Opinionista Oscar Van Heerden 15 August 2017

IMF bailout not the answer to our woes

Succumbing to the IMF and its debt dependency traps will be a faux pas. Tightening our own belts and catching our own money worked for us then, why not again?

I have recently heard a few commentators and analysts put forward an International Monetary Fund (IMF) bailout as a viable option for South Africa at the current juncture. Most of these opinions emanate from a finance and economic standpoint. However, I consider this issue from an International Relations and geo-strategic point of view.

Many South Africans may not be aware of the fact that a few years before the Nationalist Party lost power to the majority, the then Reserve Bank Governor, Chris Stals, went on a spending spree trying to salvage our currency, the rand, by selling US dollars from our national reserves at an alarming rate. The resultant effect was that by the time the democratic government took over, there was hardly any dollar-denominated revenue left in the country’s coffers. In fact, we were technically almost bankrupt with a ballooning domestic debt and a foreign debt that had to be curbed immediately.

This was when the IMF came running to Mzansi’s doorstep. As is long the established pattern evident in how the IMF operates, this was the right time to approach South Africa. Post-colonial democratic governments are ripe for lending when their citizens are newly freed nations, carrying high expectations for service delivery. It is at this point that newly elected governments have to deliver on all sorts of delivery promises including correcting years of underdevelopment and poverty. But both the cynic and historian know that offering a loan at the point of “Uhuru” ensures that the new country becomes part of the debt dependency trap for many decades to come.

Fortunately, in the heady days of the new South Africa in 1994, Mandela was at the nation’s helm. “No thank you!’ was his reply to the IMF’s “kind offer”. Instead, the governing party agreed to a self-imposed structural adjustment programme, called the growth, employment and redistribution strategy (GEAR), in 1996. At that time it was argued that this would be the only way the ruling party would be able to deliver on its new mandate, the Reconstruction and Development Programme (RDP).

Admittedly, the strategy did not deliver enough new employment but this approach however did put South Africa on a path to financial recovery with regards to growth. There was an unprecedented seven-year successive growth period, which had the concomitant effect of redistribution (with unprecedented levels of an expanded black middle class).The government was also in a position to build up sufficient savings in the form of foreign reserves, moving from a near zero base to plus-minus $50-billion at year end 2007/08.

The self-imposed structural adjustment programme worked for us, and put South Africa in the financial position to extend social delivery and implement the social grants system at the scale we see today. Tightening our own belts and catching our own money worked for us then, why not again? I think that we should take the same decision – to decline the overtures of the IMF – today.

The main risks to government’s financing strategy are threefold:

  • Macroeconomic and fiscal risk. Persistently weak economic growth, deterioration in the fiscal position and/or demands for additional guarantees or capital injections for state-owned companies would likely increase debt and borrowing costs.
  • Financial market risk. Policy uncertainty and political noise ahead of the governing party’s elective conference in December 2017 could add to market volatility. Lack of clarity on the policy trajectory of the US administration may lead to capital flow volatility.
  • Inflation and exchange rate risk. Rising inflation and persistent rand depreciation could increase the stock of outstanding inflation-linked and foreign-currency debt, resulting in higher debt-service costs.

A cursory look at those countries that have been assisted by the IMF over the years will indicate just how bad the situations in those countries are. About 11 countries have been relying on IMF aid for nearly 30 years, 32 countries had been borrowers for almost 20-29 years and 41 countries have been using IMF credit for between 10 and 20 years. This is the clearest indication of how difficult it is to get economies out of the recession mode, let alone out of the debt dependency cycle. Bear in mind that while each IMF-indebted country repays its loan, the IMF dictates policy priorities directing what the country can and cannot do. Democratic governments are dictated to by their lenders on how to run and administer themselves. Last time I checked, the policy priorities were the sovereign role of the democratically elected government and the state and were not meant to be determined by some outside authority.

I need not remind readers that the IMF is cut from the same cloth as the other global governance structures such as the WTO, World Bank, ICC and the UN system in general, where their duality is blinding. A different set of rules apply between the countries of the North and those of us in the South. The duality of the IMF and World Bank is indisputable. Their genetic code was forged in the global deals following the second of the Great European wars. 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?

South Africa has long been in the fortunate position of having challenges that are not primarily financial in nature. The financial difficulties are symptomatic of bigger problems: loss of investor confidence due to policy uncertainty, political instability in the ANC, corruption and mismanagement of public funds as well as the continuous perception of public servants living the high life with public funds. None of these bigger problems will be addressed through an IMF bailout.

I contend that an internal solution to this problem can be found and that it is going to take willingness and commitment plus sacrifices to avoid the economy from slipping further into the abyss.

Why is an IMF bailout unlikely in South Africa?

For starters, we are a member of a grouping called BRICS that has its own development bank to rival that of the IMF and the World Bank. So, if South Africa should feel compelled to seek financial assistance of any sorts, surely BRICS would be our starting point. This is an ideological matter for those countries belonging to this global grouping; after all, it was established precisely to challenge the dominant world order where countries in the South must throw their lot in with those of the North. Already BRICS is proposing an alternative trading currency other than the dollar so as to facilitate ease of doing business and not be subjected to the US and its Federal Bank’s manipulations in the global currency volatility market.

Second, there remain a number of interventions open to the South African government before thinking about the IMF and its draconian strategies. In Russia, when faced with a similar situation, the government decided to freeze the public wage bill for a number of years. This action would go a long way in alleviating South Africa’s current debt bill. We could also raise the levels of VAT, personal income tax, company tax and indeed the fuel levy to raise some more resources to service the debt. Options for differentiated VAT levies (where basic needs are VAT exempt) are already established, and could be extended to protect the poor and vulnerable from the VAT increase. Selling of non-core assets to generate once-off revenue is also a possibility. This however destroys future potential revenue streams. We could also renegotiate the South African Customs Union (SACU) agreement. This supports our neighbours, but is not beneficial to South Africa, consuming close to 5% of our gross tax revenue. Last, closing down of some departments, non-performing programmes and some state-owned entities remain options.

Third is the contentious matter of our South African private sector hoarding money and refusing to invest it into the South African economy. The amount varies depending on who one talks to, but staggering figures of R1.4-trillion are alluded to. The reasons forwarded by the captains of industry for lack of investment in South Africa are investor confidence and policy uncertainty.

There seems to me to be a big difference between “policy uncertainty” and “policy which one does not agree with”. A review of the ANC policy documents, the jointly agreed national development plan and its 30-year vision which has broad private, government and civil society agreement, is apparently not sufficient. It seems to me that if the private sector is attempting to force or coerce government to adopt policies more favourable to corporations and their bottom line priorities, then they need to stop playing the man and be specific about what policy positions are uncertain. This level of risk will result in both the private and public sectors and ultimately the poor in South Africa losing. Our private sector seems to applaud the expunging of public sector corruption, while mumbling an apology with perhaps a slap on the wrist or a resignation here or there when they are found to be too close to the corruption. This slow process of expunging corruption, collusion and historic involvement of monopoly capital in propping up the apartheid state suits the private sector. It gives them a further excuse to sit back and cry “policy uncertainty! Corruption! You see we can’t invest here!”. This is done at the expense of our country’s economy and future. I’m not sure whether this is short-termism or plain racist in its outlook for the future of Mzansi.

Fourth is the idea that we can all come together and agree on a domestic stimulus package in much the same way as the private sector agreed with the Nationalist Party government during the heyday of apartheid. The private sector puts forward about R250-billion and the government matches that, thereby offering the South African economy a welcome kick-start, which will surely put us back on a path to recovery, both financially and economically.

Let us consider a few additional factors which count in South Africa’s favour:

The South African government closely monitors the status of its contingent liabilities – commitments that may give rise to financial obligations in future – and other fiscal obligations. This was very different in the case of Greece, where the true size of public sector liabilities was purposefully understated – which subsequently led to the fiscal crisis and the government’s inability to service its debt obligations.

South Africa has credibility in that it has never defaulted on its debt payments (post-democracy); it also has deep and liquid capital markets and strong institutions.

Borrowing at reasonable cost depends on the lender’s perception of the borrower’s ability to repay. In bond markets, lenders consider the credibility of a government’s macroeconomic framework, the integrity of state institutions, the political environment and the country’s economic growth prospects.

South Africa’s long-term debt is predominantly in our local currency. High levels of government debt create uncertainty, which lowers long-term investment and growth, but the composition of debt matters. Countries with high levels of short-term dollar-denominated debt are more likely to get into fiscal difficulties.

These are the reasons why I contend that it would be a faux pas to consider an IMF bailout now or in the future.

It is without rhyme nor reason.

What is needed is a long, hard look at ourselves: Both the private and public sectors. Civil society, organised labour, opposition parties and the media also need to play their part. When we collectively finger out one man at our helm with united calls of “no confidence!”, we need to simultaneously consider what confidence we have in our own country.

For whence will we be able to save and/or borrow money and create the stimulus package our economy needs? And can we afford to wait for the Zupta storm to pass to act on this, our future? DM

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