WORLDVIEW: What happens if SA ends up needing an IMF bailout?

After dodging a bullet last month when Moody’s decided to keep South Africa rated one notch above junk, the prospect of South Africa needing an IMF bailout has receded. But chance favours the prepared and with the current government in power, anything could happen. So, what would an IMF bailout for SA look like? The best place to look for answers is Greece, the latest prominent recipient of an IMF bailout. The IMF starting giving Greece bailouts in 2010. The first, a €110 billion financing programme, had some tough requirements. Greece had to cut state employees’ wages and state pensions, raise the value-added tax (VAT), liberalise labour markets, cut red tape, and privatise state-owned enterprises, among other things. Austerity measures were implemented and led to a lot of political unrest, violence, and human suffering as the Greek economy experienced a long, deep recession. Unfortunately, the bailout didn’t get the job done, and Greece had to go back to the IMF/EU in 2012 for an additional €130 billion, and again for another €86 billion in 2015. To comply with the terms of the bailouts, Greece implemented a staggering thirteen austerity packages between 2010 and 2016. There have been deep cuts to healthcare and education spending. Pensions were slashed and the pension age raised. State employees’ wages were cut. Taxes were raised and state-owned companies were privatised. The minimum wage was cut. The result has been mixed. Greece now has a small budget surplus and its economy has finally stopped shrinking - after almost ten years, GDP growth returned in 2017. However, growth is very low and the promised boost from reforms hasn’t materialized. Unemployment is over 20% and youth unemployment is over 50%. Education spending has been cut by 20%, raising concerns about future competitiveness. In short, the process wasn’t pretty, it doesn’t seem to have boosted growth much, and vulnerable populations were hit very hard. How might things go for SA? If South Africa needs a bailout from the IMF, the organisation is going to want two things: a plan to get the budget deficit under control and a plan to boost economic growth. In practical terms, that will mean cuts to government spending, tax hikes, privatisation of state-owned enterprises (SOEs), and labour market reforms. South Africa already has fairly open borders, but the IMF may also take aim at policies like the Mining Charter that undermine investment. Interest rates would rise, and the rand would devalue. State employees, including teachers and the police, would likely see their wages cut, and social grants may also be reduced. This would reduce government spending, but would also push families into crisis. In Greece, consumer spending collapsed along with wages, prolonging the recession. The privatisation of SOEs is more promising, although it would also probably mean massive increases in utility tariffs. Labour market reforms would be good—SA has too many unskilled workers to justify its labour market rigidity. Higher interest rates would help cap inflation, but in conjunction with the devalued rand would also probably cause at least a short recession. As it was for Greece, then, an IMF bailout for SA would not be pretty. However, if it encourages sensible government spending, the offloading of chronically troubled SOEs, and labour and product market reform, long-term benefits are possible. It would be better, however, for the government to takes its spending in hand now before the IMF gets involved. Here’s hoping. - Felicity Duncan