Why SA’s best option is to ask the IMF for help
Poor performance has been all the more troubling considering how favourable the global economic environment has been, writes Desmond Lachman
It was once said of the IMF that countries call upon its services with the same enthusiasm as people visit their oncologist.
For which reason one must applaud Finance Minister Malusi Gigaba for recognising now might indeed be the time for SA to call for outside help to stabilise its economy.
Whereas all too many of his cabinet colleagues appear to be in denial about the seriousness of the country’s economic difficulties, Gigaba seems to realise how useful the IMF might be in helping the country restore investor confidence and arrest its downward economic spiral.
At a time when the rest of the world economy appears to be on the mend, there is no shortage of indications that SA’s is in trouble. The country’s per capita income has been declining for a number of years, the economy has now entered its second recession in eight years and unemployment remains stuck at more than 27%.
Meanwhile, the rand continues to flounder in the foreign exchange market and inflation continues to exceed the Reserve Bank’s target.
Among the more basic reasons for the poor economic performance has been a lack of domestic and foreign investor confidence in the government’s commitment to sound macroeconomic policies and to serious structural economic reform.
In this context, the firing of a well-respected finance minister and recent talk about clipping the wings of the Reserve Bank have hardly been helpful.
Equally disturbing to investors has been the growing divisions in the government and fears of state capture by private interest groups. It is little wonder then that the credit ratings agencies have reduced their rating of South African government bonds to junk status.
The recent poor performance of the South African economy has been all the more troubling considering how favourable the global economic environment has been.
Fuelled by the ultra-unorthodox easy monetary policies of the world’s major central banks, global interest rates have never been lower and capital flows to the emerging markets have seldom been stronger.
This has to raise a basic question. If SA’s economy has fared poorly in a favourable global environment, how will it fare when the world’s central banks start normalising their interest-rate policies and when the global economic environment becomes more challenging?
By providing financial assistance in the form of a foreign exchange loan, investors might feel more comfortable about the country’s ability to defend its battered currency
International experience teaches that it is easy for a government to lose its reputation for sound economic management but difficult for it to restore that reputation. Having been disappointed often before, investors are unlikely to believe a government’s future promises without concrete policy actions and without external certification.
This is where requesting summary assistance comes in, as it can hasten the process whereby investor confidence in the country is restored.
There are two ways in which IMF assistance could help SA.
By providing financial assistance in the form of a foreign exchange loan, investors might feel more comfortable about the country’s ability to defend its battered currency.
The more important way is that by helping SA design a credible macroeconomic policy to deal with its economic imbalances and structural weaknesses, investors would have more confidence in SA’s future economic policy direction.
This would especially appear to be the case considering that the IMF would also serve in the role of a respected external monitor of the country’s economic programme. To be sure, approaching the IMF will hardly be popular in SA’s current political context.
However, the question will soon become whether the government has any realistic alternative if it wants to put its economy back on a sound footing. In the same way that a cancer victim has little choice but to seek the help of an oncologist, the government would seem to have little alternative but to seek IMF assistance if it wants speedily to restore the economy to good health.
The sooner Gigaba’s colleagues come to that conclusion, the better it will be for the country.
• Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the IMF’s policy development and review department.