When the International Monetary Fund (IMF) extended an emergency loan to South Africa last week, it was in no position to impose tough conditions.
Other than the requirement of co-operation with the Fund, such Rapid Financing Instrument lending does not carry policy conditions. These loans are aimed at helping countries overcome economic shocks and ensuring that future growth is not jeopardised.
The Fund took the view that reform to promote investment and employment can come after measures to ensure the Covid-19 crisis does not threaten future growth. That is why South Africa was given this unconditional relief this time round. In South Africa’s current long-running crisis, this is likely to be the last round of easy unconditional money.
The IMF Staff Report backing the loan gives South Africa the benefit of the doubt on whether it will go ahead with the type of structural reform it has long urged. A Letter of Intent signed by Finance Minister, Tito Mboweni, and Reserve Bank, Governor Lesetja Kganyago laid out the many long-made promises about reform. That was sufficient to get by on this occasion and show cooperation.
Significantly, in the Letter of Intent there is a commitment by the government, which may well have been at the urging of the Fund, to “transparently plan, use, monitor, and report” all Covid-19 spending. There is also a commitment to be open about all Covid-19 contracts with details about the companies and their owners.
Yet a scenario that would have seemed absurd, had it not been real, played out in the very week that the IMF made the loan. Allegations emerged of corruption surrounding the supply of personal protective equipment to the government. Where is the monitoring to halt corrupt spending?
The Presidency’s spokesperson, Khusela Diko, and the Gauteng MEC for Health, Bandile Masuku, went on leave of absence after claims they might have benefited from contracts for personal protective equipment.
Future loans from the Fund to South Africa are bound to lay down stricter conditions on public procurement, if not insistence on a complete revamp. In virtually no area of government spending does the taxpayer get good value, due to mismanagement and corruption. As part of any credible reform plan, a new template is required for public procurement. Government is clearly unable to halt corruption on its own.
South Africa’s public finances are not wholly transparent. The budget does not go into great detail and information on contracts can only be gained with difficulty. The Auditor General does a very good job in pointing out past problems, but there is a need to stop the corruption right from the beginning.
Overall, the loan has given South Africa a significant reprieve from a self-induced crisis due to bad economic policy and the Covid-19 emergency. While it is Covid-19 related, it is in effect a loan that goes toward overall budget support.
Government is paying one percent annual interest on a loan that will be paid back over the next three to five years. On the market it would pay in the region of 6 percent for three-year money and up to nearly 7.5 percent for five-year money. Instead of having to go to the market and put pressure on its borrowing constraint, South Africa has been given a pass. This allows it to finance about 10 percent of its government budget deficit and about 40 percent of the country’s external financing needs this year. The loan helps calm the bond market and acts as an anchor for other sources of financing.
After this loan, and other emergency loans from the World Bank and African Development Bank, South Africa will have used up the easy money for the time being. There will be no further reprieves available from bad policy.
Even after this financing, we remain highly vulnerable. There will be continuing outflows of capital and negligible inflows of direct investment, putting pressure on the rand and bonds this year. This raises the chance of sudden massive sales of bonds by foreigners, which could precipitate a crisis. A fiscal crisis would have turned into a balance of payments crisis.
For the markets and growth, the Medium-Term Budget Policy Statement to be delivered in October is the make-or-break moment. In a press statement after the approval of the loan last week, the Fund said, “Specific reform commitments at the time of the October Medium-Term Budget Policy Statement will be a critical step to buttress credibility of reform efforts and should be followed by steadfast implementation.”
Without “steadfast implementation” South Africa will be heading into crisis and to the IMF again. Next time it will be to apply for a loan that will have tight conditions attached to the disbursement of each tranche. There will be no room for South Africa to squeeze out of reform if it wants the money to flow.
For years the country has been big on promises of tackling state enterprises, corruption, and cutting the deficit, but there has been little sign of action. Some time ago the credit rating agencies downgraded the country to junk status. The rating agencies said in effect that the ANC could not reform and did not want to. The IMF has been more understanding, but South Africa’s economic policy credibility will be in shreds if inroads are not made into associated problems of the deficit, state-owned enterprise bailouts, and public sector pay in October.
It is unlikely that the Letter of Intent will have to be completely re-written. As it stands the letter contains the very basics for a turnaround. It covers all the long-standing issues around which the government has stalled. It falls short of any commitment to privatisation or liquidation of state enterprises, but implementation would at least be a start.
Even if South Africa is forced to go to the Fund for a loan, it is far from certain that it will be able to implement the programme in a consistent manner. Political consensus is lacking and the government has not had the guts to take the tough decisions. There is no reason that a mammoth crisis would necessarily force a change.
Many countries have had Fund programmes, which start and stop over a number of years as they are unable to meet the agreed targets. They might implement pre-conditions and obtain the first tranche. There is then a slip and the disbursement of a second tranche is not made.
The start of a Fund program is no guarantee of a turnaround.
The views of the writer are not necessarily the views of the Daily Friend or the IRR
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