- This week, the
IMF approved a funding request for South Africa under its Rapid Financing
Instrument (RFI) programme.
concessions have applied, ranging from the annual quota allowed to the
terms of engagement.
the IMF indicates no contentious conditions are attached to it, even
though a road map towards repayment is still expected.
This
week, one of the most contentious convergences between finance, politics and
human life finally occurred in South Africa.
After a
long series of negotiations and arm-twisting, the International Monetary Fund (IMF)
approved a funding request for South Africa under its Rapid Financing
Instrument (RFI) programme.
The
programme exists to enable member countries to apply for finance when facing an
urgent balance of payment needs.
In
response to the coronavirus pandemic, the IMF identified the disruptive nature
of the outbreak and its concomitant impacts on global economic value chains and
human mobility, as an event that warranted a drastic response.
Historically,
member nations that are able to tap into the RFI programme are able to only
access funds within a prescribed limit. Once an amount has been allocated to a
qualifying member nation, its annual “withdrawal” is limited to 50%
of its approved funding. On a cumulative basis, the quota is limited to 100% of
the allocated funding.
In
response to the coronavirus outbreak, the IMF amended the annual quota from 50%
to 100%, thereby allowing nations that qualify for assistance to receive it
immediately rather than in tranches.
More
importantly, the cumulative quota limit has been amended from 100 to 150% which
in theory means a country may receive more than what it is entitled to
according to the pre-existing formula.
Such
concessions seem to have been motivated by the fact little is known about how
the virus will manifest and spread over the next year and beyond. The
concessions window is scheduled to run for six months ending in October 2020.
South
Africa’s application therefore fell within this concessions window which
enables the country to access its full facility rather than just 50% of it.
The
second concession adopted by the IMF that is relevant to South Africa relates
to the terms of engagement with member nations that borrow from the IMF itself.
For
borrowings outside the RFI programme, the IMF is known for requiring a set of
commitments that – depending on scale, scope and political persuasion – may be
regarded as draconian.
Within
the RFI programme however, the IMF works on the premise the countries that do participate
in it are dealing with a short-term emergency and hence it does not come with
the fully fledged adjustment programmes or reviews associated with general IMF
funding.
The third
concession relates to the cost of the agreement itself.
The
stated interest rate of 1.1% is relatively low in comparison to other
traditional sources of funding. More importantly, for a country with a credit
rating “enjoyed” by South Africa, the traditional sources of
financing would be even more expensive.
The
curious thing about IMF concessions is that they are as rare as they are
contentious.
The IMF’s
mixed history in intervening during times of crisis has created scepticism and
anxieties about what happens when politics rather than principles drive
decision-making. The decision to bail out Greece in 2010 was summarised by the
Brazilian representative to the IMF as nothing more than a bailout of Greece’s
private bondholders – made up of big European banks – rather than a bailout of
Greece itself.
But it is
when finance, politics and the preservation of human life intersect where the
IMF has a lot of questions to answer. Six years ago, as West Africa experienced
another bout of the Ebola outbreak, the IMF committed to providing $300 million
to the worst-affected nations – Liberia, Guinea and Sierra Leone.
The
capacity of those countries to manage to outbreak was hampered by their fragile
healthcare systems that had little capacity to manage and contain the outbreak.
While the commitment of the IMF was lauded by the G20 and World Bank, a rather
difficult question of how it had contributed to the crisis loomed large in the
room.
It just
happened to be that all three countries were regular borrowers from the IMF
which had been part of its various programmes since 1990.
The main
point to note – as ever – is that the road to the IMF is paved with many
variables ranging from natural disasters, wars, famine and poor governance. The
effect of these variables is that affected countries exhibit poor socioeconomic
variables ranging from poverty, unemployment, inequality and poor
infrastructure.
The
consequential impact of this is simply that such countries would firstly
struggle to raise finance through internal resources, and find financial
markets too expensive.
The IMF –
with its lower costs – becomes an option for countries in distress. The main
problem with negotiating through adversity is the prevalence of adverse
consequences associated with that.
In the
IMF context, countries in distress sign up for a series of commitments and
concessions that theoretically seek to put them in a stronger footing and
enable the repayment of loans.
Regrettably,
the IMF model seems to have a good ability to quantify the funding question but
a poor ability to appreciating the social cost and consequence question. The
nature of adjustments “recommended” by the IMF to borrowing countries
have the unintended consequence of worsening the fate of nations.
For a
country with high unemployment that takes up an IMF loan with the commitment to
cut the civil service wage bill for example, the obvious effect is an increase
in unemployment unless the private sector creates enough opportunities to
absorb the displaced.
Unfortunately,
there are strong correlations between countries requesting IMF assistance and
their inability to drive economic activity in a manner that leads to an easy
transition of the displaced civil servants into alternative opportunities.
Similarly,
when the IMF recommendations lead to a decline in social infrastructure
investment, the effects are passive but pervasive and intergenerational. This
was the case of the three countries that experienced the Ebola outbreak in
2014.
In its
comment paper titled The International Monetary Fund and the Ebola Outbreak,
the Lancet Journal conducted an assessment of the policies advocated by the IMF
across the countries since 1990.
The common
features of IMF conditions – reductions in government spending, cutting the
civil service wage bill and prioritisation of debt repayments – were prevalent
across the three nations.
The
effect of these IMF adjustments on the healthcare systems of the three nations
were evidenced by low levels of social spending and human capital constraints
directly associated with the IMF requests for the cutting of the wage bill.
In the
Sierra Leone example, the IMF had – in the late 1990s – required the
retrenchment of 28% of government employees. That decision on its own, had long-standing
consequences for critical public services, including health care.
Additionally,
another long-standing favourite recommendation of the IMF – decentralised
healthcare systems – was also adopted in Guinea which resulted in poor co-ordination
and articulation across the different spheres of the healthcare system with
fatal consequences when an outbreak like Ebola engulfed the country.
The
lessons for the IMF and its member nations since then, has been the need to
understand the long-run effects of all conditions rather than the singular
focus on the ability to pay.
In the
RFI programme, the IMF indicates no contentious conditions are attached to it,
even though a road map towards repayment is still expected.
This
provides an opportunity for countries like South Africa to commit – at least in
spirit – to following many of the conditions that are intended to ensure fiscal
prudence and transparency in the utilisation of funds. Given the low levels of
trust between the public and the state these days, any conditions relating to
transparency can only be welcomed.
Whether
that transparency paradigm – however it is formulated – can become the baseline
model for how the state interacts with a society anxious about corruption and
mismanagement may be the one learning lesson from the IMF conversation that
South Africans eventually learn to appreciate.
That of
course depends on whether they can trust the same people whose dire track
record in state custodianship has led us here to somehow discover a new dawn in
public accountability.
Having
opened the door to the IMF corridors, it would be tragic if our next trip down
that road cannot be cloaked under the guise of managing a healthcare crisis,
but a much broader, intergenerational social crisis.
Khaya
Sithole is an accountant, academic and activist who writes and tweets on
finance, economics and politics. Views expressed are his own.
