SA won’t save itself – but the IMF might
The stock response to revelations that the corruption of the Zuptas now encompasses Treasury and the South African Revenue Service is one of shock, anger and impotent despair. But every cloud has a silver lining.
The blows just keep landing. Jacques Pauw’s riveting book, The President’s Keepers, describes (among many other lurid stories of corruption and larceny) how SARS has been destroyed under the leadership of Gupta crony and Zuma appointee, Tom Moyane. Hot on its heels comes the news that President Jacob Zuma is pressing ahead with plans for free tertiary education, no matter where the money has to come from. The market responded predictably, by sending rates on government bonds soaring to their highest level since we had three finance ministers in one week.
Investors are fleeing the country, taking capital worth hundreds of billions of rand with them. South Africa’s risk premium over benchmark economies like Germany and the United States remains higher than at any time between 2005 and 2015. It is one of the riskiest countries in the world to invest in.
The government’s public debt was brought down significantly by then-finance minister Nhlanhla Nene, but since his removal, it has resumed its rapid rise to reach its highest-ever level, 12.5% higher than its peak in 2013. GDP growth, according to finance minister Malusi Gigaba, has declined for two consecutive years. It is at its lowest sustained level since the dawn of democracy in 1994.
Eskom has been in trouble for years, and is “going down and under very, very fast”, according to energy adviser in the Presidency, Silas Zimu. The Presidency has distanced itself from these comments, which almost certainly means they’re true. Eskom faces a liquidity crisis. Taxpayers (through capital injections), consumers (through a steep tariff hike), or both, will have to bail it out. Ratings agency Fitch has put Eskom bonds on a negative watch.
South African Airways is in even worse shape, and remains on the verge of bankruptcy even after multibillion-rand government bailouts have become routine. Denel, the SABC and South African Express are also in dire need of capital.
The government’s exposure to SoEs that are bleeding cash contributes to the risk in its own financial position. After Malusi Gigaba’s mid-term budget statement last month, ratings agencies Moody’s and Fitch both warned that the combination of renewed fiscal profligacy and a shortfall in revenue collection threaten the country’s “debt sustainability”.
All this raises the spectre of a bailout by the government’s lender of last resort, the International Monetary Fund (IMF). The government says it isn’t considering it. Which, again, probably means that it is. Either way, would an IMF loan, with its attendant conditions, be good for South Africa?
UCT finance lecturer Misheck Mutize doesn’t think so. Neither does international relations scholar Oscar van Heerden, writing in these very pages. Both fear the economic policy conditions attached to the IMF’s credit facilities.
The IMF says it has eased up on such conditions, after years of criticism over its heavy-handedness and its alleged lack of results, but according to a 2016 article in the Washington Post, it hasn’t.
That story’s authors, Alexander Kentikelenis, Thomas Stubbs and Lawrence King, do appear to be rather biased against the IMF, however. They make the following argument in their critique: “Countries in economic trouble need policy space – that is, the ability to select the policy instruments to address their economic problems, free from coercive externally imposed conditionalities. The underlying intuition is that governments have more knowledge and resources to implement domestically designed policy reforms.”
This is an opinion, not fact. And if we’re going on intuition now, my intuition says countries in economic trouble got there by abusing the policy space they had. Nobody forced them to run unsustainable budget deficits or to get up to their necks in public debt. Their voluntary, internally determined policies are exactly what led them into crisis, and those policies need to change. Besides, it’s perfectly legitimate for creditors to want to make sure their debtors are able to pay them back. If you don’t want your sovereignty violated, don’t approach the IMF, it’s that simple.
Let’s look at some typical IMF loan conditions:
- Reducing public spending to match public revenue collection;
- Cutting the public sector wage bill;
- Liberalising international trade relationships;
- Removing government subsidies and price controls to level the economic playing field;
- Liberalising the labour market;
- Privatisation of State-owned Enterprises so they’re no longer a drain on the fiscus;
- Fighting corruption.
These are all measures that South Africa desperately needs.
Mutize says South Africa’s problems are not financial in nature, but that they stem from corruption. The truth is both are grave problems. He says focusing on financial problems “will distract the government from the critical issues it needs to address which have little to do with the finances”.
Those issues, according to the link he provides, are: education, immigration, infrastructure and inequality, labour issues, land reform, and State-owned Enterprises. Half of those are explicitly on the list of issues the IMF would seek to address, and the others require sound finances.
Mutize writes: “What needs to happen is that policy-makers need to turn their minds to the real problems. This can simply be done without a bailout.”
Sure. Hey, President Zuma, if you’re reading this, please stop the corruption, and tell Mr Gigaba not to spend so much, and fix SARS, and maybe sell SAA, the SABC, parts of Transnet and most of Eskom? While you’re at it, please deregulate the labour market, reduce public sector wages, fire a large part of the civil service and substantially reduce the size of your Cabinet. Then sort out education, land reform and immigration, and rebuild our decaying infrastructure. And finally, see if you can get some of that stolen money back from your private sector buddies, please. The fiscus could use it. Thank you, sir.
There, that was easy, wasn’t it? No coercive external conditions needed at all!
Van Heerden is equally idealistic, noting that a “self-imposed structural adjustment programme” worked for us back in the 1990s, in the form of the Growth, Employment and Redistribution (GEAR) programme. Well, it avoided having to take an IMF loan, but it didn’t really “work”. We had a little economic growth, and solicited some foreign direct investment, but neither was enough to create meaningful employment. Subsequent programmes have hardly been more successful.
Besides, if he thinks that the ANC of today would approve a programme like GEAR today, and would start to behave with the fiscal discipline that such a programme requires, he’s smoking something. The government has not only become far more corrupt, but has lurched further to the left. Both ideology and greed require lavish government spending.
Mutize and Van Heerden think that if we can’t fix our economic problems ourselves, we would be better off turning to the New Development Bank, established by the BRICS countries. Asking such a new bank for a bailout just after it was established would concede that South Africa is an insignificant and delinquent member of BRICS. It would also ask a bank that is entirely inexperienced at government bailouts for help, which seems like a big gamble. Moreover, SA would be going into debt to a bank funded by countries that are considered to have an even higher risk profile, such as Russia and Brazil. Both needed IMF bailouts themselves in the last 20 years. Taking economic guidance from countries that are unable to run their own economies strikes me as unwise.
Both Mutize and Van Heerden make sweeping arguments about the fate of countries that have been bailed out by the IMF, trying to paint the institution in as negative a light as possible. Before we consider a few of them, let’s stipulate that any country that needs an IMF bailout is already in trouble, so it is to be expected that not all of them will be a prosperous Utopia after having narrowly avoided default.
Let me also state at the outset that the IMF forms part of a global financial system that is built on unsustainable debt and monetary inflation, which I oppose in principle. Government (or supranational) intervention in the economy is fraught with difficulties, of how much to do and when to do it. The IMF has been criticised both for doing too much, and for doing too little. It has likewise been criticised for being too free-market oriented, and for being too interventionist. The IMF creates moral hazard, because it implicitly permits countries to pursue unsustainable economic policies, knowing a bailout is always available.
So I agree, the IMF isn’t a great institution. But while we wait for the entire debt-ridden system to collapse faster than governments can print money, they’re the last resort for a bankrupt country.
Mutize and Van Heerden both note that 41 countries have relied on IMF loans for over 10 years, 32 for over 20 years, and 11 for over 30 years. But those sorts of loan terms are routine for governments, no matter who the creditor is. Debt, whether corporate or government debt, is often subject to refinancing. A typical home buyer also signs loan agreements of 10, 20 or 30 years. They argue that it’s “nearly impossible to wean an economy from IMF debt programmes”, yet there are only three countries in the world today that are significantly overdue on their IMF repayments: Sudan, Somalia and Zimbabwe.
The idea that countries, or the poor, are worse off after IMF interventions is purely anecdotal. It stands to reason that measures that cut public spending will affect the beneficiaries of that spending. But those are the inevitable consequences of running an economy into the ground. Without IMF loans, client countries would run out of money sooner. A collapsing economy imposes far harsher cuts to public spending than an austerity programme and loan assistance ever could.
Mutize is concerned about IMF “imposing inappropriate policy choices that would have further harmed poor people”. But that’s like saying performing surgery on a road accident victim does further harm. Yes, it does, in a way, but the short-term pain is intended to achieve long-term gain. Poverty reduction requires sustainable long-term growth and stability, which are exactly the goals that IMF-imposed policies are designed to achieve. Some people might get hurt by structural adjustment, whether they are rich or poor, but remember that they were first harmed by the government that got itself into this predicament in the first place. Trusting that same government to get them out of it, or hoping that it can be done painlessly, seems terribly naïve.
Van Heerden asks: “How is it that we don’t see any of those countries that were devastated in that war of the North assisted by the bank still owing any money? Even when Greece was in a particular predicament a few years ago, instead of turning to the World Bank, they found their own solution to that crisis. So, why should we in South Africa turn to the IMF and not find our own home-grown solution to this impasse?”
No, Greece didn’t turn to the World Bank. It turned to the IMF. Not only that, but it missed its IMF payments, which makes it one of very few countries that didn’t have war as an excuse for late IMF payments. Portugal, Ireland, Poland, Georgia, Bosnia & Herzegovina and Serbia also recently received IMF loans. Of those, only Portugal and Ireland have paid off their debt. So Van Heerden is wrong to suggest European countries do not turn to international financial institutions for help when they need it. They do.
Van Heerden proposes several possible interventions. One is a public sector wage freeze, which is an excellent idea.
The next, however, is to “raise the levels of VAT, personal income tax, company tax and indeed the fuel levy to raise some more resources to service the debt”. Finance minister Malusi Gigaba admitted in the Medium Term Budget Policy Statement that further tax hikes could be counterproductive, which suggests that the optimum tax rate – beyond which tax revenues begin to decline – has already been reached. Raising VAT would lead to rioting in the streets. Raising the fuel levy also raises the cost of everything else, for everyone. We can’t tax-and-spend our way out of this crisis, as Van Heerden appears to believe.
Then, he says we might “all come together and agree on a domestic stimulus package”, involving R250-billion from the private sector matched by R250-billion from government, to give the economy “a welcome kick-start, which will surely put us back on a path to recovery, both financially and economically”.
I don’t understand this proposal at all. First, the private sector’s money is already in the economy. It isn’t being “hoarded”. Even if some of it is held as liquid cash in bank accounts, it serves to fund loans, some of which create capital, while others stimulate consumption. Second, the problem is that the government doesn’t have any money. Where is it going to get R250-billion in matching funds? The IMF?
The IMF is not a fun institution to do business with. It isn’t supposed to be. The right way to avoid having to do business with them is to maintain economic policies that don’t force you to approach a lender of last resort. You wouldn’t approach a debt counsellor and expect them to advise you to go on borrowing and spending, would you?
South Africa sure could do with some “coercive externally imposed conditionalities”, such as labour market reform, fiscal responsibility, and privatising bankrupt state-owned assets. Hoping that our own politicians will step up with internal policies that will save the day is optimism bordering on the delusional. Perhaps the IMF can do so. DM