Opinion: Defining the low investment, low economic growth challenge in South Africa
29 May 2026
In this article by Development Bank of Southern Africa (DBSA) chief economist and group executive Zeph Nhleko, he highlights infrastructure investment as the central lever to break South Africa’s low-growth cycle, citing an estimated R13.4-trillion infrastructure requirement across key sectors including energy, transport, water and information and communications technology.
A leading radio show recently hosted the DBSA to discuss the low investment, low economic growth (LI-LG) challenge in South Africa. This is a complex but totally solvable challenge.
The LI-LG challenge is fundamental to the trajectory of the South African economy and investment is at the core. Investment is one of the essential factors for an economy to promote inclusive growth and generate employment. Unemployment, in my book, is the single biggest challenge we face today – it feeds into the levels of extreme poverty, inequality, and social instability.
It is important to be very clear which investment we are referring to – we are talking, of course, about investment in productive sectors of the economy. When capital is invested in productive sectors such as agriculture, mining, manufacturing, construction – that is, the real economy, not financial sector investment – whether through public infrastructure projects, private fixed capital investments, or blended finance mechanisms that involves both the public and the private sectors, it enhances the economy’s output capabilities, boosts demand across supply chains and generates both direct and indirect employment through the multiplier effect.
Understanding how investment can stimulate employment creation and increase productivity requires examining not just the overall investment spending but also the specific channels of capital deployment. South Africa’s unemployment dilemma is not only a function of investment shortages, but also a mismatch between the structure of investment and the employment needs of the economy. Employment outcomes depend not only on the level of gross fixed capital formation (GFCF), but also on how investment is allocated across sectors to promote economic expansion, the labour productivity of those sectors, and the efficiency with which capital is applied.
South Africa’s long-term investment performance and economic growth have been subdued. Investment growth is significantly below the 30 per cent ambition set out in the National Development Plan – our best performance since 1994 was when we were investing for the 2010 world cup, where we achieved investment levels above 21% of GDP – otherwise investment has remained around the 15% mark. Economic growth on the other hand has gradually stagnated in 3 phases. Between 1994 and 2007, growth averaged around 3.7%. From 2008 to 2019, it slowed down to about 1.6%. Since 2020, growth has averaged a mere 0.5%.
A recent research paper commissioned by the DBSA to look at the state of the South African economy, shows that South Africa has made undeniable strides in macroeconomic stability, financial system development, and social welfare expansion. These gains are reflected in improved access to basic services since 1994, a sophisticated financial sector, and one of the most extensive social protection systems in the developing world. However, for most people these achievements have not translated into meaningful participation in the economy – either through the labour market, entrepreneurship or even asset ownership. Instead, they coexist with persistent structural socio-economic weaknesses. The research paper created an economic resilience index which shows that economic resilience has been declining since 2017, with the country entering high-risk territory around 2023.
A number of factors are responsible for the LI-LG challenge, but four remain important. First, the sustained weak business confidence has resulted in a contraction in investment levels. Business confidence has been largely below the 50 points mark since 2008. This has largely been a function of energy shortages, supply chain bottlenecks and policy uncertainty, such as communicating a transparent government stance on private sector participation to resolve economic issues. Good progress has largely been made across all these issues.
Second, there has been a prolonged poor health of our non-financial state-owned entities – although there is a very welcome positive turnaround for some right now – and for some time they were not able to perform at the right levels. This was compounded by mounting debt service costs which hindered the government from funding public infrastructure at scale and required instead a focused fiscal consolidation approach. The good news is that there has been a positive shift in government over the past year or two in terms of supporting public investment. For example, the 2025 Medium Term Budget Policy Statement and the 2026 National Budget underscores an infrastructure-led growth and reversing underinvestment. The practicality of this stance requires innovative thinking in the context of the current roughly 70/30 non-interest expenditure structure in favour of the social wage.
The third and most important cause, especially for low growth, is the high levels of infrastructure deficiencies. Skills mismatch is the fourth important cause for the low economic performance. The bottom line is that, without reprioritizing investment, growth will remain weak – regardless of short‑term fluctuations.
The results of the LI-LG challenge have been high unemployment and poverty levels, and the inability to meaningfully transform living conditions to rebalance the high inequality levels. We have also seen numbers from Statistics South Africa and the South African Police Service showing how levels of social ills such as violent crime, substance and alcohol abuse remain unacceptably high – the current migration tensions is also a function this challenge.
With an average economic growth at 0.5%, the economy cannot create meaningful employment opportunities, raise income or provide fiscal space for investments. Today we have more that 11.5-million (that is more that the size of the populations Namibia, Botswana, Lesotho, Eswatini and Mauritius combined) who re perfectly capable and willing to work but cannot find work. To be categoric, this is not a cyclical occurrence that will correct itself – it is a structural challenge shaped by how our economy is configured.
Without accelerating investment, South Africa is locked into a low growth environment. If low growth is the symptom, underinvestment is the disease. South Africa requires consistent growth well above 4% to stabilise unemployment – yet we have not sustained that level in the recent past.
Despite some small improvements in poverty and inequality data, the statistics remain bleak: over 66% of the population still live below the upper-bound-poverty line. The level of inequality remains more closer to one than zero. It has been generally agreed that economic growth is necessary but on its own not sufficient to guarantee job creation – there has to be a comprehensive economic transformation approach that considers broadening economic access through the labour market, entrepreneurship and economic ownership.
Infrastructure investment as the starting point to respond to the challenge
Infrastructure investment should be the starting point. No nation on the face of the earth has ever prospered without adequate and functional infrastructure – it is just not possible. Infrastructure is a backbone to the economy. Infrastructure investment creates an immediate fiscal multiplier and removes the physical constraints on production, which in turn crowds in private capital, creates jobs, and lowers the long-term cost of doing business. Infrastructure investment is not easy – it requires public sector leadership to create a single, seamless and integrated national infrastructure development system.
A few years ago, the DBSA started a research series called the Beyond the Gap research series, to determine the infrastructure need in the next decade or two. This detailed research carried out over the past five to six years across five of the seven sectors of the DBSA focus, namely Energy, Transport, ICT, Water and sanitation, and Education – found that the infrastructure investment need over the next decade or two for the five sectors is close to R13.4-trillion. The actual funding gap is about 22% – the rest can be comfortably funded by domestic investors. A large share of this infrastructure needs is not new infrastructure outlays – but about 76% is maintenance funding.
Our peers in the middle-income category are investing close to 33% as a percentage of GDP – yet we are trying to build a modern economy with half the resources deployed by our peers. That means the current GFCF) of about R1.1-trillion a year needs to increase to about R1.6-trillion to R1.7-trillion a year, and while we are at it, we must be very specific which portion of GFCF is targeted. Fixed investment has three categories – research and innovation (about 10%); equipment and machinery (about 53%), and hard infrastructure (about 37%). It is the latter category that is capable to generate jobs at scale – and that should be the focus
There is a handful of mechanisms that we need to appreciate on how infrastructure supports the rest of the economy.
Infrastructure as a factor of production – Infrastructure acts as a core factor of production by allowing business operations though reliable roads, ports, and rail networks, enabling companies to move goods to domestic and global markets more efficiently.
It also enables manufacturing through providing a steady of energy and water.
Facilitation of supply chains – Infrastructure development, especially during construction, generates high demand for intermediate goods, such as cement, steel, and electrical equipment, which boosts the manufacturing and mining sectors. It is also highly labour-intensive, creating employment across various skill levels and raising household incomes, which in turn supports consumer spending.
Enables private sector participation in the economy – this is particularly important in the context of a constrained fiscus.
Improves public health and educational outcomes – The state of social infrastructure, such as schools, hospitals, and clinics, have a direct bearing on public health and education outcomes.
The GNU was supposed, among others, to help South Africa strengthen issues of governance and implementation. But the new challenge in a coalition environment is that suddenly government is organised and working along party politics lines. This is not helpful for addressing the LI-LG challenge, because now different parts of government are trying to solve the challenge on their own. Unfortunately, we do not have the luxury of time to focus on experiments at this point – we do not have time to be distracted by cultural and political diversions. We need to deploy tried and tested programmes and approaches.
It is for this reason that the following practical interventions, which have been perfected by the DBSA over time, are proposed for scaling. That does not mean we forget about closing the skills and unleashing small, medium-sized and microenterprises – it simply means we set our 80/20 Pareto alignment carefully and we start with interventions that are guaranteed to yield results.
The DBSA has over 43 years of infrastructure development. The bank exists to create Africa’s prosperity through infrastructure development and capacity building, so creating interventions is its bread and butter. High performance and prudent governance is embedded in the way the DBSA operates – it has been among the functional state-owned entities in this country for over four decades. From an institutional positioning point of view, the DBSA is able to deploy its interventions because it operates across the full infrastructure development value chain.
While other development finance institutions focus on early stage and core financing, the DBSA has infrastructure delivery and maintenance capabilities, over and above that. The DBSA provides total facilities management to the union buildings, is currently the Implementing Agent for two new mega hospitals that are being built in Limpopo, the Siloam hospital and the Limpopo academic, and it is the development agent hard at work rebuilding parliament since April last year to ensure that next year’s SONA and the budget speech are tabled in a brand-new parliament chamber
The following three proposals has been proven and need to be scaled:
Implement a structured programmatic approach, which is a systems approach to infrastructure development as opposed to specific projects. This approach is based on the Independent Power Producer Office blueprint developed by the DBSA in 2010 to allow private sector participation in public projects and ensure coordination and functionality in infrastructure development. Similar, programmes set up along these lines at the DBSA include the Water Partnership Office to respond to the water sector challenges; the Rail and Logistics Private Sector Participation Programme to reform the transport sector; the Credit Guarantee Vehicle to support the Independent Transmission Office; and the Student Housing Infrastructure Programme to close the gap in students’ beds requirements.
Utilising functional state-owned entities as Infrastructure Delivery and Maintenance Agents for public projects. Beyond the policy pronouncements, this is an area that requires urgent practical implementation.
Deploying the Integrated Municipal Approach. The essence of this approach is that meaningful intervention in municipalities to turn them around requires a combination of infrastructure finance; infrastructure delivery; local economic development; and governance and institutional strengthening. It also requires frontloading (pledging), that is, using the SOEs’ balance sheets to intervene and get reimbursed at a later stage. This approach should benefit from the DBSA’s Partner-A-District platform which emphasises the “coalition of the willing” stance to ensure practical progress.
Role of DFIs in closing the investment gap
There are roughly 45 development finance institutions and development finance agents in South Africa, across the three spheres of government – the top 3 (Industrial Development Corporation, the Development Bank of Southern Africa and the Land Bank, constitute about 95% of the total assets under management. The reality is that the DFIs are underutilised levers in macroeconomic policy. If we agree that the fiscus is constrained; and if we agree that DFIs operate beyond the strict risk-return thresholds of commercial banks, then it should not be difficult to see the opportunity that they can drive fixed capital formation, job creation, and economic transformation.
Our macroeconomic policy at this point treats DFIs as supplementary funding mechanisms rather than core pillars of national development. This needs to be reviewed to enable the harmonisation of fiscal policy with development finance mandates. DFIs need to be integrated meaningfully into the fiscal task allocation exercise of national economic development and infrastructure plans. This transition requires that a guarantee-system and forward budget allocations to frontloading are enabled to allow private sector participation and immediate intervention. It also requires the alignment of infrastructure pipelines and allowing DFIs to act as financial anchors to de-risk projects. It further needs enabling monetary policy counter-cyclical lending support to ensure DFIs serve as shock absorbers by providing liquidity and maintaining investment levels during downturns.
DFIs have at least four instruments in their toolkit that they can utilise to contribute to solving the LI-LG challenge. These are:
Capital mobilisation – DFIs can mobilise capital from the global DFI community; capital markets, blended finance by supplementing public funds by partnering with the private sector or collaborating with concessional capital providers, such as the Global Green Funds, to augment the fiscus.
Facilitate project preparation – The most important factor of infrastructure development is project preparation (feasibility studies, environment impact assessments and project structuring). DFIs have vat experience in this.
Relevant risk and tenor – Unlike commercial banks, DFIs have the ability to operate further up in the risk curve and offer much longer tenor through patient capital.
Thematic finance – to pursue sustainable growth, we need to finance social assets, nature assets, and ensure that resilience is embedded in our interventions. DFIs provide brilliant platforms to facilitate this.
Enablers to facilitate the proposed interventions
When all is said and done, an enabling environment has to be created for the envisaged interventions to be made and scaled. This analysis piece provides our policy makers and participants in the infrastructure development value chain with an opportunity for reflection and to be better organised. There are four critical enablers:
Adjust fiscal policy to embed DFIs as major conduits for infrastructure development – this is not complex, but very powerful. DFIs are already part of the public sector and very good at what they do. So, let’s take advantage of that and use them even more.
Re-allocate capital in the financial sector to workhorse balance sheets – there are three types of balance sheets in the monetary architecture: workhorse – concerned with day-to-day issues in the economy such as infrastructure development, firefighting – concerned with responding to systemic challenges, and opportunistic – target unconventional structural interventions in times of limited policy space. So, we have to find ways to re-allocate capital in the financial system towards the workhorse balance sheets. The recent review of regulation 28 that allows pension funds to treat infrastructure as a distinct asset class is a good example of how we do that.
Creating an Integrated National Infrastructure Development System – creation of a single national infrastructure development pathway is non-negotiable if we want to realise efficiencies. The correct way go about this is to coordinate the national system from one centre and ensure that all existing institutions are attached to one of the elements of the infrastructure value chain (as planners, financiers, implementers, etc.) – granted, others such as the DBSA, will have multiple roles in the system.
Governance and leadership – this is the foundation for institutional effectiveness – we should move beyond the noise and distractions that we are subjected to o a daily basis and get relevant expertise in place. We have countless beautiful minds in this country – and it is high time we put them to good use.
