policies, and reduce borrowing costs.
What is the progress of South Africa’s structural reforms under ‘Operation Vulindlela’, and what further actions are needed?
South Africa has achieved significant progress in advancing structural reforms through ‘Operation Vulindlela’, which targets key constraints to growth. In the electricity sector, reforms permitting private participation have contributed to stabilizing supply, including from renewable sources. Likewise, logistics reforms have opened freight rail and ports to private investment and competition, while ongoing water-sector reforms aim to enhance the delivery of municipal services.
We support the reforms implemented so far. Continued, resolute implementation of these sectoral reforms remains crucial, as reliable electricity, railways, ports, and water infrastructure are fundamental for consumers and the economy. We also recommend a comprehensive package of cross-sectoral reforms to improve the business environment, address governance challenges and corruption, and increase labor market flexibility.
Our analysis indicates that closing half of the gap between South Africa and emerging market best practices in these areas could result in an increase in real output of up to a 9 percent over the medium term. This may support annual growth rates of up to 3 percent, facilitating more sustainable reductions in unemployment and public debt.
