South Africa - Current economic position and prospects

 R-E TED t N,Q. EA-75a FILE cop N This report was. prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT CURRENT ECONOMIC POSITION AND PROSPECTS OF THE UNION OF SOUTH AFRICA September 4, 1957 Department of Operations Europe, Africa and Australasia CURRENCY EQUIVALENTS 1 South African Pound . 1 Pound Sterling S.A. f 1 . U.S. $2.80 S.A. f 1 million = U.S. $2.8 million TABLE OF CONTdNTS Page No. I. Introduction. . . . . . . . . 1 II. Recent Economic Developments . . . . . . 1 A. Production. . . . . . . . . . 1 B. Causes of Slowing Down . . . . . 2 C. Fiscal and Monetary Policies. . . . . D. Balance of Payments . . . . . . 5 E. Domestic Savings. . . . . . . . . 5 III. Economic Prospects. . . . . . . . . 6 IV. Racial Problems. . . . . . . . . . . 8 V. The Economic Importance of the Railways. . 9 VI. The Need for Foreign Borrowing. . . . . . 10 VII. Creditworthiness . . . . . . . . . 10 A. General . . . . . . . . . . . 10 B. External-Debt. . . . . . . . . . 11 VIII. Conclusion . . . . . . . . . . . . 12 Statistical Tables Map UNION OF SOUTH AFRICA Basic Statistics Area: 472,000 square miles Population (June 30, 1957) 14.2 million Of which: Europeans ).0 " Natives 95 " Colored 1.3 " Asians 0.4 " Gross National Product (1956): Z2,000 million (39,6o0 million equivalent) Percent of Gross National Product Exports (including gold) 30% Gross Domestic Savings 23% Net Import of Capital (current account deficit) 1% Gross Investment 24.% Current Government Expenditures 15% Estimated Average Annual Rate of Growth Postwar in Real GNP: 4% Average Annual Rate of Growth Postwar in Population: 27. 1956 Per Capita GNP: L140 (4390 equivalent) Estimated European Per Capita Share of GNP: L525 ($1,470 equivalent) Estimated Non-European Per Capita Share of GNP: L 0 ($110 equivalent) L956 Trade Total Exports £600 million Total Imports 494 million Of which: Of which: Gold 33% Metals & Hlfgs. 37% Uranium 6% Textiles 17% Wool 10% Rural Products 7% Other rural products 18% Other 39 Metals & Mfgs. 16% Other exports 17% Total 100% Total 100% Total External Debt, June 30, I9m7: $319 million equivalent Foreign Exchange Reserves (June 30O, w9h7) Gold $234 million equivalent Foreign xchange $121 (u I3 Total " " CURRENT ECONOIC POSITION AND PROSPECTS OF UNION OF SOUTH AFRICA I Introduction 1. The Executive Directors last considered lending to the Union of South Africa on November 28, 1955, (R-928) when they had before them an economic report (E.A. 56-a) dated November 18, 1955. At that time the Union was still experiencing rapid growth although the rate of growth was declining. The stimulus provided by the opening up of new gold mines and the related injections of private foreign capital was weakening. This stimulus plus the realization of new-found industrial possibilities had sustained a particularly high rate of growth since the war. The short-term economic problems then facing the economy, one of which seemed to be mild inflation, were not considered too serious. For the long-run the impact of economic growth on the multi-racial society of the Union was viewed as the most difficult and least predictable problem. 2. The object of the present report is to consider: (a) developments since that time and the present prospects for the Union, (b) the economic justification of further foreign borrowing by the Union at this time, (c) the economic justification of further financial help for the development program of the South African Railways and Harbours Administration. II Recent Economic Developments 3. Much remains the same as before but in several ways economic develop- ments since 1955 differ at least in degree from those of earlier post-war years. A. Production 4. The rate of development has slowed down as the investment boom in mining and manufacturing has subsided (Table 1). Whereas the real national income increased from 1946 through 1955 at average annual rate of about 4%, in 1956 it grew at about 2%, or at about the same rate as population. 5. The slowing down has been fairly general (Table 2), the most significant levelling off being in the manufacturing sector, which had in previous post-war years grown rapidly. Within the manufacturing sector, the textile industry has become a "soft spot" but expansion generally has slowed down somewhat. UNION OF SOUTH AFRICA GOLD PRODUCTION (MILLIONS OF DOLLARS AT $35 PER FINE OUNCE) 600 COO YE ARLY 500 500 400- 400 30 0 :300 200 ........ 200 ORANGE FREE 1 00 STATE AND OTHER 1935 1940 1945 1950 j955 1960 1965 WOOL: EXPORT VALUE WOOL: PRODUCTION (MILLIONS OF POUNDS) (MILLIONS OF LBS) 80 I I IYEAR END JUNE 30 60 300 40 --275 20 --j-_ _ __ _ I_ __ _ 250 YEARLY O ' 225 '36-'38 '51 '52 '53 '54 '55 '56 '57 '34-'38 '51 '52 '53 '54 '55 '56 '57 AV ERAGE (Prelim) AVERAGE (Forecast) NOTE : Greasy basis MANUFACTURING PRODUCTION ( INDEX, 1948: =00) 200 200 .5 0 1 50R T I 25 - ··· .... TA.. L- ..MANUFATURING · 1949 1950 1951 1952 1953 1954 1955 1956 1957 8/30/57 1292 IBRD - Ecorormc Staf f - 2 - 6. This has affected the income of the transportation sector, which though stretched beyond capacity, has had relatively less high-rated processed goods to move. Developments in Comestic trade and commerce have paralleled those in manufacturing. 7. Income from agriculture is recovering slowly from the decline follow- ing the fall in wool prices in 1954 and 1955. The slight recovery in 1956 was based more on increased volume (Table 3) than on better prices as the pronounced finming of wool prices did not come until towards the end of the year, 8. Counter to the general trend, the mining industry has stepped up its outout significantly (Table b). Thanks to the opening up of large new mines working richer ore bodies in the Orange Free State and other areas, gold output increased from !60 million in 1954 to $550 million in 1956. Uranium production has grown from nothing in 1952 to 1'0 million in 1954 and $120 million in 1956, to make the Union one of the world's large uranium producing countries. Production of coal, copper and other minerals has increased steadily. B. Causes of Slowing Don 9. A reduction in the rate of investment has been both a cause and effect of the reduced tempo of development (Table 5). Gross investment (including changes in inventories) has fallen fran about 27% of G.N.P. in 1954 to about 24% in 1956. As depreciation and maintenance of existing capital equipment, which was added to substantially in previous years, are taking an increasing part of total investment, net investment has, of course, declined more than gross investment. 10. In the private sector the sharpest decline has been in investment in mining (Table 6); this is the sequel to the particularly heavy investment in recent years in opening up the new gold mining areas. Public investment which also rose sharply with the opening up of these areas, has fallen off somewhat. 11. With the decline in investment in mining came a considerable reduction in the net import of private foreign capital by the Union (Table 7). From about $150 million in 1954 private net capital inflow fell to about $3 million in 1956. Foreign capital has, in the past come mainly from the United Kingdom and mainly for gold-mining and to a less extent for manufacturing; apart from the direct stimulus it provided it helped create employment for a range of South African industries and generated a mood of optimism and expansion, 12. Gold mining seems to be weakening as a magnet to overseas capital. Contrary to expectations the average profitability of gold mining has grown in the recent past thanks to the increased richness of ores being milled and the substantial profits from uranium which is produced as a by-product (Table 8). To many investors, however, it seems that the increasing costs - 3 - of processing ore cannot be offset indefinitely by the discovery of richer ore bodies; no new fields comparable to the recently developed areas in the Orange Free State are at present waiting eiploitation. Most important perhaps is that to the investor the prospect of an increase in the dollar Price of gold seems to have receded. 13. There are other reasons, however, for the rapid dwindling in the flow of canital from abroad and same weight must be given to the effect on the investor of the racial situation and the Government's racial policies. 14. Another cause has been the tight money policy in the United Kingdom where because of higher interest rates, investment has become relatively more attractive. There is evidence that these considerations have affected British private capital movements to other countries as well as South Africa. Working in the same direction has been the growth of investment opportunities in especially favored areas such as Canada. 15. Finally the inflow of capital has been offset, no one is yet sure to what extent, by the flow of South African capital to the Rhodesias. 16. But apart from the decline in the flow of capital from abroad production and investment are held down because of shortages arising from the rapid developnent of earlier years. 7ie supply of skilled labor, which comes from the European and to a much less extent the Asian and Colored communities, has become acutely short especially in the manufacturing industries, Migrants have not come to South Africa in large nubers and although non-Europeans have tended to move up from unskilled to semi-skilled jobs, they have not progressed further. Transportation and other services have also been taxed to and beyond the limit by previous growth; exports, especially of coal, chrome and manganese ores have been frustrated by the shortage of transport. 17. Also, the increasing liberalization of trade has exposed domestic manu- facturing to increased foreign competition. South Africa has already proceeded further than most non-dollar countries in liberalizing trade and plans soon - -ossibly as early as 1958 - to do away with all restrictions. The manufacturine industries grew up in earlier post-war years when foreign trade was more re- stricted than now, but by the standards of other countries at a similar stage of development, protection of domestic manufacturing has always been modest. This has been a deliberate policy so as to shield the gold-mining industry from higher prices for the material and equipment it buys, a growing share of which has come from South African industry. The bulk of South African industry will no doubt survive the fuller force of foreign competition but a few non- competitive undertakings will be weeded out; this process has probably started. In some cases, such as textiles, tariff protection may replace import restric- tion so as to shield domestic manufacturers from tunfair" foreign competition. C. Fiscal and Monetary Policies 18. The slackening pace of development - or rather the easing of inflation- ary pressures which it has entailed - has not been unwelcome since it has broughJ some relief from the strain on resources and has slowed the small but unbroken rise in prices (Table 9). In fact, the slow-down may be ascribed in part to the deliberate maintenance of conservative fiscal policies and the tightening of monetary policies in 195 when inflationary pressures seemed to threaten. 19. The Government's budget has for years produced a current account surplus which has been applied towards capital expenditures. The balance of capital expenditure has been financed by long-term borrowing with only temporary re- course to the banking system (Table 10). Internal debt on March 31, 1957 was about E940 million (A2.6 billion) of which about £800 million ($2.2 billion) was funded. This represents about 47% of gross national product; in recent years internal debt has grown somewhat less than gross national product. More than half represents the Union's holdings in railways and other revenue pro- ducing enterprises. As a whole, Government finance plays a relatively unob- trusive role in the economy, the Government believing that this helps create a climate favorable to venture capital from abroad and to the growth of domestic industry. 20. The estimates for 1957/58 foresee a slight decline in receipts due to the fact that taxation arrears, the collection of which helped swell revenue in preceding years, have by now been practically eliminated. Capital expendi- tures will rise mainly on account of increased allocations for the Railways and for Sasol, a Government-owned oil-from-coal project. The Government recently borrowed internally some E46 million, of which about half was re- financing, at 4% for 5 years and 4 3/% for 20 years. It recognizes however that it would not be possible to meet total capital requirements of the public sector in the local market without prejudicing private investment. To help provide additional funds, without extending Government borrowing beyond its limited market, or by increasing direct taxation - which is lower than in most comparable countries -, the Government has chosen to impose a savings levy. This involves a surcharge on taxation of individuals and certain corpanies, the proceeds to be repaid with interest after 5 years. A similar device was used as a temporary expedient in 1953/54. 21. As mentioned, monetary measures were tightened in 1955. Commercial banks were urged by the Reserve Bank to follow more selective credit policies and stricter consumer credit regulations were adopted for the purchase of automobiles. In September the Reserve Bank increased its rediscount rate from 4%, at which level it had been since 1952, to !M and other rates moved upwards correspondingly. In May, 1956 the Reserve Bank Act was amended to enable the Reserve Bank to prescribe additional reserve requirements for commercial banks over and above the 10% of their demand liabilities and 3% of their time liabilities which they were already required to hold with the Reserve Bank. UNION OF SOUTH AFRIGA BALANCE OF PAYMENTS ON CURRENT ACCOUNT* (MILLIONS OF POUNDS) 0 100 200 300 400 500 600 1950 EXPORTS NET GOLD OUTPUT RECEIPTS PAY ENTS 1951 IMPORTS "NET INVISIBLES 1951 RECEIPTS PAYMENTS 1952 RECEIPTS PAYMENTS 1953 RECEIPTS × PAYMENTS 1954 RECEIPTS PAYMENTS 1955 RECEIPTS PAYMENTS 1956 RECEIPTS PAYMENTS GOLD AND FOREIGN EXCHANGE ASSETS (BILLIONS OF U.S. DOLLARS) 1.00- , 1.00 END OF PERIOD .75 - .75 GOLD LOAN TO UK. .50 .50 .25 FOR.¡. E.CHANGE AOSETS :E25 GOLD '38 '46 '49 '52 '55 D J D J D J D J D 1953 1954 1955 1956 8/30/57 * 1293 includes S.W. Africa and High Commission Territories BRD - Economic Stoff -5- 22. These measures reinforced other disinflationary developments (Table 11). Savings deposits increased significantly, although some of the increase merely represented a switch from demand deposits for higher interest. Advances by the Reserve Bank were sharply reduced and all in all the money supply declined in 1955 and even after some increase in 1956 was still below the 1954 level. 23. Towards the end of 1956, too-slow rather than too-rapid expansion, became the concern of Goverunent. The Reserve Bank has not used its additional powers to increase commercial banks' reserve requirements. On the contrary, in early 1957 it informed the commercial banks that they could relax their credit policies. D. Balance of Payments 24. The decline in capital inflow, previously noted, has not been reflected in the Union's gold and foreign exchange holdings thanks to the much enhanced current payments position (Table 12). Current transactions (including gold sales) resulted in a deficit of F102 million (0286 million) in 1951, a deficit of £30 million ($84 million) in 1954 and finally in 1956, for the first time in the Union's history a surplus of £10 million ($28 million). This rapid closing and elimination of the current payments gap occurred in the face of considerable liberalization of trade. Moreover it came in a period when the rate of investment, although reduced in the last two years, remained fairly high. 25. Among the reasons for this change has been the sharp increase in gold and uranium production; together they added $170 million more to exports in 1956 than in 1954. Increased wool production and from late 1956 an improve- ment in wool prices, have also helped. But some of the explanation lies in greater economic diversification notably in the growth of indastry. Locally manufactured goods, especially consumer durables, have come to replace imports and at the same time to compete for markets in adjacent countries, especially the Rhodesias. Finally the economic slow-down has eased demand for imported goods but does not affect, at least in the short-run, the Union's output of export goods. E. Domestic Savings 26. It follows from the fact that the net import of capital has virtually ceased, and that investment has continued at a high, even if declining, rate, that domestic savings have come to play a much greater role in financing investment (Table 5). The growth of domestic savings has, in fact, been striking. Gross domestic saving as a whole covered 97% of gross domestic capital formation in 1956 against 32% in 1948. It is equally striking that the great part of this increase in the post-war years has been in private savings (including depreciation allowances). In 1956 Government savings accounted for only 11% of total domestic savings against 34% in 1948. UNION OF SOUTH AFRICA FINANCING OF INVESTMENT (MILLIONS OF POUNDS) 500 500 YEARLY TOTAL GROSS DOMESTIC INVESTMENT 400 - 400 IMPORT OF CAPITAL . 300 300 PRIVATE SAVINGS: 200 CDEPRECIATION ALLOWANCES 100 100 PUBLIC AUTHORITIES 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 *Excluding accumulation of Foreign Exchange Reserves CENTRAL GOVERNMENT - CAPITAL ACCOUNT (MILLIONS OF POUNDS) YEAR ENDED MAR. 31 0 20 40 60 80 100 120 1953 EXPENDITURES :: * RECEIPTS 1954 EXPENDITURES 194RECEIPTS EXPENDITURES 1955 RECEIPTS 957 EXPENDITURES (Pra5. RECEIPTS EXPENDITURES 1958 (Est.) RECEIPTS CURRENT ACCOUNT SURPLUS OTHER INTERNALl EXTERNAL BORROWING REVENUE RECEIPTS ON LOAN ACCOUNT RECEUNTDS EN10N (NET) 8/30/57 1294 IBRD- Economic Staff -6- 27. Corporate savings are contributing an increasingly large part of ori- vate savings. Corporations have followed conservative dividend policies and have in many cases amassed considerable re.:erves; undistributed profits which were not taxed at all until recently, are *;till taxed rather lightly. This has meant some restriction of the flow of savings from one corporation or industry to another, a restriction which will lessen as the new gold mines increase the distribution of profits and as the gold-mining industry as a whole broadens the scope of its investment. The same sort of limitation applies to personal savings. Farmers tend to invest their savings in agriculture even when the investment is less productive than it might be, say, in industry. Because they are able to pay higher rates of interest, building societies are attracting an inc2easing share of personal savings which are then channelled to home and office building, 28. Thus even though domestic saving has come increasingly to replace imported capital in a quantitative sense it has not done so in a qualitative sense. Foreign capital is more venturesome than domestic and because it goes mainly to mining and manufacturing where capital output ratios are relatively high, it is often more productive. The Government recognizes that as a result of domestic saving and investment habits industry, especially new industry, may be neglected. Because of this, it has established the Industrial Develop- ment Corporation (I.D.C.) which uses Government savings for industry. Recent- ly the Reserve Bank and the I.D.C. joined in setting up the Industrial Finance Corporation to mobilize Government and private capital, including private foreign capital, for industry. The Government has also come to play a role in the ownership and control of industry where the risks or size of special projects discouraged private investors. For this reason it established some years ago as Statutory Corporations the Iron & Steel Industrial Corporation (ISCCR), an oil-from-coal plant (SASOL) and the Electricity Supply Commission (ESCOH). The Railways & Harbours Administration, a government department, has a virtual monopoly of surface and air transportation. There is no indi- cation that the Government intends to broaden its ownership and control of industry and in general its policies are conducive to private enterprise. III Economic Prospects 29. The probability is that the slowing down of the last two years is no more than a plateau, like that reached in 1951 and 1952, before another period of quicker development. If this is so it has provided a useful breathing space in which the development of basic services such as the railways, can catch up in part with the previous growth of mining and manufacturing. 30. As the economy matures it becomes less likely, however, that the rapid rate of development of earlier post-war years will return. Forecasts for gold and uranium output, unless very large and rich new deposits should be found, assume a modest increase over the next five or six years, punctuated by a slight decline in gold output in the next two or three years as old marginal mines are taken out of production. Production of coal and chrome, manganese and other ores will be increased as transport facilities improve. 31. Wool production is increasing and the benefit of higher prices will be fully felt in 1957. Some increase in production of other agricultural goods seems likely. The possible inclusion of French North Africa in the proposed European Common Market might create some short-term difficulti-s for South African citrus growers. The United Kingdom, by far the most important market for the Union's agricultural goods, would of course not be affected. Also as far as perishable items are concerned South Africa is helped by the fact that its output is out-of-season in the Northern Hemisphere. All in all the pro- posed European Common Market should not seriously affect the marketing of South African agricultural products. 32. The pivotal sector is manufacturing. Here South Africa has the advantages of skillful and conservative management, low-paid unskilled labor, and abundant coal and iron ore. These resources have been married to give the country a steel industry whose products are among the cheapest in the world, and a range of fabricating industries which have survived a fair degree of foreign competition. A disadvantage is the shortage of skilled labor. Unless a much greater immigration of artisans from abroad should ease this problem, a satisfactory rate of economic development will depend on further mechanization and the admission of Africans to more skilled jobs. 33. Marketing the additional South African industrial products does not present immediate problems. Industrial development has so far been mostly to replace the imports hitherto demanded by the Europeans, and there would seem to be further scope to cater to the needs of this group. Inevitably, however, industrial expansion would be limited if it were to be confined largely to one-fifth of the population. Other markets would emerge as the real income of the Africans increases and this fact alone would seem to exert a strong pressure for it to increase. In addition, South Africa has already increased its exports to the expanding economies near-by and has good prospects of further expansion. 34. The Government recognizes that future development will in increasing measure depend on industrialization. As mentioned, it is providing finance where necessary for this purpose. It is also considering increased tariff protection for certain industries; the dictum that industrialization would mean protection and higher costs which the gold-mining industry could not afford, is coming more and more into question. -8- IV Racial Problem,! 35. The Government and indeed everybody else in the Union are concerned about the problems which racial structure and policies pose for the future. The main lines of a program for carrying forward "Apartheid" were set out in the so-called "Tomlinson Report", published in 1956 after five years study by the Government appointed "Commission on the Socio-Economic Development of the Bantu Areas." The basic premise of the report is that for the European "integration can have only one end, and that is the elimination of the European as a separate entity". To avoid this and at the same time to derive the great- est compatible economic advantage, separate geographic zones for African popu- lation and development would be consolidated. The Europeans would provide increasing help to the Africans to develop the agricultural and industrial resources of these zones so as to support their increasing numbers. Outside these zones Africans who have already been assimilated into a permanent part of the European urban communities would be moved from their often wretchedly poor suburbs in the communities to their own separate satellite towns nearby. 36. The Government has not adopted the Tomlinson Report but has announced its intention to carry forward "Aartheid". It is difficult, in the circum- stances, to measure the economic consequences of "'Apartheid" because there is little guidance as to how far or how fast the Government will in fact move. What has been done thus far? 37. Relocation of urban Africans has been started. There is no evidence that the expense of this relocation will impose a financial burden that will seriously weaken the finances of the Union and local governments and divert resources from productive uses to a non-productive duplication of facilities. Increased expenditures by public authorities are being offset in large part by increased taxation from the Africans and by more efficient utilization of African labor. For example, expenditures on construction of new homes, schools and hospitals for Africans are being held down through standardization and by use of relatively low-paid African labor in their construction. 38. There has also been a policing of the movement of Africans. The question here is whether the Africans so much resent this and similar policies that they would attempt to stop production by one means or another. So far, in the post-war period, industrial stoppages by either African or European employees have been almost non-existent. There is little evidence one way or the other about the extent of organization among Africans but that there is some is apparent from the recent successful bus boycott in Johannesburg. Whether and how soon the barriers of language and local and sometimes con- flicting loyalties which seem to divide Africans will be broken down by, among other things, a sentiment of Pan-Africanism, is unanswerable. The economic strength of Africans, if organized, would be great, and no one can safely say how it would be used. Greater African organization must, however, be recog- nized as a possibility at least in the long run. -9- 39. Race Policies, which antedate the word "Apartheid" have involved dis- criminatoy employment policies. As previously mentioned, development is impeded by - among other things - shortage3 of labor at levels of skill reserved principally for Europeans. Howev?r, the non-Europeans seem gradually to be rising to higher levels of skill and with them higher monetary rewards. Unfortunately, no detailed information is available about the growth of income among the racial groups. Such sampling as has been attempted, however, indi- cates that all groups are benefitting from economic development. In material terms, and subject to the difficulties of comparison, the African in the Union has today a higher standard of living than in most other parts of the continent. 4o. Finally it may be asked whether the Union's racial policies are dis- couraging the inflow of capital and migrants. That there is some connection seems probable but that it is the dominant influence is doubtful. The decline in the inflow of capital is probably due as much to the decline in the opening up of new mines and to tight money abroad, as to the evolution of racial policies. The Union has attracted relatively few migrants from abroad but this is explained largely by the fact that there is no shortage of the less-skilled workers, who are generally those most likely to migrate. V The Economic Importance of the Railways 4l. The importance of railways in a large, thinly populated country, many of whose productive areas are separated by inhospitable country from coastal ports, is great. The close relationship in the past between railroad con- struction in the United States and Canada and general economic development has its Parallel in the Union at the present time. The Union is even more depend- ent on railroad expansion and improvement in some ways because it lacks navigable rivers to the inland. 42. Railways provide the obvious means of hauling at low-cost the bulk commodities, like wool, coal, grain and metallic ores, which are important in the Union's foreign and internal trade. For some commodities and in some locations private road transport (as distinct from road transport operated by the Railways) affords an alternative, but the Railways are protected from private competition of this sort by Government regulations. The policy of giving much greater stress to rail than road transport is defended in part by reference to the fact that the Union has an abundance of very cheap coal suit- able for steam locomotives, cheap electricity and lacks cheap domestic oil. 43. In the past, economic development and railroad expansion have gone hand in hand (Table 13). To keep pace the railways have a continuing heavy program of investment without which economic development would suffer. - 10 - VI The Need for Foreign Borrowing 44. The Union's present ability to finance development from its own savings does not mean that it would be able to do so in future. As a greater distrib- ution of corporate profits is made by the recently developed mines, the rate of private savings may in the short run level off. In fact personal savings have recently declined somewhat (Table 5). 45. As previously mentioned in Part III the rate of development will in all probability increase again. To finance an increase in investment, foreign capital would be needed to supplement domestic savings even if total savings remained at their present high level. 46. The Government might seek to find all the capital it needs by increasing taxation or by greater internal borrowing, but feels that this would be at the expense of the private sector. In order to create a favorable environment for sound private investment the Government has followed a general policy of allow- ing private industry free access to the capital market, of limiting its own local borrowing as far as possible and of borrowing abroad from time to time to meet the needs of the public sector. This policy, while it has meant some- times that public investment has lagged behind private, has had the advantage that economic development particularly in the private sector, has gone ahead. It is a policy well justified by its past success. VII Creditworthiness A. General 47. The present pause in development, which is in all probability quite temporary, has little bearing on the Union's long-term creditworthiness. To some measure, the slowing down has been the consequence of the rapid development of the past and the prerequisite of soundly based further development. 48. But in some ways the position has changed. Gold and uranium output have increased significantly to further strengthen the Union's payments posi- tion. At the same time, it is becoming increasingly clear that in the long run increased industrialization is the key to economic development. The Union has the human and material resources on which to base such development, but overseas capital and to some extent managerial and technical skills are still needed if the most effective use is to be made of these resources, - U1- B. External Debt 49. Past development has not been at the cost of excessive foreign borrowing. External public debt as of June 30, 1957, is estimated at $315 million (Table 14 or about $16 million less than when the previous loan was made. Somewhat less than one-third of the total is owed to the Bank and slightly more than one-third to bondholders in the United Kingdom. The remainder is held by bondholders in Switzerland, the United States and the Netherlands and by the Export-Import Bank. By currencies, about t5% is in sterling, 37% in dollars and most of the balance in Swiss francs. The currency coposition is however of little con- sequence to the Union whose annual gold output alone is almost twice the total of its external public debt. 5O. Annual service on existing public debt in the peak year, 1958, will take only about 3% of present annual gross foreign exchange earnings (Table 15). Now and in 1960, when the first maturities of the proposed joint operation would fall due, service payments should take less than 2% of annual gross foreign exchange earnings, 51. The vulnerability of the Union's foreign exchange position arises from the very large amount of private foreign capital at current market values in its industries, especially gold mining. Virtually all of this capital is in the form of equity. There are no reliable figures as to its amount but some indication is given by the fact that in 1956 net investment income remitted from the Union was about $ 160 million. A disorderly repatriation of any sizeable part of equity capital would of course be disastrous not only to the Union's foreign exchange position and credit but also, through rapid erosion of value, to the foreign investor. The recent drying up of private capital inflow was due in part to a slight shift of South African shares at mildly depressed prices fran British to South African ownership. The possibility of a large scale repatrietion of foreign equity such as occurred in 1930 and 1931 seems ouite remote and the most recent indications are of some revival of private capital inflow. 52. The Union's technical position as a borrower is enhanced by the stabil- ity of its foreign exchange earnings. The bulk of such earnings come increas- ingly from goods for which there is a steady foreign demand; wool and a few other products for which foreign demand is more volatile are still important but they are not, as in many other developing countries, of overwhelming importance. Gold and foreign exchange reserves stand at about $380 million and thus equal about three monthst imports, a safe level in view of the Union's position as the world's leading gold producer and against the background of its foreign exchange earnings and commitments. The Union has only used short- tern foreign credit to a slight extent and that only for normal trade trans- actions where it is appropriate. 53. The Union's strong position as a borrower has put it among a small group of countries which have been able in recent years to place public bond issues in London, Tiew York and Zurich. Over the last few months, South African bond prices have eased more than some others in New York, but not in London. - 12 - The difference, which is not great, may be due to the vagaries of the smaller turnover in New York and to greater sensitivity there to racial problems. In any event, despite the tight market New York is again receptive to a further South African public bond issue. VIII Conclusion 5h. The Union should be well able to service the additional external debt contemplated. 55. The decline in the rate of investment on the one hand and the increase in domestic savings on the other has almost enabled the Union to finance its current rate of development from its own resources. However, it is desirable to increase the rate of development and as a means to this end the Union is justified in borrowing abroad. 56. Among the more important factors limiting economic growth is trans- portation, especially rail transportation. Bank assistance is well directed in helping the South African Railways and Harbours Administration to carry out its current development program, to which substantial local resources are being devoted. TABLE 1 NET NATIONAL INCOME Market Constant (1948) Change from Constant (1948) Change from Year Prices Wholesale Prices Previous Year Retail Prices Previous Year million Z million % i million % 1947 686 733 - 726 - 1948 778 778 + 6 778 + 7 1949 825 782 + 1 795 + 2 1950 932 825 + 6 565 + 9 1951 1133 878 + 6 979 +13 19j2 1164 787 -10 925 - 6 1953 1284 860 + 9 986 + 7 1954 1391 927 + 8 1049 + 6 1955 1495 965 + 4 1094 + 4 1956 1546 982 + 3 1109 + 1 Note: Neither the wholesale price index nor the retail price index is an entirely satisfactory statistical basis for calculating constant prices. They are both used for purposes of approximation, however, and are considered useful fo'r inter-temporal comparisons. bource: Bureau of Census and Statistics TABLE 2 NET NATIONAL INCOME BY SOURCE - CONSTANT (1948) RETAIL PRICES Change from Change from Change from Change from Year Total Previous Year Manufacturing Previous Year Agriculture Previous Year Mining Previous Year - million % F. million % X. million %_ z million % 1947 726 - 165 - 103 - 93 - 1948 778 + 7 182 +10 129 +25 89 - 4 1949 795 + 2 188 + 3 117 - 9 90 + 1 1950 865 + 9 209 +11 129 +10 130 1/ +L 1951 979 +13 2L0 +15 190 +47 138 + 6 1952 925 - 6 253 + 5 138 -27 139 + 1 1953 986 + 7 267 + 6 177 +28 133 - 6 1954 10L9 + 6 28) + 6 195 +10 134 + 1 1955 1094 + 4 297 + 5 177 - 9 147 +10 1956 1109 + 1 294 -1 181 + 2 166 +13 Change from Change from Change from Year Trade and Commerce Previous Year Transportation Previous Year Other Previous Year t million % S million Z. million 1947 141 - n.a. n.a. - 1948 133 - 6 n.a. n.a. 1949 143 + 8 n.a. -.a. - 1950 143 nil 82 -19 - 1951 149 + 4 92 +12 147 - 8 1952 141 - 5 86 - 7 133 -10 1953 144 + 2 87 + 1 137 + 3 1951, 153 + 7 95 + 9 142 + 4 1955 159 + 4 105 +11 153 + 8 1956 160 + 1 103 - 2 147 - 4 1/ Increase due largely to increased value in t of gold production resulting from 1949 devaluation against the dollar. Source: Bureau of Census and Statistics. TABLE 3 Agricultural Production Average Forecast Product Unit 1934/39 1947/48 1952/53 1953/5 1954/55 1955/56 1956/57 Wool (sold at Union harbors) million lbs. 233 205 257 268 290 296 320 Corn million bags 22 32 34 39 37 37 40 Wheat " " 5 5 6 6 6 9 9 Fruits (dried) thousand tons 12 15 15 17 14 11 n.a. Citrus fruits thousand short tons 173 215 221 273 327 315 n.a. Deciduous fruits " " " n.a. 69 88 83 110 120 122 Sugar i" i 451 512 670 725 829 939 349 Tobacco million lbs. 19 40 44 40 34 30 44 Butter (excluding farm butter) " " 32 48 62 65 74 77 81 Cattle slaughtered thousands 610 1,091 1,149 1,238 1,228 1,105 1,268 Sheep and Goats slaughtered " 3,165 3,025 3,588 3,854 3,885 4,095 3,696 Source: Data provided to the Jlission. TABLE 4 Mineral Production A. Volume Product Unit 1938 1948 1952 1953 1954 1955 1956 1/ Gold million fine oz. 12.2 11.6 11.8 11.9 13.2 14.6 15.9 Coal (marketable production) million tons 18 26 30 31 31 33 36 Diamonds millions of metric carats 1.2 1.4 2.3 2.6 2.9 2.6 2.6 Copper (marketable production) thousand tons 15 29 38 38 49 8 47 Asbestos (market. prod.) 23 46 134 95 109 120 n.a. Manganese " i" 608 305 969 912 773 649 769 Chrome Ore " i 195 455 639 799 707 597 691 Iron Ore " " " 557 1,283 1,932 2,173 2,087 2,203 2,277 B. Value (where current value exceeds l10 million annually) (W million) Gold (output at value realized) 87 100 147 148 165 183 199 2/ Uranium - - - 4 15 30 39 Coal 5 9 15 17 16 17 21 Diamonds 1 10 15 14 13 13 13 Copper - 3 12 9 10 13 13 1/ Provisional Source: Data provided to the hission TABLE 5 GRO3S SAVING A-D ]NVESTPT (E mi,llion at current market pri ces) 148 18 19 53 194 195 l?6 1956 Pcrcentage of Percentage of Total Gross Total Gross Investment Inveotment CROSS 1NVDST IENT a. Building and Construction 121 45 216 235 237 247 252 53 b. lachinery, Plant and Equipment 99 37 167 203 214 197 189 39 c. Het Change in Inventories 41 15 -58 -15 26 52 29 6 d. Transfer Costs 6 3 6 7 8 8 2 Total: 262 102 331 30 A.r 59 4L 100 GROSS SAVING a. Personal Saving 2/ ( 9 3 ( 140 190 183 161 34 b. Corporate Saving ( 131 63 71 74 99 20 c. Current Surplus of Fublic Authorities and Social Security Funds 28 11 33 49 57 60 53 11 d. Depreciation Allowance __i2 19 _2) 108 122 136 151 _2 Total Gross Domestic Saving: 89 33 257 360 440 453 464 97 e. Belance on Current Account 2/ 178 67 74 70 41 15 Total: 267 100 221 2 &4 504 479 100 GROSS NATIONAL EXP-4DITURE (L million at current market Prices) a. Private consumption 727 970 1,062 1,117 1,198 b. Government Consumption 116 183 201 208 216 c. Gross Capital Formation 267 331 _432 485 504 Total Gross Domestic Expenditure 1,110 1,484 1,693 1,810 1,918 d. Balance on Current Account -178 -74 -70 _Z-45 -51 Gross National Expenditure at Barket Price _132,410 122 L25 1867 1/ Estimate 2/ Including errors and ommissions 2/ See footnote 1 to Table 12 Source: Estimates by South African Reserve Bank. TABLE 6 Gross Capital Formation Percentages of Total 1948 1950 1952 1953 1954 1955 I, Gross Public Investment 1. Union Government 16 17 17 17 15 L Of-which: S.A,R (10) (12) (11) (13) (11) (9) Other Enterprises ( 3) ( 3) ( 3) ( 2) ( 2) (2) 2. Provincial Administrations 2 4 5 6 4 4 3, Local Authorities 7 10 9 8 8 9 4. Public Corporations 4 7 9 10 9 6 Total Public Investment 29 38 4t 41 36 32 II. Gross Private Investment 5. Residential Building 17 18 17 1 13 l4 6. Farming 13 15 14 12 11 12 7. Mining 8 15 20 16 1 12 8. Manufacturing 12 16 19 16 14 14 9. Commerce, Transport, etc. 6 8 10 8 7 7 Total Private Investment 56 73 80 66 59 59 Gross Fixed Capital Formation 85 111 120 107 95 91 III. Net Change in Inventories 15 -11 -20 -7 5 9 Gross Capital Formation 100 100 100 100 100 100 1/ Preliminary estimates (revised). Source: S. A. Reserve Bank. TABLE 7 Net Inflow of Private Capital Year f million 1946 17 1947 182 1948 91 1949 50 1950 53 1951 58 1952 38 1953 26 1954 55 1955 -3 1956 1 1957 (1st quarter) 5 2/ 1/ Includes errors and omissions, which are considered quite minor, trade credits and drawings and repayments under uranium loans (now a net outflow). 2/ Estimate. Source: Data provided to the mission, TABLE 8 Working Revenue, Costs and Profits of Gold Mines 1955 1956 I Qtr II Qtr III Qtr IV Qtr I Qtr II Qtr III Qtr Ore milled (m.tons) 15.9 16;6 17-0 16-h 16,4 17.3 17.4 Yield (d,ts,per ton) 4.217 4.235 4.270 4.372 4,441 4.474 4.569 Gold production (t000 fine oz.) 3,361 3,508 3,634 3,590 3,643 3,867 3,973 Working revenue (Z m.) h2:4 4h;2 45;8 45;0 45;6 48;4 50;1 Working costs (Em.) 32.0 33.1 34.1 34.0 34.5 36.5 37.2 Working profit from gold (Z m.) 10.4 11.1 11.7 11.1 11.1 11,9 12.9 Working profit-from uranium (Z m.) 1/ 3.4 4.1 4.8 5.3 5.7 5.9 6.2 Working revenue per ton milled (sh.and d.) 53/2 53/4 53/10 54/10 55/7 56/0 57/8 Working costs per ton milled (sh. and d.) 40/1 40/0 40/1 41/4 / 2/1 42/2 42/10 Working profits on gold per-ton milled (sh. and d.) 13/1 13/h 13/9 13/6 13/6 13/10 14/10 1/ Before interest on-and repayments of loans received for the development of uranium production. Source: Transvaal and Orange Free State Chamber of Mines. TABLE 9 Price Indices 1953 = 100 Wholesale Prices Cost of Living 1948 67 77 1950 76 80 1951 86 89 1952 99 97 1953 100 100 1954 101 102 1955 104 105 1956 105 107 1957 (May) 106 109 Source: Bureau of Census and Statistics TABLE 10 Central Government Revenue and ExDenditure (( million) Provisional Estimated 1948Z49 1951/& 1954/55 255/5 1956/57 1957/58 Current receipts 1/ 153.4 271.4 277.1 315.8 338.2 322.1 Current expenditure 146_ Q72 264.0 286.0 302.7 293.1 Current Account Surplus (+) 7.0 33.5 16.7 29.8 35.5 29.0 Net Capital Account Expenditure (-) -61.8 -76.2 -65.8 -61.0 -81.2 -94.1 Total Net Expenditure (-) 72.8 32 -4.7 Z-. Financin of Net Expenditure: External Borrowing (Net) - 13.4 0.3 11.0 - 3.8 14.0 Internal Borrowing (+) (a) Public Debt Commissioners 2 21.5 16.6 44.0 30.7 26.6 37.0 (b) Reserve Bank 17.0 29.0 -10.0 24.3 -14.1 ) (c) National Finance Corporation - 4.0 15.0 -33.2 1.5 ) (d) Commercial Banks 16.0 -23.0 - 9.0 - 1.3 18.1 ) 14.1 (e) Other 0.3 2.7 8.8 __1.) Total +54.8 +42.7 +49.1 +31.2 +45.7 +65.1 1/ Includes receipts on Revenue Account, National Road Fund, 3outh Africa iative Trust Fund and Bantu Education Account. 2/ Includes investments by Public Debt Commissioners of pension and provident funds, social security funds, sinking funds, etc. Source: Data provided to the mission. TABLE 11 Money Sup'ly (E million) Demand Deposits End of Notes & Reserve Commercial Change 6ver the Calendar Year Coins Bank Banks Total Previous Year 1938 19.7 4.8 75.0 99.5 + 8.0 1948 66.2 16.4 336.1 418.7 - 2.5 1949 64.9 11.2 296.3 372.3 - 46.4 1950 71.7 42.0 332.3 446.0 + 73.7 1951 79.1 22.1 336.0 437.2 - 8.8 1952 85.3 25.1 328.9 439.3 + 2.1 1953 93.3 10.0 340.7 444.0 + 4.7 1954 97.5 27.9 345.9 471.3 + 27.3 1955 90.9 21.0 326.0 448.6 - 22.7 1956 94.0 23.0 338.8 461.9 + 13.3 Causes of Change in Money Sunly (" million) Advances,etc. Change in Reserve Commercial Savings4/ Annual Change Foreign Assets Bank Banksl/ Deposits Other Total 1938 + 7.2 - 1.8 - 2.1 + 3.6 + 1.1 + 8.0 1948 -167.2 2/ +94.8 2/ +53.2 +13.4 + 3.3 - 2.5 1949 + 17.0 -66.0 3/ - 7.1 + 8.1 + 1.6 -46.4 1950 + 55.7 -11.3 +28.3 - 6.6 + 7.6 +73.7 1951 - 34.5 - 1.0 +34.0 - 3.7 - 3.6 - 8.8 1952 - 3.7 +16.4 4 9.7 -21.3 + 1.0 + 2.1 1953 - 26.3 417.8 +10.8 - 1.5 + 3.9 + 4.7 1954 + 43.2 -18.9 +26.3 -27.1 + 3.8 +27.3 1955 - 16.9 416.7 +29.2 -44.1 - 7.6 -22.7 1956 + 3.8 4 5.5 . +35.6 -39.2 + 7.6 +13.3 1/ Including bank balances with National Finance Corp. 2/ Reflects gold loan to U.K. 3/ Reflects repayment of gold loan to U.K. _/ Increase in savings deposits (-), decrease (+) Source: South African Reserve Bank. TABLE 12 Balance of Payments 1/ (L millions) 1948 1951 1952 1953 1954 1955 1956E/ 1. Merchandise a) Imports f.o.b. 354 467 415 423 437 485 1491 b) Exports f.o.b. 132 281 277 288 323 360 402 2. Net Gold Output 99 150 152 153 164 182 197 3. Freight and Insurance on Imports - 39 - 42 - 42 - 41 - 41 - 45 4. Other Transportation and Insurance and Foreign Travel (net) 11 14 13 12 10 12 ) 5. Investment Income (net) - 24 - 3 - 47 - 52 - 54 -58 ) 6. Government n.i.e. (net) 2 2 1 1 3 3 ) 7. Other Services Including Donations ) (net) - 2 3 3 3 2 3) 8. Balance on Current Account -175 -102 - 58 - 59 - 30 - 28 10 9. Drawings on I.M.F. 3 4 - - - - - 10. Official Loans a) Sterling - - - - - - - b) U.S. Dollars - 9 10 5 15 8 - 3 c) Swiss Francs - - 5 - 5 - - d) Dutch Guilders - - - - - 5 - 11. Short Term Liabilities - 3 1 - 2 - 2 - 1 - 2 - 12. Net Private Capital Movements 3/ and Omissions and Errors 91 58 38 26 55 - 3 1 13. Total (Items 8 through 12) Change in Gold and Foreign Exchange Holdings (Increase+and Decrease-) - 84 - 38 - 7 - 30 44 -20 8 1/ Note: Balance of Payments data in the above detail is available only if it includes South West Africa and the Protectorates. All tables, except the above, cover the Union alone. For this reason there is a discrepancy between figures for Current Account shown above and figures in the basic data and on Table 4. The 1956 deficit for the Union alone in the latter tables is an estimate by the Reserve Bank. 2/ Preliminary 3/ Including trade credits and drawings under uranium loans. Source: Bureau of Census and Statistics TABLE 13 Indices of the Growth of National Income and Railway Traffic 1947 = 100 Ton-Miles of Net National Income at Year Railway Traffic Constant (1948) Retail Prices 1947 100 100 198 105 107 1949 110 110 1950 121 119 1951 127 135 1952 135 127 1953 146 136 1954 149 144 1955 151 151 1956 153 153 Source: Calculated from information supplied by Bureau of Census and Statistics and S.A. Railways and Harbours Administration. TABLE 14 Summary of External Public Debt (in U.S. . million) Forecast Dec. 31, June 30, Dec. 31, June 30, 1950 1955 1956 1957 National and Government Guaranteed Debt 114.5 291.9 274.4 261.7 U.S. Dollar Debt: a) Publicly issued bonds - - 25.0 25.0 b) Privately placed debt 20.0 38.0 21.8 18.0 c) I.B.R.D. - 91.0 78.9 71.1 d) U.S. Government - 19.6 18.6 18.1 Total 20.0 148.6 144.3 132.2 Canadian Dollars (I.B.R.D.) - 2.1 1.8 0.8 Sterling Debt: a) Publicly issued bonds 86.0 86.0 73.4 73.4 b) Privately placed debt - 5.1 4.5 4.2 c) I.B.R.D. - - 25.2 25.2 Total 86.0 91.1 103.1 102.8 Debt payable in gold (Swiss Banks) 8.5 - - - Netherlands Guilder Debt (Public issue) - 13.1 13.1 13.1 Swiss Franc Debt: a) Publicly issued bonds - 28.0 28.0 28.0 b) Privately placed debt (incl.ESCOM)- 7.0 7.0 0.1 c) I.B.R.D. - 2.0 1.8 1.7 Total - 37.0 36.8 29.8 Debt of Political Sub-divisions 42.9 39.3 36.6 36.2 Publicly issued sterling bonds 42.9 39.3 36.6 36.2 Total External Public Debt 157.4 331.2 335.7 314.9 Source: Data provided to Mission Esti-rated Interest rnrl Arortization Pireits os E ten l -Tbl:rc Debt (million equivalent) All Currencies U.S. Doll 3 PundaL xid - t..rh Amorti- Amorti- Amorti- Amorti- Year Total Interest zation Total Interest zation Total Interest zation Total Interest zation 1957 39.2 14.3 24.9 16.9 6.0 10.9 12.8 6.4 6.4 9.5 1.9 7.6 1958 60.7 13.1 47.6 31.5 5.3 26.2 26.8 6.0 20.8 2.4 1.8 0.6 1959 44.6 11.6 33.0 21.1 4.4 16.7 21.3 5.4 15.9 2.2 1.8 0.4 1960 33.2 10.3 22.9 19.6 3.7 15.9 11.4 4.8 6.6 2.2 1.8 0.4 1961 30.2 9.3 20.9 17.2 3.0 14.2 10.0 4.6 5.4 3.0 1.7 1.3 1962 32.2 8.4 23.8 16.8 2.4 14.4 12.4 4.3 8.1 3.0 1.7 1.3 1963 42.9 7.3 35.6 16.2 1.8 14.4 23.8 3.9 19.9 2.9 1.6 1.3 1964 23.5 6.0 17.5 8.5 1.2 7.3 12.4 3.3 9.1 2.6 1.5 1.1 1965 25.9 5.2 20.7 8.3 0.9 7.4 15.0 2.7 12.3 2.6 1.6 1.0 1966 13.3 4.5 8.8 4.1 0.7 3.4 6.8 2.3 4.5 2.4 1.5 0.9 1967 36.7 4.0 32.7 4.0 0.6 3.4 30.4 2.0 28.4 2.3 1.4 0.9 1968 9.2 3.3 5.9 3.9 0.4 3.5 3.1 1.6 1.5 2.2 1.3 0.9 1969 23.9 2.6 21.3 3.8 0.3 3.5 3,8 1.0 2.8 16.3 1.3 15.0 1970 37.8 1.7 36.1 3.8 0.1 3.7 18.4 0.8 17.6 15.6 0.8 14.8 1971 1.2 0.3 0.9 - - - 0.2 0.2 - 1.0 1.0 0.9 Source: IBRD Statistics Division - .''''CAPRII ~\SOUTH AFRICA L P-" RESERVES AND HIGH COMMISSION TERRITORIES BULAWAYO BEITBRIDGE WINDHOEK PORTUGUESE 0 WALVIS BAY AN EAST AFRICA :p T 0 R A S O T H W E ST AFR ICA •• . TRANSVAAL HNSU MBA LOURENÇO MARQUES ir ~ MAFEKINGä LUDERITZ o L AN O O RA N GE F R E E ATL I * oKMBERLEY *- ATAL TAT E•7,. OrreBLOEMFONTEIN .: 7- /. OPIETERMARITZBURG URBAN NATIVE RESERVES ::,C A P E P R V N C E HIGH COMMISSION NATIVE TERRITORIES . Grat kgi f. E EST LONDON 0 50 100 150 MILES reat /isl R CAPE TOWN PORT ELIZABETH IBRD-223R