A bit like a multinational Stokvel, the Washington-based International Monetary Fund acts as the banker of last resort for member countries which get themselves into difficulties. To prepare itself, the IMF has a regular programme of sending surveillance teams to assess its potential exposure – and where it finds problems, to encourage members to act before it’s too late. The surveillance team, which visits South Africa twice a year, spent the fortnight to November 21 in the country, meeting with stakeholders from across the social and economic spectrum. On Rational Radio this week Econometrix chief economist Azar Jammine explained why the IMF’s warnings need to be heeded and how the Ramaphosa Administration is running out of time to convince its political allies to come on side – or reap some rather awful consequences. Because of the tough conditions it always applies, nobody likes having to approach the banker of last resort. Much better to make the changes before having to enter the last chance saloon. – Alec Hogg
Hello to Azar Jammine the Chief Economist of Econometrix. Last week – in fact on Friday – Treasury issued a statement to say that the International Monetary Fund team had visited South Africa from the 6th to the 21st of November and came to some interesting conclusions. By way of background, why would the International Monetary Fund have to send a team to South Africa in the first place?
___STEADY_PAYWALL___
South Africa is a member of the International Monetary Fund and it is the way in which the IMF works. They send an annual or bi-annual delegation to a country to actually examine everything and to speak to the relevant important player, to assess what the situation is like.
Seems like quite a long journey though – quite a long visit from the 6th – nearly 2 weeks that they spent in the country.
You’ve got to realise that there are specialists who actually concentrate on particular areas of the world and who would necessarily – if they wanted to get a detailed impression of how the economy of a country was doing – would spend up to a week in the country. I don’t think this is particularly unusual.
So they do it twice a year. They come here for surveillance as they call it, surveillance of what?
Surveillance of just how well the country is managing its finances, so as to determine the extent to which the IMF might indeed – in the longer term – be called upon to actually assist the country. You’ve got to realise that each IMF member in turn actually pays into the IMF and this is how the IMF builds up the size of its funds. So it wants to make quite sure that its members are actually running their countries appropriately. It’s in this regard that obviously the IMF would have raised some eyebrows – well I don’t know that it would have come as a complete surprise – at the deterioration that has taken place in South Africa’s fiscal situation.
So from their perspective – from the Washington institution’s perspective – would they now be coming to look at South Africa thinking we might have to lend these guys money in future?
This is what they’re probably examining to see whether they may in fact have to do it and if they do, what kind of conditions would they impose on granting South Africa such loans in the longer term. I don’t think we’re there yet, I don’t think the fiscal situation has deteriorated enough, but if we carry on the way it was indicated in the medium term budget policy statement, then we may be heading that way.
So the guys from the IMF were here. They’ve got a big bank account, if South Africa gets into trouble it can draw from, but then there will be conditions attached. Always better of course not to have to borrow in the first place isn’t it?
Absolutely and unfortunately one can imagine what those conditions attached would be like and they would not be particularly popular with many members of the ruling tripartite alliance, but they would then have very little option but to accede to those conditions.
They spoke about three big challenges, no surprises there. The first one weak economic growth in South Africa. Secondly a deteriorating fiscal – taxes are lower than than what’s being spent – and the third one is problems at state-owned enterprises. Azar, did you get much comfort from what the IMF is recommending that South Africa does?
I think they are trying to put some pressure on the government to actually perform and to start implementing many of the strategic reforms that the government itself has actually put forward, but which are not being allowed to be implemented because of opposition from within the ruling tripartite alliance. And I think by putting additional pressure on the government – apparently in the same way as the ratings agencies are putting pressure, or threatening clearly to downgrade our credit rating – the hope is that some sense will prevail within the ruling party. But if the ruling party does not act to rectify the structural weaknesses of the economy then eventually they may find themselves in a situation where they are forced to act because otherwise there will be no money and service delivery will suffer even more than it is at the moment.
So when the IMF says things like South Africa must create an environment conducive to private sector investment and the second point that it needs a decisive approach towards implementing structural reforms, what does it mean by that, what practically is it telling the Ramaphosa administration to do?
There are a number of areas. Firstly, it’s telling Ramaphosa you better do something to improve growth itself and that involves a whole host of things which the government itself has outlined in the Treasury strategy – in the document 2 months ago – improve your educational outcomes, try and become more productive, deregulate the economy to try and spur small business activity, make it easier to finance small business activity – pay them properly – and embark upon decent infrastructural investment, which you haven’t been doing for the last few years because you’ve been spending all your money financing the remuneration of a burgeoning public service. That is the second aspect that the IMF would be basically calling on the government to do – to somehow rein in the enormous growth in public service – which has far exceeded the growth in remuneration that we’ve seen in the private sector. Thirdly, the government would need to address the incompetence and inefficiencies and losses being incurred by state owned enterprises. And of course – indirectly in all of this – try to do something to beat off corruption.
So it’s pretty well known – lots of people are calling for this – the fact that the IMF is calling for it now and the ratings agencies are calling for it, is that enough to overcome political resistance?
Alec you must tell me whether political resistance is an all embracing and dominant factor, because if it is, then South Africa is in deep trouble. If somehow common sense can prevail and Ramaphosa can persuade his cabinet colleagues of the need to actually abide by what Treasury has been suggesting, then I do think we have a chance. To do that does require a firm hand and especially in relation to interests such as those of the trade unions, who are basically arguing that why should they now be paying the penalty for all the excesses and losses incurred in the past decade by a corrupt government.
They got a point there. But just to close off with – in a developing country, where politics trumps economics – are we going to be doing the normal development country misstep here by allowing politics to usurp the sensible economic policies or might someone like Ramaphosa be able to negotiate his way into a different outcome?
I think that disappointment over the past two years since Ramaphosa became president, is the failure of his regime to actually take power over the political interests that also have an interest in the perpetuation of corrupt activities. One can only hope that the powers that be, turn a little faster in the next year to try and restore some of the confidence that people originally had. That Ramaphosa and his team would actually win over the interests of the country – in relation to politicians – who are preventing them from doing so.
Azar Jammine the Chief Economist of Econometrix.
