1$ * No. E 12la RESTRICTED ~ .. J, ThiS report is restricted to use within the Bank. I Public Disclosure Authorized INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized REPORT ON THE ECONOMY OF SOUTH AFRICA December 13, 1950 Public Disclosure Authorized Public Disclosure Authorized Economic Department Prepared by: J. H. Collier CONTENTS PAGE Basic Statistics Summary and Conclusions ••••••••••••••••••••••••••••••••••••• i I. The structure of the South African Bconomy •••••..••••••••••• 1 1) Geographical Background •••••••••••••••••••••••••••• 1 2) Population ........•. ,. ....•....•.......... " . 1 J ) ~Ia-'viorlal Income •••...••• .,.............................. 2 II. The Postwar Position of the South African Economy ••••••••••• 4 1) Liquid Position at the End of the i:!ar.............. 4 2) The Investment Boom ................................. 5 J) Government Investment a~d Budgetary Policy••••••••• 7 4) Currency and Banking Policy ••••••••••••••••••••.••• 9 III. The South African Balance of Payments.~ ••••••••••••••••••••• 10 1) The Traditional Sources of Foreign Exchange •••••••• 10 2} The Balance of Payments Effect of the Postwar Boom. 16 3.) The Hard Currency Position ••••••••••••••••••••••••• 18 4) The Need for Non-Sterling Capital •••••••••••••••••• 20 IV. The Future Ureditworthiness of South Africao ••• ~ ••••••••••• $ 21 1) The Importance of the Over-all Balan~e of Payments Positiono •••••••.•••••••••••••• 21 2) The Prospects for Over-all Current Account Balance. 21 3) The Pattern of Development and its Effect on the Dalance of Payments ••••••••••••••••••••• 22 4) The Risk Elements in a Bank Loan •••••••••••.••••••• 24 v. The External Debt ~ecord of the Union of South Africa ••••••• 27 UNrOll OF SOUTH AFaICA Basic Statistics Total Area 472,000 sq. miles :'opulation 12.1 million l'Iational Income (1948/49) S.A.b 831.7 million Of which: Agriculture 124.2 II Manufacturing, private 195.4 II ulining 93.0 11 Q.urrency Unit South African Pound Exchange rate S.A.b 1 =U.S.~2.80 Prices Home goods 1937 =100 sept. 1950 =183 I ruport goods 1937 :: 100 sept. 1950 =250 Government Budget (S~A.b Million) 19~9/50 1950/51 Actual Estimates Current e;::pendi ture 148.9 Current revenue -148.6 Surplus or Deficit - 0.75 - 0.3 Expenditure on Loan Account 82.0 56.0 Foreign Trade • Exports (f.o.b. including non-monetary gold) 230.6 251!4 Imports (f .o~b.) 352.9 312.0 Balance of Payments 191:.8 Cur~ {.. receipts 263.3 287.9 Current payments 430 . ...,....399.2 ....... Balance on Current Account ...,. 166.7 - 111.3 i ~~y AND CONCLUSIONS The de,velopment of a modern economy in South Africa dates only from the latter part of the nineteenth century but has proceeded with great rapidity. The discovery of diamonds, which signified the start of South Africa's economic revolution, came in 1867 but it was the later gold discoveries of 1886 which provided the greatest ma~let for European capital and technical skill and which gave the Union its most important basic industry. The speed of development in mining and other occupations haa ' been made possible by the import of substantial amounts of capital main­ ly from the U.. K. As most of the private capital went into gold mining, a speculative activity, investment has proceeded in a series of bursts characterized by optimistic over-investment at some periods and excess­ ive caution at others. Since the end of the war several factors have combinea to pro­ duce a sustained investment and consumption boom. The economy ended the war with the banking system in a very liquid conditj,on and with ample foreign exchange reserves; there was the wartime backlog of investment ano consumption demand to be made good; the discovery of a new gold min­ ing area in the Orange Free State created an altogether new demand for investment both directly in mining and in the provision of services and amenities; the general high level of activity stimulated a continuation of the wartime growth of secondary industry and demanded a general ex­ pansion of the public utilities. The boom was accelerated and facilita­ ted by an exceptionally heavy flow of capital to the Union from the U.K. in 1947 and earj y J.'148 and by credit expansion wl~blu ~o'Utl1 AJ.·rl~D' Dur­ ing this period internel savings were very low and the high level of in- ii vestment and consumption expenditure was maintained by incurring large defi­ cits on the balance of payments covered either by capital inflow or by util­ ization of foreign exchange reserves. The total balance of payments deficits in 1946-1949 period was S.A.}, 515 million and in this period foreign exchange reserves fell from S.A.}' 266.8 million ($1160 million equivalent) to S~A.}' 104.6 million ($293 million equivalent). South Africa is in the rather unusual position that the appraisal of its crem tworthiness, even for a doll ar loan, is dependent primarily upon its over-all balance of payments prospects rather than on its dollar balance of payments positiono In fact, the value of current gold production, presently running at S.A.b 143 million (~400 million equivalent) and expected to rise to S.A.h 200 million ($560 rrdllion equivalent) or even more, and other dollar (exporting) earnings is expected to be substantially larger than the direct dollar payments made by South Africa for imports and service items. As a developing economy with a rate of investment larger than that 7'lhich can be financed out of local savings , it is likely that South Africa will continue for some time to run a deficit in its current balance of pay­ ments with the gap to be filled by the flow of foreign capital - primarily private capital - to South Africa. The major risk element involved in a Bank loan to South Africa, consequently, is that the i~£low of foreign capi­ tal will not be sustained on a sufficiently high level. This is not a matter which is entirely within South Africa's own control but is dependent on international developments and on the reaction of investors to economic and political conditions within the Union. In 1948, the infloYf of foreign capital caIne to a halt and some "hot" money was withdravm from the Union. As a result, exchange reserves and actually reached a low of the equivalent nf $219 million at the end of August 1949. It is e.;;sen- tial, therefore, that South Africa, dependent as it on uncertain move- iii ments of foreign private capital, maintain an adequate level of foreign ex­ change reserves, and one of the major purposes of the proposed Bank loans is to make possible desired investment in electricity and transportation under­ takings .vi thout drawing down foreign exchange reserves in payment of' imports needed for this investment. Another risk in the South iU'rican economic position is that exist­ ing inter-racial social tension may become so acute as to impair the economic production of South Africa. Although this is an element which cannot be measured statistically, it is not thought likely that this problem will have serious econondc repercussions, at least during the life of the proposed Bank loans. In addition, in the long run, it vdll be necessary for South Africa to adjust its structure of production so that exports of manufactured products VJill take the place of production of gold as sooner or later the reserves of gold-bearing are will be depleted. However, present indications of the size of the ore reserves atld of the probable rate of gold production indicate that this is not an element affecting the creditwo~thiness of South Africa for proposed 15- or 20-year loans. On the basis of the analysis of the economy of South Africa, the conclusion seems clear that the proposed borrowings of ~~60 million are well vvithin South Africa' 5 present creditwQrthiness. This conclusion is rein­ forced by the excellent external debt record of the Union of South Africa .. !. The Structure of the South Afric~n Economy The Union of South Africa is a Dominion of the Commoll':!ee1 th of Nations 8nd llB such f!hjoys full sovereil':n rights. It wps formed in 1910 by the union of the four self-governing colonies of the Cppe. the OrE'nge Free State, TrF'nsvf'pl, C'nd Nptd ~.rt.ich then became nrovinces of the Union of South Afric8.. The Orpn~;e Free S tate end the l'rensvael had been indenendent Dutch Re'.)ublics before the -;oer We.r in 1899 efter vIhich they beceme J;:,ritish Crov.!Il Colonies. ::r'he St8tute of V.estminster conferred Domini0n status on the Union in 1931. Of the tokl ['rea of the Union of 472,000 squt"re miles, only ['bout 6;J is cultivr~ted; it is estimptee. thpt 85,J of the pref' is not preble Bnd thet of the .. ~ 5 .; rem1"J.m.ng J. jO, only one-third cnn be cultiv~ted intensively. This is due DPrtly to soil deficiences end ;;rimprily to insufficient pnd irr0gul:=-r r~infall--1JjOst of Sleuth Africa suffers from FJ regulFT six !!'Ionths lrrinter drought. iVillCh of the summer reinfell is in the form of torrential dO\OTnPours lrThieh \ol!?osh P..1JJt:'y lerge quanti ties of value.ble soil. The uossible irrigpble 8ref! is smell, Elmounting only to some t':TO million <,cres. The over-ell shortage of 1JT8ter in the Union p.ffects not -::nly egricul ture but industripl development. and the futu:c'e ex- \ pension of secondery industry ,,1.11 at some time necessarily involve lerge-scale investment in lrlater supplies. 2) Fonulption 'Ihe totel populr-tion of the Union is 12.1 million. Only 21/~ are "Europel'lnu • 1Jrl:ich is the term applied to all members of the 1I'hi te T8ce, 68/" ere nf'tive ll Africans, B/J are IIColoured , i ,e.