Unshackling South Africa from the bonds of expropriation without compensation (EWC) will be an absolute necessity for navigating and exiting the fiscal malaise into which the country is rapidly descending.
The Covid-19 crisis presents the country with a twofold problem – how to get through the immediate turmoil, and how to then emerge from it into sustainability.
In his recent address on television on the government’s social relief and economic support measures, President Cyril Ramaphosa announced a R500-billion plan to get the economy moving again. On the face of it, this is a vast sum of money – equivalent, the president said, to some 10% of the country’s GDP – only about a quarter of which will come from redirecting currently budgeted spending.
In his follow-up address, Finance Minister Tito Mboweni said that additional measures would bring the ‘package’ up to R800 billion. Yet, as we at the IRR have pointed out in the past, this does not come to hundreds of billions in new money – indeed, the idea of a R500-billion ‘stimulus’ (as the president’s remarks were initially interpreted) is itself something of a misnomer. Most of this is to come in the form of reprioritising existing expenditure, extending guarantees and so on.
However it is structured, the Covid-19 crisis is going to demand borrowing.
Dogmatically resisted
Remarkably, the pandemic seems set to push South Africa to approach the International Monetary Fund for assistance. This has been dogmatically resisted from within the African National Congress and its alliance partners, but the gravity of the situation and the fact that the funds will likely be offered on concessional terms seems to have made the idea marginally more palatable.
Besides this, there are various other lenders – such as the New Development Bank and the African Development Bank – that could offer smaller, albeit useful, amounts.
This would likely bring direct borrowing to around R100 billion. This is by no means small change and for a country whose fiscal position has been a matter of escalating concern for years, this is no small matter. Mboweni’s comments in his medium term budget policy statement in October last year have an eerie prescience to them: ‘On our current trajectory, by the end of the three-year framework, debt service costs will be bigger than spending on health and economic development.’
And the billion dollar question is whether or not more will need to be sourced, and how this can be done.
That more will be needed is a reasonable certainty. The scale of needs at this time is exceptional. Financing the medical response will come with a large and unanticipated price tag. Government has committed itself to increased social spending to cushion the pandemic’s impact. While this has been presented as a temporary measure, it may be politically impossible to pull back on it later. And if any further stimulus is envisioned, this will need to be raised from somewhere, too.
Facing a dark catastrophe
This comes on top of an economy that is no longer simply idling (or in a ‘technical recession’), but is facing a dark catastrophe, with GDP expected to decline by anything up to – or even exceeding – 10%. Whatever quantum of revenue the government may have been counting on before the pandemic took hold can confidently be expected to take a major knock. All told, the fiscal situation is dire.
As noted earlier, this means the country faces the twofold challenge of getting through the crisis, and emerging afterwards into sustainability.
The key will be to get South Africa’s productive economy going. An integral part of this will be to undertake some of those elusive ‘reforms’.
An obvious place to start here is dispensing, unambiguously, with the threat to property rights in the form of EWC. Not only is EWC a distraction from the real problems besetting land reform – the matter that it nominally seeks to address – but it signifies a great deal of what is malfunctioning in the country and keeping it from a real chance at reaching its aspirations.
EWC strikes directly at the security of property, a condition that underwrites investment. As we at the IRR have heard often, the mere debate is making the country ‘uninvestable’. Not for nothing did Moody’s identify it as a reason for downgrading South Africa’s credit rating. The latter will, as it happens, ramp up the costs of borrowing.
More than this, EWC is symptomatic of ideologically driven policy-making. It speaks to a state and political order seeking control over economic decisions. The consequences of this would be deeply destructive.
Precipitous fall in investment
Indeed, economic modelling by academics Dr Roelof Botha and Prof Ilse Botha, produced in late 2018, confirmed on the basis of EWC experiences elsewhere that the policy would produce a precipitous fall in investment, with a consequent decline in growth – and government revenue. The financing requirement would escalate by hundreds of billions of rands, aggravated by rising interest rates. ‘This study,’ the authors write, ‘confirms imminent socio-economic disaster for South Africa in the event of EWC being pursued.’
President Ramaphosa said that ‘the pandemic requires an economic response that is equal to the scale of the disruption it is causing.’ That is correct.
The stated policy of the government to seize property without compensation will make such a response impossible, by placing out of reach the funds South Africa will need to borrow, and by strangling the confidence of businesspeople to invest and generate the wealth without which no ‘economic response’ can achieve much at all.
If you like what you have just read, subscribe to the Daily Friend