• SMEs drive up to 40% of GDP and most jobs but face regulatory and financial constraints

• Power shortages and limited access to finance remain major barriers to business expansion

• Regulatory burden linked to weaker productivity, investment and job creation

South Africa could raise its economic output by up to 9% over the medium term by improving its business environment, according to the International Monetary Fund. The estimate comes from a Country Focus note published in its weekend read, “Enhancing South Africa’s Business Environment to Boost Growth and Create Jobs.” The IMF indicates that closing half the gap with emerging market best practices in areas such as business regulation, governance, and labor markets could lift annual growth to around 3%, from current levels of about 1-2%.

The institution notes that South Africa’s regulatory framework, particularly licensing and permitting requirements, remains fragmented, costly, and more burdensome than in peer economies, discouraging private investment and limiting firm expansion. Its analysis, based on firm-level data, shows that increased time spent on regulatory compliance is directly associated with weaker business performance, including slower sales growth, reduced productivity, and lower employment expansion. Small and medium-sized enterprises, which account for a large share of job creation, are disproportionately affected due to limited administrative capacity, amplifying the broader economic impact in a context where unemployment exceeds 30% and reaches around 60% among young people.

These constraints are reflected in broader structural conditions across the economy. According to the United Nations, South Africa’s growth trajectory remains limited by persistent bottlenecks in infrastructure, labor markets, and business conditions, restricting firms’ ability to expand and absorb labor. Power shortages, logistics inefficiencies, and regulatory fragmentation have weakened productivity and delayed investment decisions, reinforcing a cycle of low growth and high unemployment. IMF Article IV findings project growth at around 1.3%–1.4% in the short term, underscoring the gap between current performance and the levels required to significantly reduce unemployment.

World Bank findings point to similar structural constraints affecting the business environment, particularly for small firms. Small and medium-sized enterprises face persistent barriers including regulatory complexity, limited access to finance, and constrained market access, all of which restrict their ability to grow and create jobs. Access to finance remains one of the most significant constraints on business operations, second only to electricity shortages, highlighting the interaction between regulatory inefficiencies and broader structural bottlenecks.

According to the International Finance Corporation’s MSME Voice report, based on surveys of more than 2,600 firms, small businesses identify limited access to finance and restricted market access as key barriers to expansion, despite accounting for about 34% of GDP and employing roughly half of the workforce.

Statistics South Africa estimates that the official unemployment rate stood at 32.9% in the first quarter of 2025, with more than 8.2 million people unemployed, while youth unemployment rose to 46.1%, highlighting persistent labor market pressures. The data also shows a decline in formal sector employment alongside a marginal increase in informal activity, indicating limited absorption capacity in the formal economy. At the same time, small businesses remain central to job creation, contributing between 34% and 40% of GDP and employing around 60% of the workforce, according to national estimates. However, nearly 300,000 informal sector jobs were lost in late 2025, reflecting the vulnerability of township enterprises and small traders to regulatory, economic, and enforcement pressures.

Other institutional and academic analyses reinforce the link between the business environment and economic performance. Studies based on World Bank Enterprise Survey data show that legal and regulatory constraints, alongside limited access to finance and markets, continue to weigh on the growth of small businesses in South Africa. The World Bank’s Enterprise Surveys indicate that countries that reduce regulatory burdens and simplify licensing tend to see higher private investment and increased firm creation, suggesting that improved business environment frameworks could strengthen South Africa’s growth prospects.

By Cynthia Ebot Takang