Murmurings that the National Treasury would have no option but to turn to the International Monetary Fund IMF and other international lending agencies were in the wind way before Covid 19.
The pandemic’s impact on the South African economy provided the final warning shot for a state aware of the urgent need to undertake structural reform but held hostage by its political ramifications.
Those who warned that the state would have to seek such financial assistance in the face of a welfare bill supporting just under 18 million people were derided for their “alarmist” statements but the Treasury has applied for $4.2bn R7Obn in assistance from the IME Now there’ll be those who argue that SA is in the same boat as many other economies in the world that have been blindsided by a pandemic that has sent the global economy into its deepest recession this century and, as such, there can be no blame cast on the management of government finances.
But a look at the past decade’s governance paints a very different and more realistic picture. For most countries, the need to turn to the IMF arises from a very weak balance sheet normally a crisis of the balance of payments, and hence external support is normally a positive turning point.
This, however, is not necessarily the case for SA. It is instead a recognition of a failure to grow and support business to drive economic growth and accompanying job creation. The country failed to put in place reforms of its own accord and is now facing a looming government funding crisis, albeit without a balance of payment problem.
Should our economic prospects not take a turn for the better, there’s a very real prospect that we will need to seek additional funding from the IMF in the coming few years. We walked into this pandemic in the worst possible fiscal position, without the means to effectively respond to the health and economic storms it unleashed. Ahead of the last global recession in 2007 08, we had an arsenal to wage an effective war against the crash in financial markets. A budget surplus of about 1% of GDP and a debt to GDP ratio of about 22% gave the country the ability to spend in the downturn. With debt under control and a nation spending only 2.2% of GDP on debt servicing costs, the first administration of president Jacob Zuma was encouraged to spend.
And spend it did, without the caution the Treasury now has to exercise with the R500bn stimulus injection. Now, like other emerging market countries, we have to find avenues to spend to support a shrinking economy. Except this time we face a debt to GDP ratio that promises to accelerate towards 90% in the near future, a budget deficit rising to about 15% of GDP in 2020 21 and debt servicing costs climbing to 6% of GDP. We are exhausting the conditionality free money from the IMF’s Rapid Financing Instrument, which will likely be paid out at the end of July.
The next step will be borrowing based on harsh but necessary conditionality. This is the Stand by Arrangement often talked about. There will be conditions to accessing funding, such as a definitive commitment to stabilise the GDP to debt ratio in the medium term, fiscal rules to strap the government to the mast and contentious reforms to state owned enterprise SOEs . Effectively, an element of sovereignty has to be lost as a form of collateral.
Deep questions have arisen over the long-term political stability of countries with IMF programmes. They typically suffer from changes in government, given the backlash on tough conditionality. Very few countries manage the trick of simultaneously rescuing their economy and blaming the IMF, not themselves, for the conditionality.
The conditionality “belongs to the country”, the IMF always says, but this is not really true. The country must sign up to the conditions to the loan and offer them up in a letter of intent to the IMF’s executive board. On the surface it is presented as not being a loss of sovereignty, but in reality it is. Many countries have long periods of “will it won’t it” before applying for a loan for this reason.
There’s no getting round the fact that any further approach to the IMF will come when we are in a most desperate position and to emerge from it will not be easy. It will require political resolve and a clear focus on structural reforms of SOEs, energy policy reform and labour law changes.
The IMF has long called for similar reforms and, if we don’t reform ourselves, it will lead us down that road. It will not be an easy path and comes with embarrassing scenarios where the country’s budget is submitted for audit.
The traumatic thing for the country is that it would happen at speed. In essence, our sovereignty would be lost, affecting all spheres of society. It needn’t be this way if we ourselves take the reform decisions already on the table, now.
This article was first published in the Sunday Times