In his address to the nation in which he extended the lockdown last week, President Cyril Ramapahosa said, ‘our country will need to undergo a process of fundamental reconstruction.’
The President said a plan for the economy would be revealed in due course. Any plan to deal with South Africa’s low growth, high unemployment and the economic fallout from Covid-19 will have to address how government can fund its budget.
South Africa entered this global crisis with an economy that was already contracting, a mammoth budget deficit, and with the Moody’s downgrade, a far more constrained ability to borrow. South Africa’s ten-year government bond yield is now almost 1.5 percentage points higher than it was at the beginning of March.
With the mammoth capital outflows from emerging markets in recent weeks and the cash needs of a contracting local economy, the chances are that government will not be able to fund its deficit.
The country now has no better course of action than to head to the International Monetary Fund (IMF).
The other options are to continue to kick the proverbial can down the road, or a government attempt to kickstart growth, monetisation of the deficit – that is printing money, using foreign exchange reserves, or even defaulting on debt.
The pursuit of one these options does not exclude others. What is common to all of them is that they would undermine growth and raise the chance of hyperinflation.
Approaching the IMF
South Africa would be in an unusual position if it were to approach the Fund. Most Fund programmes are designed to assist countries with balance of payment problems and an associated shortage of foreign exchange, constraining the country’s ability to ensure crucial imports for growth.
The Rand is under pressure, but with about R800 billion in foreign exchange reserves held by the Reserve Bank there is an ability to pay for imports.
South Africa has a different set of problems stemming from low growth and an outsize deficit. But an IMF programme remains the best option. An IMF loan could help government to get over the political hump of an adjustment, which would involve hardships with cutbacks in the civil service and services, but would allow social grants and poverty-related spending to be maintained.
From its reports we broadly know what the IMF would require. Amongst other measures, it would require a sustained cut in the budget deficit to a level of around three percent, the sell-off or liquidation of loss-making state-owned enterprises, and an easing of the labour laws to allow companies to pay below the national minimum wage. It might also insist on measures to ensure public procurement is above board. And there are suggestions that it might curtail black economic empowerment requirements for government purchasing, to cut out ‘middleman’ charges.
The idea of an approach to the IMF strikes a raw nerve in the ANC’s Tripartite Alliance. The secretary-generals of the ANC, the South African Communist Party, and labour federation Cosatu have pointed to ‘the need to safeguard South Africa’s democratic national sovereignty’ against the IMF.
The response from former Johannesburg mayor and founder of the People’s Dialogue, Herman Mashaba, to the Tripartitie Alliance position on the IMF as reported by The Citizen was forthright.
‘The level of arrogance displayed by Cosatu and the SACP is beyond imagination, to try to dictate how and from where South Africa will receive funding, when their unhealthy influence over government has largely put us in the position where we have few potential funding options left’, he was quoted by newspapers as saying.
That is precisely the problem – there are no big funding options left.
‘If not IMF, then give me the money. I cannot eat ideology,’ Finance Minister Tito Mboweni has said.
The left have simply not come up with any practical solutions to SA’s current predicament.
Options are few
South Africa is borrowing at rates well above what is sustainable and loans from other sources such as the BRICS Bank, or directly from the Russians or the Chinese would be small change. Besides, the Russians have been hit by a low oil price and the Chinese have been hard hit by the contraction of their own economy.
A default on South Africa’s debt would impair the country’s name for many years and would bring on a domestic financial crisis. About 85 percent of South Africa’s bonds are Rand denominated and held by banks and other financial institutions and pension funds.
Other options such as the monetisation of the deficit involving the Reserve Bank purchasing government debt are a path to hyperinflation.
The idea that the Reserve Bank should make its foreign exchange reserves available to government to meet urgent spending needs is also dangerous. The Bank is independent and it does not have the function of financing government budget deficits.
The Bank’s foreign exchange reserves allow it to meet local demand for foreign currency, and give it a secure balance sheet against which to raise its monetary firepower, which it has done. The reserves are also an important anchor in the country’s creditworthiness.
Last week the Bank of England made available what could be an unlimited amount to allow the UK government to spend without going to the bond markets. Finance Minister Tito Mboweni showed outrage on Facebook . ‘The UK Treasury has done a great historical disservice and harm to independent central banking in my view.’
This shows that there will be no creation of government fiat money while Finance Minister Mboweni and Reserve Bank Governor Lesetja Kganyago are in place.
Can Ramaphosa seize the moment?
With the renewed wave of Ramaphoria engulfing the country, the President is in a good position to come up with an economic plan that would involve short-term hardship.
From what has emerged, part of government’s ‘fundamental restructuring’ and the kickstart plan will involve massive infrastructure projects. An unidentified Treasury official told City Press that ‘The only way to kick-start the economy is through an infrastructure programme [of] not less than R2 trillion.’ As this is about the same amount as the Budget in February estimated for total government spending this year, this has to raise the issue of how it would be funded.
The President has also appealed to ‘solidarity”, and the Solidarity Fund, which is financed by private contributions, will help in the fight against Covid-19. The funds set up by the Oppenheimer and Rupert families will help small business. But the earnings of the big corporates are under pressure, so there are limits. Might this crisis speed the way to prescribed assets in the name of ‘solidarity’?
An approach to the IMF will almost certainly require some legislative changes such as that on minimum wage legislation, possibly BEE legislation, laws on public procurement, and other areas. Therefore, the President and Finance Minister will have to carry much of the ANC with them.
Is there a deal to be done on this in the ANC, perhaps around big infrastructure projects after finances are stabilised?
And the big question is whether, even if a Fund programme is adopted, would South Africa have the political ability to implement the key measures?
The views of the writer are not necessarily the views of the Daily Friend or the IRR