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An IMF loan is a generational debt trap – don’t do it Tito!

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Oscar van Heerden is a scholar of International Relations (IR), where he focuses on International Political Economy, with an emphasis on Africa, and SADC in particular. He completed his PhD and Masters studies at the University of Cambridge (UK). His undergraduate studies were at Turfloop and Wits. He is currently a Deputy Vice-Chancellor at Fort Hare University and writes in his personal capacity.

The suggestion by Finance Minister Tito Mboweni that South Africa may go to the International Monetary Fund for a bailout to help deal with Covid-19 and the current financial crisis is a bad, bad idea.

Not even the current coronavirus pandemic should be used as a guise to approach the International Monetary Fund (IMF) for a loan. The IMF is already an infested, sick body that will give us far more diseases than the current Covid-19 virus. Best to stay at home and far away from Washington DC, which is where the HQ of the IMF is located.

On five previous occasions, we dabbled with this body and on all those occasions we barely made it out alive. Thank God for the various sanitisers and detergents in our arsenal over this period. The last one as you know was in 1993, just months before our first democratic election when the National Party under FW de Klerk borrowed $850-million because they had depleted the fiscus and the coffers were bare. 

Fortunately, the democratic government under Mandela repaid the loan by 1998, putting us in a much better position to take our own policy decisions and charting our own way forward.  Which is what the democratic government did. Professor Brian Kahn, at the time with the SA Reserve Bank, made the following observations in this regard:

“There is significant opposition to the IMF and its influence on policy formulation in South Africa. Similarly, there was heated debate when South Africa applied for a loan in 1993, at a time when the country was run by the Transitional Executive Council (TEC). The financing facility was for $850 million to support the balance of payments in the face of the prolonged drought. Although the letter of intent spelled out conditionalities that were in the normal ‘neo-liberal’ mould, the level of conditionality was fairly low, and also were not made public. The letter of intent committed the new government to: a reduction within a few years of the government budget deficit to 6% of GDP; expenditure containment rather than tax increases; containing the civil service wage bill; a continuation of tight monetary policies of the past 4/5 years, and monetary targeting; policies to ‘couple wage restraint and training to foster investment and promote employment’; maintenance of the financial rand mechanism without the introduction of new exchange control mechanisms; and finally a simplification and rationalisation of the tariff system and the phasing out of import licensing and non-tariff barriers. (Padayachee, 1997 p32)”

Sounds familiar? These are the same structural reforms Minister Mboweni is talking about now.

These policies typified the IMF position on economic policy and are precisely the types of policy that are criticised by the IMF critics in South Africa.

The view that South Africa should look towards the IMF to be rescued from the unfolding economic meltdown seems to be growing by the day and, according to Misheck Mutize, a lecturer in finance at UCT’s Graduate School of Business, there are a number of reasons why we should not be turning to the IMF at all.

“First, historical evidence suggests that IMF-administered rescue programmes are actually a recipe for disaster. They worsen rather than rescue the situation.

“Second, to suggest that South Africa’s problems are financial in nature is a dangerous misdiagnosis. It will distract the government from the critical issues it needs to address which have little to do with the finances.

“Third, one of the main driving factors of the current economic predicament is a loss of investor confidence. This is linked to other factors like policy uncertainty, political instability within the ruling party and mismanagement of public resources mixed with corruption. An IMF bailout won’t address these problems.

“And lastly, hopping onto the IMF programme would disturb the country’s commitment to reforming the global multilateral financial world. South Africa is part of the BRICS bloc which is grooming a new and perhaps alternative multilateral development finance institution called New Development Bank. If anything, South Africa must look to BRICS if it needs financial rescue.”

He concludes with, “I believe that the solutions to the country’s economic crisis are within. It needs internal discipline to address them – not an external force.”

I could not agree with him more. While the South African situation is getting more desperate, which calls for desperate measures, the idea of turning to the IMF is a bad one and must be dismissed. As I have previously indicated, we have so much money going around in this country, to turn to the IMF would simply be a cop-out and cowardice on the part of both the finance minister and the president.

Let’s turn to the IMF because it is easier than taking on the public sector unions and the ballooning public sector wage bill. Or, let’s take the IMF loan because we don’t want to fire the redundant workers at our SOEs, in particular, but not restricted to, SAA, Transnet and Eskom. It’s easy to take the IMF loan because then we don’t have to privatise certain sectors in our economy and sell off our national carrier. Trillions in the PIC, billions in the DBSA, IDC, UIF and so many other pots of money. And that’s saying nothing about the Reserve Bank, private sector billions and our foreign cash reserves.

Pundits are correct, we don’t have a finance problem in South Africa so don’t disguise it as such because you don’t want to provide the requisite leadership. Take the bold decisions, take the uncomfortable decisions; it’s going to be in our long-term interests as a country.

The IMF historically has a bad record. Instead of bailing out countries, it has created a list of countries suffering from debt dependency.

Of all the countries across the world that have been bailed out by the IMF, 11 have gone on to rely on IMF aid for at least 30 years; 32 countries had been borrowers for between 20 and 29 years; and 41 countries have been using IMF credit for between 10 and 19 years.

This shows that it’s nearly impossible to wean an economy from the IMF debt programmes. Debt dependency undermines a country’s sovereignty and integrity of domestic policy formulation. The debt conditions usually restrict pro-growth economic policies making it difficult for countries to come out of recession. Do this, minister, and you will enslave generations to the debt trap of the IMF.

We must also remember that the BRICS bloc was formed, in part, to challenge the dominance of the Western Bretton Woods institutions – the IMF and the World Bank.

Mutize reminds us that, “It would be politically naive and economically counterproductive for South Africa to give itself to the IMF. It would undermine South Africa’s integrity and tarnish its place within the BRICS bloc. And it would undermine the idea that the BRICS New Development Bank can offer an alternative to the Bretton Woods institutions.”

Patrick Bond also reminds us that, “…the Bretton Woods institutions are no better and, not so long ago, Ramaphosa offered a scathing critique of Washington’s bias: ‘We should not go to the IMF because, once we do, we are on a downward path, we will be sacrificing our independence in terms of governing our country and sacrificing our sovereignty.’ He cited the risk of imposed ‘cuts in social spending’, what with anticipated IMF orders to Eskom ‘to do away with free electricity quotas for the poor and indigent’.”

Ramaphosa repeatedly denies that the Bretton Woods institutions will bail out South Africa: “IMF, no, we’re not looking at the IMF. The New Development Bank has a facility that could be made available to us. And we are exploring that as well. And we want to do it in a way that does not require a sovereign guarantee.”

According to Bond, “Ramaphosa probably didn’t mean the BRICS New Development Bank, which makes project-specific loans, but instead its $100-billion contingent reserve arrangement, which offers a $3 billion credit line for South Africa to immediately draw upon, in the event of a balance-of-payments emergency deficit.”

For all the above reasons we are not yet there, Minister Mboweni. Stick to your guns and challenge all those that don’t want real structural reform to come forward and provide viable alternatives to the Treasury. Provide the leadership we so desperately voted for in the last election, President Ramaphosa.

Do it, not only for us, but for all future generations to follow. As you have been stating repeatedly these last few weeks, together we can do more and we will overcome this current situation. Why? Because we are a resilient people. Let us build our own path and not according to the dictates of the IMF. DM

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