Policy changes vital to reboot economy as IMF hovers
Fixation on redistribution and transformation has entrenched poverty and unemployment
SA’s economy needs urgent restructuring, yet the political preconditions are probably years away. Near-term IMF engagements must set the stage for the fundamental reforms required; SA’s national dialogue must more objectively assess local and global realities.
The country’s economic journey is proceeding along a path well-known to the IMF. Populist pressures are indulged to the point where growth slows as debt mounts. Scope to negotiate often only arrives once access to international debt markets becomes doubtful. Even then, governing elites sometimes choose, tragically, a deepening economic crisis over an economic rebirth pregnant with political risks.
IMF restructuring teams, which include deal makers, lawyers, economists and bankers, typically seek mutually beneficial concessions from debt holders and policymakers. SA’s path could greatly benefit from such a restructuring, but factional battles within the ANC restrict President Cyril Ramaphosa’s freedom to make concessions.
It is easy to make the case that if Ramaphosa is overly accommodative of IMF demands he risks losing the support of the unions and the SA Communist Party. This could result in him being outmanoeuvred by his party’s patronage-focused faction, bringing about a Venezuela- or Zimbabwe-like outcome. Moody’s Investors Service has chosen to be very patient with SA’s policymakers. The IMF can likely also be persuaded that its best option is to take a long view.
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It’s a borrower’s market. Today’s global debt markets feature $15-trillion in negative-yielding securities. While a harsh contraction in demand for emerging-market debt is certainly possible, it seems unlikely anytime soon.
While liberation movements rarely spawn commercially astute economists, Ramaphosa has some well-read advisers. IMF professionals, past and present, have written extensively on “financial repression”. Their arguments for prescribed assets and writing off loans make difficult reading for pension-fund beneficiaries and bank shareholders.
There are various reasons to suspect SA’s creditworthiness could erode for several years before a truly hectic crisis would be unleashed. Among the stranger examples is if, rather than demanding a sharp contraction in populist policies, the IMF accepts “concessions” from Ramaphosa’s team that will strengthen him in the ANC but that he would not have dared to pursue without IMF cover.
The underlying constraint acting on SA’s economic growth is that policies and practices undermine exporting while household interest payments retard growth in domestic consumption. Expanding exports is necessary but not doable in the near term. Alternatively, legislation can swiftly be passed forcing lenders to reduce interest rates and write down various categories of consumer loans. IMF restructuring experts could see merit in rehabilitating spending at the expense of savers, such as investors in bank shares.
IMF criticism of SA’s ballooning public-sector and state-owned enterprise (SOE) wage bills under then-president Jacob Zuma doesn’t guarantee they will favour pressuring Ramaphosa to seek broad job cuts. Ramaphosa is too vulnerable politically to deconstruct Zuma’s unsustainable blending of populism, transformation and patronage.
While IMF restructurings often constrain garden-variety populism, SA’s unsustainable policy indulgences trace to the 1990s transition challenges. Patching sections of societal fabric worn by avoidable frictions builds cohesion. Such domestic maturing should precede IMF pressures for economically necessary but politically combustible pivots. Given SA’s history, diversity and concentration of wealth, creating a unified nation was never going to be easy.
In effect, the build-up to the 1994 election and the subsequent constitutional negotiations were a tacit agreement on an informal social compact: a responsible redirecting of income would lead to broad prosperity for the historically disadvantaged majority while minority rights would be protected in perpetuity.
This was politically and socially sensible. The danger was always that policymakers would place excess reliance on redistribution and this would stifle growth, thus entrenching pervasive poverty and unemployment. This has happened without triggering an objective reappraisal of transformation.
The recent election made little progress towards agreeing on SA’s top economic priorities. Inequality and transformation remain as prominent as unemployment and poverty. Viable economic plans were not debated. Rather, economics issues were subsumed amid corruption accusations.
Whereas SA chose not to focus outward a quarter of a century ago, the global economy pivoted towards intense integration, thus pummelling poverty. SA’s policy fixation on redistribution and transformation precluded adequate growth, thus cementing poverty and unemployment at politically destabilising levels.
The IMF won’t be able to push hard for necessary shifts until SA’s access to credit constricts. Yet irrespective of anticipated scenarios and timetables, the costs of transformation policies on growth, unemployment and poverty must now be freshly reassessed.
• Hagedorn is an independent strategy adviser.