OECD Urges South Africa To Cut Interest Rates, Budget Deficit

By Patrick McGroarty

South Africa should cut interest rates and pull-in its budget deficit to maximize its economic growth potential, the Organization for Economic Co-operation and Development said on Monday.

"South Africa is advancing, but failing to fully achieve its considerable potential," the OECD said in a report on Africa's largest economy.

Despite the stern advice, the OECD's forecasts for South Africa's economy to grow 2.8% this year and 3.8% in 2014 are rosier than those of the South African government.

Finance Minister Pravin Gordhan said last week that growth would reach 2.7% of gross domestic product this year and 3.5% in 2014. He also said that the federal budget deficit for the fiscal year ending at the end of this month had expanded to 5.2%, from a previous forecast of 4.8%, and that he would pull it back to 3.1% by the 2015-2016 fiscal year.

The OECD urged him to act even faster, and urged the central bank to cut interest rates again. "The macroeconomic policy mix has been insufficiently supportive of growth while allowing large budget deficits to persist," the report said.

The bank cut rates to 5% from 5.5% previously in July for the first time in nearly two years, but central bank governor Gill Marcus has since said that future cuts aren't likely while inflation remains near the bank's target ceiling of 6%. South Africa's annual inflation rate was 5.4% in January.

The OECD also urged officials to overhaul what it said is a dysfunctional labor market, where public sector employees too often earn big pay increases from unions allied to the governing party, the African National Congress.

"The interaction of weak competition in product markets and dysfunctional labour markets is holding back growth and aggravating unemployment," the report said.

South Africa's official unemployment rate is 24.9%, and Mr. Gordhan's budget released last week acknowledged that the real rate including discouraged job seekers is significantly higher at a third of the workforce or more.

Write to Patrick McGroarty at Patrick.mcgroarty@dowjones.com.

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