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Title page 1

Contents 3

Acknowledgments 5

Lists of acronyms 6

Overview 7

PART 1: The state of the economy 11

1.1. RECENT DEVELOPMENTS 12

1.1.1. Domestic conditions gradually improved during 2024, but GDP growth remains subdued 12

1.1.2. Poverty remains prevalent due to limited job creation 14

1.1.3. Lower inflation allowed for more accommodating monetary policy 15

1.1.4. South Africa's external balance is stable but vulnerable to volatile commodity prices and short-term capital flows 16

1.1.5. The fiscal deficit rose to a new level leading to higher public debt 16

1.2. OUTLOOK AND RISKS 18

1.2.1. Improved growth prospects and fiscal consolidation 18

1.2.2. Uncertainties in the global economy cannot be ignored, but the main risks are domestic 21

1.3. THREE POLICY ACTIONS FOR FASTER AND MORE INCLUSIVE ECONOMIC GROWTH 22

1.3.1. Action 1: Addressing the infrastructure constraints 22

1.3.2. Action 2: Improving the efficiency of public spending 23

1.3.3. Action 3: Strengthening human capital 25

REFERENCES 27

PART 2: The overdue reform and emerging priorities in the basic education sector 29

2.1. THREE KEY CHALLENGES IN BASIC EDUCATION 30

2.1.1. Challenge 1: The learning crisis - early progress, setbacks, and the urgency to accelerate progress 30

2.1.2. Challenge 2: The increasing financing constraint of the State 33

2.1.3. Challenge 3: Limited efficiency and equity of public spending on basic education 37

2.2. THREE ACTIONS FOR BETTER LEARNING 40

2.2.1. Action 1: Focusing on learning outcomes, starting with foundational learning 41

2.2.2. Action 2: Leveraging the private sector to expand access to, quality of, and competition in education service delivery 44

2.2.3. Action 3: Improving the efficiency and equity in public spending on education 46

Annex 1. Basic education datasets 50

Annex 2. Key lessons from the Sobral experience in Brazil 51

Annex 3. The Mississippi Miracle 53

References 54

Tables 4

Table 1. Baseline forecasts 18

Figures 4

Figure 1. Weak GDP growth led to declining GDP per capita 12

Figure 2. GDP has underperformed all other income groups since 2016 12

Figure 3. Financial services drove growth in recent quarters 13

Figure 4. Weak domestic demand hindered growth in 2024 13

Figure 5. Rail freight volumes have declined significantly 13

Figure 6. Unemployment remains elevated, with most job seekers unable to find work in over a year 14

Figure 7. South Africa has one of the lowest employment ratios in the world 15

Figure 8. Larger goods trade surplus kept the current account deficit contained in H1 2024 16

Figure 9. FDI flows to South Africa remain weak compared with other Emerging Markets 16

Figure 10. The persistently wide fiscal deficit and rising public debt over time 17

Figure 11. What drove the deterioration of fiscal deficit in recent years 17

Figure 12. South Africa is on the wrong side of productivity growth, 2011-2022 22

Figure 13. The gap in labor productivity between South Africa and the world is widening in all sectors, 2001-2017 22

Figure 14. Contributing factors to productivity in South Africa 26

Figure 15. South Africa's HCI is low relative to its spending on education and health 26

Figure 16. Results from International Assessments by South Africa, 2000-23 31

Figure 17. Comparing the System Test Scores and School-based Assessment Scores, Western Cape, 2022 33

Figure 18. South Africa budgetary allocation to the education sector 34

Figure 19. Real spending on basic education has declined since 2019-20 34

Figure 20. On average, provinces allocate 41 percent of their budget to education, 2023-24 35

Figure 21. Variations in public spending per learner in Grades 1-12 across provinces 35

Figure 22. Provinces spend, on average, about 75 percent of their education budget on wages, 2024-25 36

Figure 23. South Africa's underperformance: Expected vs actual PIRLS 2021 Grade 4 scores 37

Figure 24. The differences in spending per learner are not always corrected by public funding, results for one province in 2021-22 39

Figure 25. Reforming the education system: from challenges to recommended actions 41

Figure 26. Reading benchmarks in Nguni languages 43

Boxes 4

Box 1. Why is fiscal consolidation a priority for South Africa? 20

Box 2. Measuring inequalities in learning outcomes 32

Box 3. Explaining the Norms and Standards for School Funding (NSSF) 35

Box 4. How are wages negotiated in the education sector? 36

Box 5. US Charter Schools, Colombian Concession Schools, and UK Academies 45

Box Figures 4

Figure B1. South Africa's debt dynamics are unfavorable 20

Figure B2. Without fiscal consolidation, there are significant risks of debt non-stabilization 20

Figure B3. Learning outcomes are the most unequal in South Africa 32