A funding crisis seems increasingly probable. But would that lead to the IMF negotiating necessary policy reforms?

The IMF’s prospective value-add can be formidable when a country’s politics stifle its economy. Ten-year Greek government bonds traded at over 19% in 2015 versus less than 1% today. The IMF’s tools don’t however guarantee success. Its largest lending programme was for Argentina whose comparable bonds currently yield over 40%.

Our ten-year sovereign debt trades near 9%, as the commodities boom has eased South Africa’s fiscal pressures. However, rather than spurring serious job growth, the surge in commodity exports has encouraged plans for another massive wave of redistribution. If BIG programmes are now necessary to counter widespread food stress, that is further confirmation of how unsustainable our policies are.

Our obscene unemployment and poverty cannot be remedied without fundamental policy pivots – which our ruling party categorically rejects. Meanwhile, the pandemic has greatly accelerated the global economy’s transition, favouring services and innovative alternatives to extraction-reliant growth. Extraction-focused economies have long been laggards. Conversely, countries which had large concentrations of poverty and focused on integrating into global supply chains through adding value have been top performers.

Extraction-based economies must transition by increasing workforce productivity to freshly slot themselves into the global economy. The primary driver of increasing workforce productivity is a high workforce participation rate among young adults. 

That our youth unemployment bulge is so extreme traces directly to prioritising redistribution ahead of growth. Even if ideal policies and practices were, somehow, swiftly adopted, the effects of sidelining so many young adults would remain a long-term drag on growth.

The IMF has much experience assisting countries where the politically connected have distorted policies to advance their narrow interests, thus choking growth and piling up debt. They frequently employ financial repression tools, such as negotiating concessions from bondholders, while arranging necessary policy reforms to increase growth.

As a debt crisis looms, publicly traded bonds are marked down. If policy reforms are then enacted without a corresponding debt restructuring exercise, bondholders enjoy a windfall. Thus it’s more sensible to restructure debt while negotiating policy reforms. Ideally, government acceptance corresponds with a public endorsement via elections. 

If the party of the politically favoured is assured of maintaining sufficient electoral support, adequate progress will be elusive. This impediment in South Africa has finally begun to erode.

Worst-case outcome

The ANC’s leadership will presume that their worst-case outcome for the 2024 poll is that they enter into a coalition as the dominant party. If, prior to that election, the ANC were to agree to an IMF-endorsed debt restructuring accompanied by necessary policy reforms, they would risk a quite unpredictable realignment of political power. The unions and the SACP, among others, might turn on them.

While the ANC will be highly averse towards a meaningful engagement with the IMF pre-2024, a credit or liquidity crisis could change this. Currently however, the world is awash with capital and SA is enjoying a trade surplus.

Where things get interesting, is that it is obvious that the ANC’s leaders never imagined that the political and economic environment could deteriorate so quickly. They must now come to terms with there being two bills to settle. 

The ANC’s political machinery and messaging around redistribution has spawned an enormous web of legal and illegal patronage. Blatant corruption has reduced the nation’s wealth while legal patronage, through BEE and other policies, undermine the nation’s income production and growth prospects.

Settling the years of looting is painful but possible. It makes sense for bondholders to accept write-downs alongside the enacting of fundamental policy reforms necessary to sharply boost South Africa’s growth and productivity. The debt restructuring would be complicated but reasonably manageable. On the other hand, the policy reforms would be exceedingly challenging even for a highly capable government. 

The bill for sidelining so many young adults can’t be settled. The backlog can’t possibly be reduced fast enough to avoid millions of South Africans turning 30 without ever having been meaningfully employed. Such scarring can’t be healed.

The ANC has used inequality to dominate our national narrative and political landscape. The conditioning has become so effective that rarely does anyone ever describe South Africa’s economy, however briefly, without mentioning inequality. The conditioned reflex to hearing “inequality” is to think of “racial inequality” within a historical context. 

There always needed to be substantial redistribution to address historical inequities but patronage instincts took hold. Members of the ANC and its alignment partners were looked after while leaving a majority of young adults stranded. There is now about as much inequality among blacks as between blacks and whites.

To presume the IMF will be able to dictate terms to the ANC ignores a great deal. The party’s leadership clearly prioritises the interests of the party ahead of the nation’s and this means the ANC could be slow to blink in a standoff. There is also a potent race card to be played with one hand while holding a begging bowl in the other. Pre-pandemic trends suggested this region would account for nearly 90% of the world’s extreme poverty within a decade – and the pandemic hasn’t helped. Meanwhile, western progressives are quick to push white-guilt themes.

Politically exiled

Conversely, it is not hard to imagine the ANC being politically exiled post-2029 and it must be clear to its more pragmatic leaders that the party cannot, on its own, fix what it has wrought. Irrespective of our voting preferences, we should want the more pragmatic among the ANC’s leadership to appreciate how their party and the country can benefit from working with reality-grounded political opponents and the IMF.

Between now and 2024 the national dialogue must shift from focusing on inequality to jobs. This must persuade voters and our current political elites of the need for a coalition which can produce a much more capable state.

The views of the writer are not necessarily the views of the Daily Friend or the IRR

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