Country’s wheels grind to a halt in sands of corruption

South Africans are punch-drunk from almost daily disclosures of corruption, so new announcements of multimillion-rand scams pass almost unnoticed. To make things worse, the economy is on its knees. There has been no meaningful growth for a decade. As a result, unemployment is rising and tax collections are lagging the government’s insatiable need for funds. At a time when consumer spending is already under pressure, further tax hikes are likely.

A link between the rampant corruption and our economic woes seems obvious. Yet some economic theorists have argued that corruption is not necessarily bad for economic performance. In situations in which bureaucratic restrictions stifle activity and economic transactions, corruption may actually increase efficiency by “oiling the wheels” of the domestic economy.

Such positives are, however, very unusual. Much more often, corruption is “sand in the wheels” of economic activity, reducing efficiency and wasting limited resources.

Corruption in SA clearly falls into this category. It is not adding to productive economic activity in any way. Rather, in vastly enriching a privileged few, it has added a huge cost to all state and state-directed activities. It is negatively affecting our economic performance and diverting billions in public money, desperately needed for education, health, infrastructure and social grants, into the pockets of politically connected individuals. It is also destroying any willingness by local and foreign businesses to invest in SA, which would grow the economy and create jobs.

Sadly, the damage already done will take decades to undo, even were corruption miraculously to end overnight. This is because corruption has been on such a huge and farreaching scale that it has plunged most of the stateowned enterprises (SOEs) into frighteningly high levels of debt. Repaying just the interest due will handicap their operations for a very long time.

Usually, companies only borrow to buy equipment needed to increase production. But SOEs such as South African Airways (SAA) and PetroSA are borrowing to fund their current operating expenses. This places them in an unsustainable and risky position.

As individuals in similar positions know too well, every time you borrow to meet your daily needs you face new, higher interest payments and this means borrowing more.

As a monopoly, Eskom merely passes its rising debt costs on to consumers, in addition to the unnecessary hikes in its operating costs buoyed by the overpaying of corrupt contractors.

As a result, electricity prices have increased fourfold since 2008. This has reduced the disposable income of households and raised the production costs of businesses, resulting in a slowdown in overall economic activity.

The rising indebtedness of SOEs is such that banks and pension funds are now reluctant to lend to them. As a result, the government has had to guarantee the debt in the event that SOEs default. This is why the government dare not allow SAA to default, as this would trigger the obligation for the Treasury to repay a range of other SOE debt.

This requirement has added to the concerns global credit rating agencies were already expressing about the government’s own debt.

While the debt of 50% of GDP is not especially high by global standards, it is rising rapidly. And when its SOE guarantees are included, this increases to a more worrying level of more than 70% of GDP.

As a result, the government’s foreign currency debt is now rated junk and there is great concern that Moody’s and S&P Global Ratings will follow Fitch in downgrading the government’s rand-denominated debt to junk. This will increase government and SOE borrowing costs, complicating their already precarious position.

Given the grave state of our economy and the extent to which corruption undermines our ability to recover and deliver services, one would expect robust economic policy debate and action to stamp out corruption to dominate the political agenda.

Sadly, this is not the case. Indeed, most political actors seem unaware of the damage their inaction is causing. The poor and the unemployed are paying the price for this. And the burden they carry will remain heavy for a long time.

SADLY, THE DAMAGE ALREADY DONE WILL TAKE DECADES TO UNDO, EVEN IF CORRUPTION WERE TO MIRACULOUSLY END OVERNIGHT THE RISING INDEBTEDNESS OF STATE-OWNED ENTERPRISES IS SUCH THAT BANKS AND PENSION FUNDS ARE NOW RELUCTANT TO LEND TO THEM