The prognosis that the South African economy is in dire straits is pretty obvious even to the untrained eye. The solution to the country’s present predicament is also pretty much understood. The International Monetary Fund (IMF) has recently produced a comprehensive view, which deserves to be considered.
Continued slow growth should be a matter of grave concern and ought to be treated as an emergency.
Thus far the short and medium term outlook suggests that growth outcomes will continue to be pedestrian. What is even more worrying is that over the past four years global economic growth has gained momentum, suggesting that the solution to South Africa’s vanishing growth lies in the country.
The new minister of finance, Malusi Gigaba, recently hinted that South Africa may be compelled to seek assistance from the IMF. I think the conditions are right for serious consideration of the proposal even though IMF programmes are not very popular with politicians.
There are a number of reasons for this. Requests for IMF assistance suggest that those who manage the domestic economy have failed. The fund’s programmes also come with clearly defined milestones, often described as “conditionalities”. But in most instances, these are well-intentioned and aimed at success.
It’s better to enter an IMF programme early before the situation becomes frantic. As medical doctors might argue, it is easier to deal with an ailment in the earlier stages before it reaches an advanced stage.
The alternative to asking for help now would be continued poor growth outcomes that would have serious social and economic costs.
The country’s poor economic growth record spawned a number of problems.
A shrinking economy means tax revenue shortfalls. The fiscal policy response would be higher taxes or bigger budget deficits.
And then again, interest payments, the fastest-growing government expenditure item, would grow even faster. Already, about 11 cents out of every rand goes into servicing public debt.
As the economy shrinks, more and more income would have to be spent on interest payments. Government’s ability to provide a social safety net in the form of social grants and other services, like education and health care, would be much more constrained. The service delivery protests that have become increasingly the norm would become even more widespread as the fiscus comes under serious strain.
Ultimately, the brigade of the unemployed would bear the brunt. Of course, the employed would also suffer because slow growth affects incomes.
Low and anaemic growth dries out consumer confidence. Job losses and subdued growth in incomes as a result of poor growth outcomes and prospects chip away at consumer confidence.
South Africa’s growth performance post 2008 has been very low. Over the past 10 years, the economy recorded an average of 2% growth per year. If this continues it will take more than 30 years to double average incomes in South Africa.
But if the country can increase growth to 5%, as projected by the National Development Plan, it would take only 14 years to double average income. The higher the growth rate, the shorter the time required to double incomes and bring people out of poverty.
The investor-confidence deficit is largely as a result of ever-increasing political risk, policy uncertainty and wrangling in the ruling party and lately revelations of alleged looting of public funds by the political elite.
But not everything’s broken. The performance of the country’s monetary authorities in the management of monetary policy is admirable.
Where there appear to be lapses is the asset and liability management of the National Treasury. And here, the massive losses of state-owned enterprises readily come to the fore.
This is a blot on the canvas of fiscal policy management. And the much-touted structural reforms that are required haven’t been forthcoming because government lacks the capacity to formulate and implement the appropriate policies. In fact, even if it designed the correct ones, the investor community has little faith in its ability to carry them through.
Hence, the need for an IMF programme.
The IMF has the solution
An arrangement would achieve a number of objectives.
Firstly, the fund could help the country formulate policies that would unblock the problems that continue to inhibit economic growth and job creation. The mere adoption of an IMF programme would help address the question of policy uncertainty.
Secondly, the IMF is well placed to provide foreign exchange loans, bringing stability in the rand foreign exchange rate market. This in turn would improve investor confidence, leading to more investment in the country. Economic growth would pick up and there’d be an improvement in consumer confidence.
An IMF programme would send a clear and unassailable signal to investors that the country is committed to pursuing a given set of policy options. And it would will the commitment appear credible.