Asking the IMF for help will give SA a chance to regroup and rebound
Mired in its worst economic crisis since the Great Depression, one has to hope the SA government will heed the adage that a good crisis should never be allowed to go to waste. Maybe then it will move resolutely ahead with its request for a fully fledged IMF financial programme in support of the basic economic reforms the country so desperately needs.
It would be a gross understatement to say the country’s economy was in poor shape even before the pandemic struck. According to the World Bank, SA’s per capita income in 2019 was no greater than it was in 2010 while, in reflection of a highly sclerotic economy, unemployment remained stubbornly stuck at about 30%. At the same time, the country’s budget deficit had continuously deteriorated, its external accounts remained uncomfortably weak, and all too many of its state enterprises had been run into the ground.
Hardly in the best of health on the eve of the Covid-19 pandemic, the country, along with the rest of the global economy, is now being ravaged by a once-in-a-century health crisis. That has occasioned a number of economic lockdowns that have had devastating consequences for both the overall economy and its public finances. It has also resulted in a collapse in international demand for SA’s exports and very weak international commodity prices.
According to finance minister Tito Mboweni, the SA economy will probably contract by at least 7% in 2020. That in turn will cause the country’s budget deficit to widen to a staggering 15% of GDP in 2020 and put its public debt to GDP ratio well on the path to exceeding 80%. This troubling trajectory has already prompted the ratings agencies to downgrade SA government debt to junk status and has caused overseas investors to start questioning the country’s public debt sustainability.
After earlier in the year experiencing large capital outflows and a financial market meltdown, SA, along with the other emerging market economies, is now experiencing a reprieve. It is doing so on the back of the vast amount of liquidity being pumped into the global financial markets by the US Federal Reserve and European Central Bank. However, it would be a grave mistake to think these favourable global liquidity conditions will last forever. It would also be a mistake to think that, absent huge international official support, the SA economy would be in a position to endure another sudden stop in capital flows.
The government is doing the right thing in approaching the IMF for a major financial support package. Better to do that now, while market conditions are still orderly, than to do it in a hurried manner in the midst of a financial market crisis. That should put the government in a good position to negotiate an IMF loan on terms that will best suit the country’s long-term economic interests. It might also allow the country to avoid a disorderly debt default.
One has to hope that in any IMF negotiation, the SA government and the IMF address the major structural impediments that have hobbled the country’s growth prospects over the past decade. This should include not only seeking to repair the country’s compromised public finances and put the country’s state enterprises on a sounder footing, but also measures to reduce the chronic insider-outsider problem that characterises the country’s labour market and perpetuates the unacceptably high unemployment levels. It should also include measures to make the country’s economy more competitive and increase its attractiveness to foreign investors.
It would seem to be all too easy for the SA government to bow to domestic political pressure and resist IMF demands for economic reform. It would also seem too easy for the IMF to try to curry favour by providing SA with easy finance without attaching conditions to reform the economy. However, if the SA government and IMF choose those paths, they will be squandering a once-in-a-century opportunity to steer the country’s economy in the right direction. By so doing, they will also be condemning the country to many more years of relative economic stagnation and high unemployment.
• Lachman, a former deputy director in the IMF’s policy development and review department and chief emerging market economic strategist at Salomon Smith Barney, is a resident fellow at the American Enterprise Institute.
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