Prepare for IMF bailout
DEEPENING ECONOMIC CRISIS As government loses the ability to fund its operations, it’ll be forced to turn to the international body.
Prudence teaches that societies experiencing difficult and uncertain times should hope for the best but prepare for the worst. SA can hope the situation will improve. But it should also plan for the possibility that it won’t and that confidence in government’s ability to manage its deteriorating financial situation will evaporate. This will lead to higher borrowing costs and reduced access to financing for the government and state-owned enterprises (SOEs). It could also lead to SOEs defaulting on their debts and their creditors calling in their government guarantees.
As government loses the ability to fund its operations, it’ll be forced to turn to the IMF. No-one wants an IMF programme for SA. It means government accepting an outsider, dominated by rich countries, overseeing its economic policies. IMF support will be conditioned on SA agreeing to reforms such as: Reducing government’s budget deficit and the current account deficit so it can meet its financial obligations Deregulation and labour market reforms designed to encourage investment. But if SA begins preparing for this possibility, it may be able to mitigate its worst effects and be ready to exploit whatever opportunities it creates. Government has considerable experience dealing with the IMF. But it’s over 20 years since SA negotiated a financing arrangement with the IMF. Unless challenged, the IMF is likely to condition its financial support on a standard recipe of reforms.
But over time the IMF has become more amenable to supporting member state- proposed programmes. It’s learned that there’s more than one strategy for resolving such crises. The optimal solution depends on each country’s institutional arrangements, history, and particular economic, social, environmental and political characteristics … and on the impact of macro-economic policies on social factors like gender, equity and sustainability.
So what should SA do to ensure it gets the best possible deal? Establish clear, realistic objectives for the plan it wants the IMF to support; Get its diplomatic ducks in a row so it can strike the best possible deal. SA should focus on restoring a sustainable budget situation. This will require government to make some painful policy choices about levels of expenditures. Government can build confidence if it can show that: Benefits exceed costs and the costs are being equitably shared. Policy choices are based on the human rights imperatives in the constitution and on promoting growth. It’s serious about addressing governance problems in SOEs and departments. It’s complying with the legal procedures applicable to government finances and the open budgeting processes that it used in the past. Finally, government must encourage other social actors to help mitigate the pain. A demonstration of broad support would help convince the IMF to support government’s strategy.
Danny Bradlow is SARCHI Professor of International Development Law and African Economic Relations at University of Pretoria.
This article was originally published on The Conversation and has been cut and edited.