- SA faces a “dramatic” budget shortfall as a result of the coronavirus pandemic.
- The country’s economic predicament requires intervention.
- But concerns linger over possible strings attached to international relief facilities.
The economic calamity of the coronavirus has broken South
Africa’s resistance to borrowing from the International Monetary
Fund.
And now some allies of President Cyril Ramaphosa and his
ruling African National Congress worry that the $4.2 billion loan government is
negotiating with the Washington-based agency marks the first step toward a
slippery slope of submission.
“This is a precursor because Cyril’s government doesn’t
have the resources,” said Lumkile Mondi, economics lecturer at
Johannesburg’s University of the Witwatersrand. “This is just to soften
the alliance partners in preparation for a much bigger ask.”
While the money from the IMF’s coronavirus relief facility
comes with few strings attached, persuading the unions may be a dress rehearsal
for overcoming opposition to a more demanding programme in coming years.
Scarred by the experiences of African countries such as Zambia in the 1980s,
where a program imposed by the IMF led to unrest and poverty, the ANC resolved
to remain self-reliant in the aftermath of the apartheid era.
“One of the things the ANC had in its DNA, you don’t want to go the IMF, you will undermine your sovereignty.”
– Matthew Parks
“One of the things the ANC had in its DNA, you don’t
want to go the IMF, you will undermine your sovereignty,” said Matthew
Parks, parliamentary coordinator for the 1.8 million-member Congress of South
African Trade Unions, which has supported the ANC since Nelson Mandela took
power in 1994. “The president pleaded with us. We accepted it given the
extraordinary challenges.”
A near-decade of mismanagement and corruption under former President
Jacob Zuma, combined with the coronavirus outbreak and loss of South Africa’s
investment-grade rating, have left the economy in its worst state in the
democratic era. Infrastructure investment has stalled and debt is surging. The
National Treasury has forecast an economic contraction of as much as 16.1% this
year – the unemployment rate was already almost 30% and the economy was in
recession before the coronavirus hit.
South Africa, a founding member of the IMF in 1944, inherited
an economy decimated by the isolation that apartheid brought. Mandela’s
government set up a team that enacted policies that made the country investment
grade with all three major credit-rating firms – opening it up to investors
everywhere – by 2000. It has raised its own financing in the market ever since.
“It was back in 1996 where I was involved, there was a
big debate” over whether to take multilateral finance, said Iraj Abedian,
a university economics professor at the time and now chief executive officer of
Pan African Investment & Research Services.
“We took the decision that it was inappropriate to rush
into this, and decided to get the house in order without someone in Washington
telling you what to do.”
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Dramatic hole
In 2007 and 2008, South Africa recorded its first budget
surpluses since all-race elections in 1994; in 2008 its debt-to-gross domestic
product ratio was just 26.6%.
Its only multilateral debt is a $3.75 billion World Bank
loan extended to the state-owned power utility to build a power plant, which is
still under construction.
The government currently expects to lose R285 billion ($17
billion) of tax revenue as a result of the lockdown. The National Treasury
predicted in February, before the outbreak, that debt will reach 65.6% of GDP
this financial year with a budget deficit of 6.8% of GDP; the IMF reckons the
shortfall could now reach double that. The debt ratio could also reach 80%,
according to Finance Minister Tito Mboweni.
“The hole in the budget is dramatic,” said Miriam
Altman, a commissioner in the National Planning Commission in the South African
Presidency and an economic adviser to government and companies. “We have to
find the lowest-cost borrowing.”
“The hole in the budget is dramatic.”
– Miriam Altman
Despite the limited conditions – transparency and a
commitment to good macroeconomic management – the talks over the $4.2 billion
loan are taking longer than expected, a person familiar with the negotiations
said, declining to be identified as they are confidential. Still, a deal is
likely within a month and the loan will likely be the biggest extended so far
from the facility.
Nigeria first
“We face different challenges, and circumstances are
different, thus we felt this was the best approach to respond to the
current situation,” the National Treasury said of the loan application,
declining to comment on whether further assistance will be sought. The
government is also seeking money from the World Bank, African Development Bank
and New Development Bank for the first time.
Still, senior ruling party officials will need to vet any
agreements with international finance institutions, said Ace Magashule, the
ANC’s secretary general, according to the Sunday Times.
South Africa is not the only country to have had its resolve
tested by the virus outbreak.
Bruised by a 1980s austerity plan engineered by the World
Bank and the IMF that demanded the economy open up to competing
imports, Nigeria had until this year never borrowed from the IMF. Now the
administration of President Muhammadu Buhari has taken a $3.4 billion loan from
the fund.
Wary of the conditions that could come with broader support
programs from the IMF and other multilateral lenders, South Africa would still
prefer moving on its own, said Enoch Godongwana, head of the ANC’s Economic
Transformation Committee.
Bullet, belt
“Bite the bullet, tighten the belt but impose your own
terms,” he said. “What may be difficult is if we continue on the same
trajectory that we have had over the last 10 years, that eventuality of going
to the IMF may happen.”
With a track record that’s seen the government wage bill
rise 40% over the last 12 years and state companies accumulate billions of
dollars of debt, an IMF program may be inevitable, many economists believe.
“Something like a stand-by arrangement or an extended
funding facility is going to be required,” said Peter Attard Montalto,
head of capital markets research at Intellidex. “Countries must either
reform themselves or it is eventually imposed upon them.”
–
With assistance from Alonso Soto.
