South Africa should con­sider help from the IMF to fix its econ­omy

Financial Nigeria Magazine - - Contents - By Matthew Kofi Ocran Matthew Kofi Ocran is a Pro­fes­sor of Eco­nomics, Univer­sity of the Western Cape. Dis­clo­sure state­ment: Matthew re­ceives fund­ing from the NRF. He is also af­fil­i­ated with Nel­son Man­dela Univer­sity as a Re­search As­so­ciate.

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.

The IMF iden­ti­fies three key ail­ments as causes of the coun­try's anaemic eco­nomic growth. These are low con­sumer and in­vestor con­fi­dence and pol­icy un­cer­tainty.

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 which 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 chips 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 the 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. 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 was com­mit­ted to pur­su­ing a given set of pol­icy op­tions. And it would make the com­mit­ment ap­pear cred­i­ble.

South African rand notes

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