South Africa needs action to create jobs: World Bank

South Africa can bolster hiring by temporarily extending tax incentives, suspending rules that increase labor costs and introducing measures to support entrepreneurship and self-employment, according to the World Bank.

While other reforms, including tackling electricity supply constraints, remain pivotal, time-bound emergency measures to support poorer workers and create jobs are needed as the economy recovers from the devastation wrought by the coronavirus pandemic, the Washington-based lender said Monday in its South Africa Economic Update.

Africa's most-industrialized economy contracted the most in a century last year and lost 1.4 million jobs as restrictions to curb the spread of the virus weighed on output and forced some businesses to cut wages, reduce staff or permanently shut down. "To put this into perspective, it took the country six years to add 1.4 million jobs to its pre-pandemic economy," the World Bank said.

South Africa's unemployment rate stood at a record 32.6% in the first quarter of 2021, the thirdhighest of 82 countries tracked by Bloomberg. The rate has remained above 20% for at least two decades, even though the economy expanded by 5% or more a year in the early 2000s.

Analysts blame the problem on an education system that doesn't equip students with adequate skills to find jobs and strict labor laws that make hiring and firing onerous. Racial disparities that date back to the era of white minority rule and have also left many black South Africans living in so-called townships on the periphery of cities and made it difficult for them to access and retain formal employment.

The World Bank suggested that the government deepen employment tax incentives and temporary relief for industries affected by stop-start lockdowns until a sizeable number of firms become operational again. Both measures should be time-bound and could support 2.3 million jobs at a cost of 18 billion rand ($1.25 billion) a year, it said.

President Cyril Ramaphosa said Sunday that the Unemployment Insurance Fund will extend temporary support to workers who lost their income due to ongoing restrictions, without giving details. He extended a ban on alcohol sales and several other curbs for two weeks as the government struggles to bring a third wave of coronavirus infections under control.

The government, labor unions and business groups could consider negotiating a temporary suspension of regulations that increase labor costs and impede hiring, the World Bank said. The moratorium, which should last for 12 to 18 months and linked to the pandemic and addressing its economic fall-out, should benefit vulnerable people, who've borne the brunt of firings, it said.

The World Bank also suggested that South Africa relax rules that hinder entrepreneurship, self-employment and micro- and -small business, scale up programs that provide training for entrepreneurs and provide start-up grants. The country could potentially halve its jobless rate if it were to increase self-employment, which currently account for 10% of total employment, to the 30% average seen in upper-middle-income countries, it said.

"There is a risk that the recovery leaves behind most of the potential economically active population, particularly young job seekers, which would mean that the pandemic permanently impaired the country's longterm development prospects," the World Bank said. "Should South Africa not use the crisis as an inflection point, it risks suffering another lost decade."

South Africa's annual economic growth rate averaged 1.7% between 2010 and 2019, after increasing by an average of 4% a year from 1999 to 2008, the bank said. Per-capita GDP per has contracted since 2015 and real per-capita income is almost back at levels last seen in 2005, it said.

The World Bank raised its 2021 GDP growth forecast for South Africa to 4% from 3.5% as the country benefits from a recovery in global output, especially in China and the U.S., two of its main trading partners, and favorable commodity prices.

Structural reforms aimed at restarting privatesector investment and creating jobs are necessary to unlock growth, boost competitiveness, support public finances and improve social and economic outcomes, it said.