Muddling on with eyes fixed on our shoes

Five years ago the head of the Treasury’s budget office, Michael Sachs, promised the IMF he would eat his hat if SA government debt hadn’t stabilised in three years. The IMF said it would rather Sachs implement a debt ceiling.

Back to the present, and SA has just been granted a R70bn IMF loan to plug the deficit, with the Treasury promising to consider a debt ceiling. However, with SA’s debt-toGDP ratio seeming to be on an unstoppable course towards 100%, it is arguably too late.

The IMF is too diplomatic to say, “We told you so”, but would things have been any different had SA introduced a debt ceiling five years ago? At the time the IMF representative in SA, Axel Schimmelpfennig, argued strongly for one, warning that SA’s expenditure ceiling was at best “a drift anchor”. He said: “It slows you down but as long as growth continues to fall short of projections your debt will keep floating up.”

Then, SA’s target was to stabilise gross debt at 49% of GDP by 2018/2019. Without Covid-19, it would now be nearing 65% since, as predicted, spending growth has not slowed as sharply as the economy. Thanks to the pandemic, the debt ratio is now closer to 80%, and the Treasury has hit the panic button.

However, the problem with any fiscal rule is that it is as good as the political will behind it. Without collective responsibility from the whole cabinet and leadership from the top, a debt ceiling introduced five years ago would not have prevented SA’s fiscal deterioration. Nor will one if introduced in 2020.

To keep other ministers in check, the finance minister needs the strong support of the president. Without it, his is a lonely position. Right now, Tito Mboweni cuts a lonely figure and it is unclear how long he can remain in such an untenable position.

It’s an impression enhanced by a recent tweet of his showing him walking alone in downtrodden shoes. It said: “Each day produces a ‘Moment’. To be alone, to drive home, to look happy and to have people enjoy mocking your comfortable shoes. As long as you do not take things emotionally, you will be ok.”

Things are really dire when a finance minister warns that the public finances are “dangerously overstretched” and unless brought under control the country will shortly experience a debt crisis. The results would be devastating: interest rates would skyrocket, government spending would screech to a halt, inflation would take hold, and everyone would be poorer.

There are two camps with opposing views on what happens next. The hopeful camp believes that the government, backed by business, will urgently reform and open up the network industries (ports, rail, energy and telecoms) to private participation to boost efficiency. This, coupled with a joint infrastructure drive, will restore confidence and investment.

Once growth revives, the extent of fiscal consolidation required to stabilise the debt ratio will be manageable, allowing SA to slowly recover.

The hopeless camp believes the political and capacity constraints to undertaking progrowth reforms, and the huge spending cuts needed to stabilise the debt trajectory, are impossible for this weak, riven government to achieve without tearing itself apart.

As such, it believes SA will be lucky to implement 20% of the required reforms and will be back at the IMF in two years looking for a larger bailout. Either that or the country will unravel down the route of failed populist policies until it is just another poor backwater.

SA’s habit has been to muddle along a middle road between these two stark options, neither fully reforming nor fully failing. But the Covid-19 crisis has cut that option short by accelerating the fiscal crisis and exposing the sheer incompetence of the administration.

One would have to be hopeful indeed to continue to extend this government the benefit of the doubt.