SA's labour market was clearly "broken" and failing the unemployed, the International Monetary Fund (IMF) said yesterday.

In an annual report on SA, the world's biggest lender echoed concern that labour policies inhibited the government's desire to reduce unemployment.

Surprisingly, the IMF predicted that the economy would grow by 4% both this year and next - well above official and independent estimates.

But it warned that without labour reform, the economy would have to grow at 6%-7% to reach an official goal of creating 5-million jobs in the coming decade.

"The labour market is clearly broken and failing the unemployed," the IMF said in its annual article IV consultation with SA.

SA's unemployment rate rose to 25,7% in the second quarter of this year, a seven-year peak, as an influx of new job seekers surpassed a modest pick-up in employment.

There were myriad reasons behind SA's high structural unemployment rate, but one factor that has "certainly not helped in recent years is high real-wage growth", the IMF said.

Unions clinched pay settlements well above the inflation rate in the past couple of years, even when the economy was in recession during 2009 and more than 1-million jobs were lost. Average wage increases so far this year have amounted to about 8% compared with last month's inflation rate of 5,3%.

If wages were not aligned to productivity, SA's competitiveness was unlikely to improve and "only a fraction of the half-a-million new jobs a year were likely to materialise", the Washington-based institution said.

The IMF welcomed proposals in the government's new growth plan to moderate broad economy-wide wage growth.

But it suggested an accord be found among the government, employers and unions to limit above- inflation wage increases to 1%-2% over the next few years.

If this was not possible, the collective bargaining system should be changed to take better account of the limited ability of small and medium-sized enterprises to comply with wage settlements, the IMF said. It also said measures to strengthen product market competition would help to create jobs.

Further trade liberalisation was needed and more aggressive efforts to attract new entrants into key network industries such as telecommunications, transport and energy, it said.

The IMF said the rand was 10%-15% overvalued, but could not be blamed for the lack of competitiveness of SA's exports. Cost of production was key, including rising labour costs.

There was a case for keeping interest rates steady due to "downside risks" to SA's recovery . "The high degree of uncertainty to the outlook . calls for delaying the start of tightening monetary policy." Th is view tallies with expectations in SA that the Reserve Bank will keep its repo rate steady .