The local economy should start picking up a little, perhaps not as much as previously expected, but the outlook for South Africa's economy remained positive in the short term, Econometrix chief economist Dr Azar Jammine told members of the French South African Chamber of Commerce and Industry on Monday.

Econometrix expected the local gross domestic product (GDP) to contract by 2,1% this year, before growing by 2,7% in 2010. The country's GDP was forecast to grow by 3,7% in 2011 and by 3,9% in 2012.

However, Jammine pointed out that the International Monetary Fund was becoming more pessimistic about South Africa than previously, given its downward revision of South Africa's GDP forecasts over the past few months.

This was owing to the dramatic appreciation of the rand, he said.

While the rand had been one of the weaker currencies worldwide between 2006 and 2008, it had become the third strongest currency in the past few months, along with Brazil and Australia's currencies.

It was attracting huge amounts of money owing to the fact that it was a large exporter of commodities.

Jammine warned, however, that if the world stock markets fell again, the rand would be one of the currencies to fall the fastest.

Nevertheless, Jammine said that the world economy would likely continue to improve in the short term and that the rand would remain strong in 2009 and in 2010.

He added that there would still be huge volatility in the rand exchange rate, but said that the rand would not collapse.

Meanwhile, Jammine pointed out that while the country's economy should start improving a little, many challenges remained.

For example, inflation would increase if Eskom's proposed tariff increase under its second multiyear price determination (MYPD-2) was granted by the National Energy Regulator of South Africa, which would in turn likely push up interest rates.

Jammine proposed that the government move its inflation target range higher than the current 3% to 6% range for the period that new electricity increases are being implemented.

He noted that there were advantages and disadvantages to a big increase shock of a 146% electricity price increase in the first year of the MYPD-2 and 12% increases in the years thereafter, as well as to a smoothed approach, where electricity prices are expected to rise by about 45% a year.

However, he believed that government would likely choose the smoothed approach for electricity increases, given that a 146% increase would devastate the economy and deter investors from investing in the country.

A smoothed tariff increase approach would, however, not lead to a sufficient drop in electricity demand and there would be uncertainty over whether Eskom would be able to finance its expansion plans, he said.

Further, Jammine emphasised that the country's leadership had to uplift the education and skills training of the poor and unemployed, in order to ensure that the productivity of the country is improved, inequality is eradicated, and to start dealing with the country's unemployment problem.

However, he noted that the country's leadership seemed to lack recognition of what the country really needed, namely education and skills training.