South Africa’s economy has struggled over the past few years, riddled by poor economic policy, the burden of corruption and rising inequality. Trapped by low economic growth, many investors and economists predicted that ultimately South Africa would need to approach the IMF for financial support. There was no sense of urgency attached to this forecast as most only expected us to hit a fiscal cliff later this decade. Things have changed.
As Coronavirus sweeps through emerging and developed markets alike, it has left in its path economic destruction of a magnitude somewhere between the Great Depression and the Global Financial Crisis. While the fear associated with the virus would have reduced attendance at restaurants and other public spaces regardless, government enforced lockdowns have exacerbated the economic cost. To make people whole, governments globally have extended a large social security net to protect those most vulnerable from the sudden halt of the global economy. Such policies will help insulate businesses and consumers from some of the economic fallout, but it will add to the already high fiscal burden which governments carry.
South Africa’s economy was weak at the start of 2020. Coronavirus has meant things have taken a turn for the worse. At the beginning of the year, estimates were for GDP to grow by just over 1% in 2020 – now it stands at -5.2%. Estimates are likely still too optimistic, and it would not surprise us if the economy shrunk by 10% in real terms this year. As a result, South Africa’s debt to GDP ratio will climb towards 80% and questions about fiscal sustainability will come to the fore. The risk is that one day bond investors will no longer want to purchase South Africa’s debt and finance its deficits. What can South Africa do once it is shut out of financial markets?
There are a few alternatives, such as prescribed assets or an IMF program. Prescribed assets, whereby government forces funds to have a certain percentage of their portfolio invested in government bonds, would be disastrous. The vibrancy of capitalism is dependent on capital being allocated to its most productive use. If the market cannot decide where savings should be allocated and in what quantum, one of the central pillars of a vibrant economy would be lost. Additionally, such a move would likely scare off international investors.
Unfortunately for South Africa reformists within the ANC, such as President Cyril Ramaphosa and Finance Minister Tito Mboweni, have struggled to implement policies aimed at boosting growth and stabilising South Africa’s debt-to-GDP. Vested interests from the ANC’s alliance partners, Cosatu and the South African Communist Policy, have prevented any real change. The inability to advance policy reform is perhaps the single biggest reason why an IMF bailout is just what the doctor ordered to jumpstart South Africa’s economy.
The IMF’s primary focus is to ensure the stability of the global financial system. It is essentially the lender of last resort for countries who are no longer able to access the bond market. When countries approach the IMF for a program, the IMF attaches conditions to the bailout. These conditions, ultimately reforms, are to prevent the country from implementing poor policy decisions which led to the economic troubles in the first place. In South Africa’s case, the IMF can force through desperately needed policy reforms, the ANC can hide behind the IMF claiming that it wasn’t their choice while Cosatu and the SACP can feign their disgust. With assistance from the IMF, we can recapitalise Eskom, privatise state-owned enterprises, reduce the bloated public service and introduce investor-friendly labour laws. Most importantly, we can get back to growing SA’s economy once again.
Do IMF bailouts work? Unfortunately, the data is mixed. In those instances where IMF programs are unsuccessful, it’s often because the austerity imposed is too harsh and too sudden. An overly aggressive austerity drive can push countries into deep and prolonged recessions. However, without an IMF program, many countries would be forced into austerity regardless. A successful program allows for a phased in approach towards spending cuts. The key here is time: the earlier an IMF program is implemented, the less austerity is required. Similarly, the sooner medicine is administered to the patient, the faster the recovery.
South Africa should not let a good crisis go to waste. Coronavirus has provided ANC politicians with the perfect excuse to approach the IMF. Rather than wait a few years until there is no alternative, South Africa should use an IMF program as a prophylactic measure to cure its ailing economy.