Source: The Economist with a further comment from Bloomberg and Daily Maverick at the end.
South Africa borrows from the IMF for the first time since apartheid
And it may not be the last
ALTHOUGH IT IS rarely shy about spending other people’s money, the African National Congress (ANC), South Africa’s ruling party, has long been wary of the IMF. After Nelson Mandela came to power in 1994 the fund practically begged to help his new government. Mandela eventually saw the potential benefits of a cheap loan. But the ANC rejected the offer.
Opposition to the IMF has remained a shibboleth of the party. Yet on July 27th South Africa said it had agreed to a $4.3bn IMF loan. The deal signed by South Africa, one of 78 countries to have received covid-related help, is not a standard IMF programme and thus does not have stringent conditions. But the need for it nevertheless reflects the extent of the country’s underlying economic problems.
For some of the ANC’s self-styled comrades the worry about the IMF has perhaps been that it would make it harder for them to loot state coffers. For others, including Thabo Mbeki, Mandela’s successor, an IMF loan would have meant an intolerable violation of sovereignty.
Despite his doubts about the IMF, Mr Mbeki pursued macroeconomic policies so orthodox that a rabbi might have blessed them. Under Trevor Manuel, finance minister from 1996 to 2009, and Tito Mboweni, governor of the reserve bank from 1999 to 2009, South Africa closed its budget deficit, and tamed inflation, which had averaged 14% in the 1980s. Though the ANC’s patronage machine kept whirring, GDP grew by more than 5% a year from 2005 to 2007.
Then came Jacob Zuma. Under his presidency corruption thrived and public spending ballooned. The negative effects of rigid labour markets and affirmative action intensified. Real GDP per person has shrunk every year since 2015. The ratio of public debt to GDP rose from 26% in 2008 to 56% in 2018. As early as 2015 writers such as R.W. Johnson warned that South Africa was heading for a bail-out.
This condition-light deal is not quite the Rubicon-crossing that some envisaged. But it is a toe in the water. In a letter to the fund, Mr Mboweni, who in 2018 returned to the government as finance minister, and Lesetja Kganyago, the reserve bank’s current governor, made several pledges, primarily relating to public finances.
They promised to cut the share of spending that goes on public-sector wages and to speed up structural reforms, for example to state-owned enterprises such as Eskom, the indebted electricity utility. They are open to a self-imposed “debt ceiling” (public borrowing is projected to hit 87% of GDP in 2024 before declining). But little of this is new. In June Mr Mboweni gave a statement to parliament with similar commitments.
South Africa’s problem is not a lack of ideas. It is politics. Although he has said he supports Mr Mboweni, President Cyril Ramaphosa has done little to show it. He has often made the job of his finance minister harder, for instance by promising that there would be no “mass retrenchment” of public employees, and by dithering over state enterprises. Corruption remains rife. Credit-rating agencies doubt that Mr Mboweni will meet his targets. Few believe that Mr Ramaphosa will face down trade unions or his party ahead of its National General Council and local elections in 2021.
So this may not be the last time South Africa turns to the fund. The next bail-out would come with tough conditions, which would infuriate the ANC. But the party ought to appreciate what Mr Mbeki and Mr Manuel understood: that the way to protect your economic sovereignty is to avoid the need for the IMF in the first place.
SA will start repaying R70bn IMF loan only from 2023
The loan to assist in fighting Covid-19 will be disbursed as a lump sum into the government’s account at the SA Reserve Bank
SA’s $4.3bn (R70bn) emergency facility from the International Monetary Fund (IMF) will be released on Wednesday and the country will only start repaying the loan in 2023.
The foreign-currency loan to assist in fighting the coronavirus pandemic was approved on Monday and will be disbursed as a lump sum into the government’s account at the SA Reserve Bank, Montfort Mlachila, the Washington-based lender’s senior resident representative in SA, said in an interview.
The facility is SA’s maximum entitlement under its special drawing rights with the IMF. It is payable over 3.25-5 years at 1.1% interest. It has to be repaid in eight equal instalments, the first of which is due at the end of 2023, he said.
The money comes after some senior officials in the ANC and its alliance partners initially rejected suggestions that the government seek help from multilateral lenders. The conditions of structural adjustments attached to such loans would undermine the nation’s sovereignty, they said. However, the IMF said emergency loans that are aimed at the virus and health interventions come without the usual conditions that have concerned past borrowers.
“The government is entirely free to use it as it sees fit,” Mlachila said.
“Obviously, we would like the government to use it for appropriate purposes, including in the direct fight against Covid-19 in terms of the health interventions as well as other economic measures to reduce the impact of Covid-19 on people’s livelihoods and to preserve jobs.”
The loan comes days after President Cyril Ramaphosa said the government would crack down on corruption linked to its coronavirus response and ordered a probe into the misuse of public funds. Nine government agencies, including the National Prosecuting Authority, police and the SA Revenue Service, are investigating allegations of wrongdoing.
With more than 450,000 confirmed Covid-19 cases and 7,257 fatalities, SA is the worst-hit country on the continent. A lockdown aimed at curbing the spread is devastating the economy, with the government expecting it to contract 7.2% in 2020.
“SA does not have outstanding credit from the IMF, and its capacity to repay” the loan is adequate, the government said in its letter of intent to the lender.
External- and public-debt sustainability indicators will not change significantly as a result of the loan, “and we will take any necessary measures to maintain debt sustainability”, according to the letter that was co-signed by finance minister Tito Mboweni and Reserve Bank governor Lesetja Kganyago.
An increase in virus-related spending, including a R500bn stimulus package, is set to add pressure to an already strained fiscus. Government debt is projected to peak at close to 90% of GDP in 2023-2024 and the budget deficit will swell to a record in 2020.
The ANC will struggle to keep economic promises to the IMF after its ‘Rubicon’ moment
In his book Rubicon, Tom Holland, an ace chronicler of the ancient world, reminds us that the soldiers of the 13th Legion, as they waited to shoulder arms and cross the Rubicon, were about to shatter the “sternest laws of the Roman people. They would, in effect, be declaring civil war.”
And the sweeping reforms that Finance Minister Tito Mboweni and Reserve Bank Governor Lesetja Kganyago have committed to are about to unleash a civil war within the ANC.
This will make the pledges outlined in the Letter of Intent to the IMF difficult to deliver, to say the least. Indeed, such promises have been made numerous times over the years, with increasing frequency under the Cyril Ramaphosa presidency, which gives them a hollow ring.
We have heard all of this before. One of the many hurdles is the shambolic mess that is Home Affairs. If a company is trying to recruit foreign talent because of the dearth of skills here, you can bet vital documents will get lost in the maze that is Home Affairs. This is a reflection of wider failures of governance.
The letter also says that: “In addition to fiscal consolidation, debt stabilisation will require removing structural constraints to growth,” – another mantra that has yet to be realised.
Montalto notes that: “The first thing to note is that the letter is signed by Governor Kganyago and Minister Mboweni. This is the norm… Yet both are firm believers in fiscal consolidation and structural reform – and always have been – yet have limited power to move the dial more fundamentally on issues that go beyond their institutions. Therefore there is a credibility question.
“We think Ramaphosa should have signed the Letter of Intent to get over this problem and add further weight to create some momentum behind structural reforms, reflecting a top-down, cross-government commitment being needed. But indeed, this is precisely why he couldn’t, given his deep risk aversion… As such, the commitments must be taken with a very hefty pinch of salt.”
… Moeletsi Mbeki, political analyst and the Deputy Chairman of the South African Institute of International Affairs, said in an interview on Wednesday that the IMF loan was “politically doable”.
Crucially, in order to grant the loan, the IMF has accepted the Treasury and the Reserve Bank’s figures about how the economy will perform. The headline figure here is that both are expecting the economic contraction for the full year to come in at around a 7% decline.
But as difficult as the economic issues might be, what about the political issues? Think of the ultimate fate of Julius Caesar, the Roman who led the soldiers across the Rubicon.
Political analysts feel the problem of the IMF loan creating a kind of civil war within the ANC is overstated.
Objections have come from various quarters, including the Cosatu breakaway and the SA Federation of Trade Unions (Saftu). Saftu general secretary Zwelinzima Vavi said on Wednesday 29 July that the federation “notes with deep concern and anger that the IMF issued communication confirming that it had lent South Africa $4.3-billion (R70-billion) following the acceptance by government of all conditions stipulated by the IMF”.
In terms of alternative solutions to IMF funds, Saftu had looked at the possibility of quantitative easing, higher taxes on corporations and the rich, tighter exchange controls, a crackdown on illicit financial flows and other strategies to address the debt load.
But Moeletsi Mbeki, political analyst and the Deputy Chairman of the South African Institute of International Affairs, said in an interview on Wednesday that the IMF loan was “politically doable”.
There are essentially three reasons why the loan would not create a kind of civil war in the ANC.
Second, one of the consequences of the Jacob Zuma era was the shattering of the trade union movement. Previously, the communist party was very influential in the union movement. But former president Zuma engendered infighting in the union movement, which has effectively destroyed the power of the unions.
Cosatu is now essentially a public-sector union and its position as both dependent on government as employer and as a representative of mainly state employees, puts it in a weak position to criticise measures that could support salary levels. “They have built Cosatu a golden cage,” Mbeki said.
And third, the leading figures within the economic management of the country have changed. The “exile” group has given way, in general, to people who were active internally during the apartheid period, starting at the top with Ramaphosa, but including Mboweni and Kganyago. “The UDF people now rule.”
“The reality is, the ANC’s serious primary concern is to control state revenues. They see the state as the goose that lays the golden eggs. The debate within the party is about how the omelette is divided, not how it is made.”
It’s also worth noting that the IMF itself has changed. The old days of the structural adjustment programmes, the focus of much of the left-wing criticism of the IMF, are over, he said.