Running to the now ‘reformed’ IMF would be a mistake
Covid-19 creates an opportunity for the government to act boldly, which includes greater investment in social services and a much larger public sector
Historically regarded as a villain that has obstructed the prosperity of “developing nations”, the International Monetary Fund (IMF) has taken many of its critics by surprise. It is now saying that exchange controls (finally on outward flows, not just inflows) are precisely what “developing nations” need to exercise sovereignty. But it’s not just its recommendation of controls that’s so surprising.
In response to the coronavirus, the IMF is now offering grants or loans with comparatively low interest rates (albeit dollar denominated), and with few conditions attached. This has been sufficient for Esra Uğurlu and Adam Aboobaker (Reformed IMF has options with fewer strings attached, May 27) to argue that turning to the IMF is an attractive prospect to source cheap financing to save lives.
There are serious problems with this position. First, it is based on the incorrect assumption that SA has a foreign exchange reserve crisis and an urgent balance of payments crisis and therefore accessing a loan from the IMF is desirable to raise the foreign currency to cover medical imports and SA’s short-term, foreign-denominated debt service costs.
Secondly, the argument fails to consider the medium- to long-term term implications of an IMF loan given the unfolding global economic recession and the types of reforms that will be needed to save lives. Finally, the argument mistakenly claims that the IMF has changed its spots and that it would be a tragic mistake for this not to be recognised.
The SA Reserve Bank notes that an adequate level of reserves equals the value of three months of imports or the equivalent of short-term, foreign debt service costs. At last count SA had access to $43bn (R754.65bn) in foreign currency reserves — not counting $6.9bn in local gold reserves — a slightly healthier level than it was before the outbreak of the coronavirus.
This does not mean we should not be thinking how to strengthen our forex reserves situation; it proves only that we do not have to go to the IMF to do so
SA’s imports for 2019 cost R1,490bn, which, in today’s significantly devalued currency, would cost just less than $85bn. This means, based on last year’s higher levels of trade and imports, we could cover the import costs for six months, double the level required by the Reserve Bank — more than sufficient to cover all urgent medical imports.
What about our ability to service short-term, foreign-denominated debt costs? SA’s total state debt service cost in the 2020/2021 budget was R229.1bn. A very small percentage (10%) of this is required to be paid back in forex. Of course, the problem remains that corporations, banks and parastatals have borrowed from international creditors to the sum of $185bn (just more than half of which is denominated in forex).
This is what is behind the rising debt-to-GDP ratio that typically results in the IMF being brought in. But this raises the question as to why SA foreign debt jumped by $100bn during the “nine lost years” of the Zuma regime. Is all that foreign debt legitimate?
How many parastatals borrowed from the World Bank, the China Development Bank, the Brics New Development Bank, the African Development Bank and other institutions whose credits, to the likes of Brian Molefe and Siyabonga Gama, were demonstrably corrupt, (think of the loan to Medupi, or the loan to purchase the oversize locomotives)? A debt audit should therefore be mandatory, before there is any further servicing of the foreign debt.
Nevertheless, according to Reserve Bank requirements, the country is far from having a forex reserve crisis. This does not mean we should not be thinking how to strengthen our forex reserves situation; it proves only that we do not have to go to the IMF to do so.
Regulating capital outflows through the implementation of more stringent capital controls — now more easily implemented as illustrated by the IMF’s own position — as well as the introduction of import substitution measures and limiting the imports of luxury items, a public audit and scrapping of anything illegitimate, would all be key measures in this regard. Given all of the above, a loan is not required. The question may then be asked, but why not take the loan anyway, given the concessionary interest rates and seemingly few strings?
Besides the loan not being needed, it is also undesirable. Beyond not having a forex reserves crisis now, nor an urgent balance of payments situation, the first major problem is that this loan from the IMF, even though small (now) with “few strings”, must be paid back in dollars. Such a loan will therefore only exacerbate the problems of SA’s balance of payments (and the structural weaknesses in the current account), rather than ameliorate them.
The latter problem we face is due to the “‘phasing out and liberalisation of exchange rate controls” by the post-apartheid government as early as 1995. This means that since the early 2000s the country has experienced a surge in financial inflows. Many attribute this phenomenon solely to the increase in portfolio investment, but there has been an equal rise in foreign direct investment (FDI).
This led to a subsequent increase in the level of outflows, in the form of profits, dividends and interest payments — to the non-resident bond and equity holders responsible for the inflows — with the ensuing pressures on the current account.
This situation has locked us into the requirement of unusually high interest rates to attract financial inflows. Needed to boost the capital account to offset the relatively high current-account deficit that is constantly exacerbated by the outflows, and so on, as the cycle is reproduced.
The contradictions between [the IMF’s] research and its policy recommendations remain as spotted as ever
Having to repay more dollar-denominated debt will create greater dependence on FDI and portfolio investment and exports to raise the forex to service that debt. These structural problems make it difficult to break from the country’s export-orientated growth path and dependence on financial inflows. However, being difficult is different from being impossible.
Our government’s response to Covid-19 is an invitation for us to act boldly; this includes greater investment in social services and a much larger public sector. Doing this will require the implementation of a wealth tax, the mobilisation of domestic resources at regulated interest rates, prescribed assets and using the Reserve Bank more effectively. These are measures our Treasury is against taking, a stance coincidentally supported by the IMF.
All else aside, it’s worth investigating whether the IMF is finally reformed. Uğurlu and Aboobaker urge us to acknowledge “the transformation the IMF has undergone over the years”. They go on to argue that the IMFs “rapid financing instrument (RFI), which provides financing at a 1.1% interest rate to be paid over three to five years”, may be the solution for us. However, while RFIs do provide financing at concessional interest rates, they are not a free lunch: the Treasury would be “required to co-operate with the IMF to make efforts to solve ... balance of payments difficulties”.
Recall that such co-operation led directly to the $160bn in public-sector wage cuts in the February budget, thanks to the IMF’s article IV consultation a month earlier. It “encouraged the authorities to implement strong fiscal consolidation and state-owned enterprise (SOE) reforms to ensure debt sustainability, accompanied by decisive structural reform measures to boost private-sector led, inclusive growth ... Directors suggested reductions in the public-wage bill and fiscal contingencies from SOEs, coupled with improved tax administration and compliance”.
While this position may have changed slightly since Covid-19, given the need to prevent the global economy from crashing, the contradictions between its research and its policy recommendations remain as spotted as ever. The IMF’s chief economist Gita Gopinath was crystal clear that austerity will soon return: “We are completely cognisant of that this is a crisis where countries will have to spend — there's a need for spending on health, for spending on workers and firms, this is not the time for austerity. Later on, when we are on the other side of this, of course that would be the time to put the right strategy in place to make sure your books are in good shape”.
The leopard still has its spots, one only has to look a little closer to see that not much has changed. Even if some may argue that the IMF has less sway than some give them credit for, it’s clear the Treasury does not require a stick to dance to the IMFs tune.
• Brown is economic justice programme manager at the Alternative Information & Development Centre.