Hirsch: Nene shielded SA from ‘junk’. Treasury reputation tarnished.

The implications of President Jacob Zuma’s sudden dismissal of then Finance Minister Nhlanhla Nene are far reaching. We’ve seen bond yields, the currency and equity markets come under immense pressure. There are also talks of an emergency MPC meeting to help stem the tide and fight an oncoming recession boosted by hyperinflation. But what if one flips the argument and looks at what, if anything, David van Rooyen can bring to National Treasury. The Conversation Africa Editor Caroline South spoke to Alan Hirsch. He voices his concerns around new Finance Minister David van Rooyen’s appointment and says it’s a ‘very serious situation’.Hirsch has published widely on trade and industrial policy issues including his book ‘Season of Hope – Economic Reform under Mandela and Mbeki’. He also sits on the board of Trade and Industry Policy Strategies.Great insights. This article was first published on The Conversation Africa. – Stuart Lowman

By Caroline South*

South African Treasury has been lauded as the best run department in the national government. What gave it that reputation?

Under the leadership of Trevor Manuel, the Treasury became not only the most outstanding government department in South Africa, but also a globally recognised high performer.

David van Rooyen, South Africa's incoming finance minister, left, shakes hands with Jacob Zuma, South Africa's president, during his swearing in ceremony at the Union Buildings in Pretoria, South Africa, on Thursday, Dec. 10, 2015. The rand fell for a sixth day in the longest streak of losses since November 2013, stocks slid and bond prices tumbled the most on record after South African President Jacob Zuma fired Finance Minister Nhlanhla Nene and replaced him with a little-known lawmaker. Photographer: Waldo Swiegers/Bloomberg *** Local Caption *** David van Rooyen; Jacob Zuma
David van Rooyen, South Africa’s incoming finance minister, left, shakes hands with Jacob Zuma, South Africa’s president, during his swearing in ceremony at the Union Buildings in Pretoria, South Africa, on Thursday, Dec. 10, 2015. The rand fell for a sixth day in the longest streak of losses since November 2013, stocks slid and bond prices tumbled the most on record after South African President Jacob Zuma fired Finance Minister Nhlanhla Nene and replaced him with a little-known lawmaker. Photographer: Waldo Swiegers/Bloomberg *** Local Caption *** David van Rooyen; Jacob Zuma

Manuel and his successive directors general, Maria Ramos and Lesetja Kganyago, and their successor Lungisa Fuzile, built an ethos of teamwork, hard work and recognition for performance. They also paid serious attention to transformation of the leadership of the institution. High performers understood that promotions within the organisation were possible, and were a likely reward for outstanding performance. This led to a culture of the Treasury “growing its own timber” which further strengthened the new organisational culture.

Manuel and the director generals fiercely promoted and defended the organisation and its members, building a culture of loyalty based on trust rather than fear. The result was an organisation with high internal standards and a very high reputation with stakeholders. Its high reputation with stakeholders reinforced its pre-eminence in government.

Its reputation continued through to Nene.

Many developing countries suffer from poor fiscal management. South Africa appears to have broken the mould. Why and how?

It was absolutely critical for the minister to ensure that he had the full political backing from the President and other senior members of the executive. Manuel was able to obtain that. He was helped by the fact that he came into office at a time of debt crises in Latin America and poor macroeconomic performance in other parts of Africa which hammered home the need for strong central management of government finances.

Treasury asserted full control over financial management. The implementation of the recommendations of the Katz Commission on tax policy were helpful too. It recommended that taxes should be simplified and that all taxes should go into a central revenue fund to be managed by the National Treasury.

Treasury was further helped by the country’s constitution which tightly limits the fiscal power of provinces, and cities (though to a lesser extent), and prevents Parliament from writing the budget. Parliament was essentially able to accept or send back a budget, not to amend its details.

But to maintain this newly won authority, the quality of management offered by the revamped National Treasury was critical.

What have been the National Treasury’s two biggest achievements since democracy?

It’s difficult to narrow it to two, but the most obvious achievements were the introduction of a spending framework that encouraged better planning, called the medium term strategic framework, supported by the Public Finance Management Act and the Municipal Finance Management Act, and the major repair job of our tax system, which became the South African Revenue Service. Better tax collection and more skillful spending led to much greater budgetary discretion in the 2000s, which allowed for political imperatives to be addressed.

What have been its two biggest failures?

One that comes to mind is the integrated financial management system, a centralised and comprehensive software system that was intended to replace the Basic Accounting System. This was hugely over budget and massively behind schedule.

Another was the relative looseness of budgeting in the mid-2000s which meant that the cushion the country had when the 2008 financial crisis hit us wasn’t thick enough. It was politically very unpopular to run a budget surplus, and politically impossible to introduce a strict budget rule.

Thirdly, it could be argued that the introduction and implementation of the home-grown structural adjustment programme; the Growth, Employment and Redistribution (GEAR) programme in 1996 could have been better managed.

What does the appointment of the new minister mean for the future of the National Treasury, and for the country?

Minister Nene was an excellent finance minister who managed the budget carefully and stood up bravely when risks to the country’s financial integrity appeared. Statements made by ratings agencies last week hinted that Nene stood between South Africa and junk bond status.

The removal of Minister Nene is a significant act. The fact that he has been replaced by someone who is unknown and untested simply compounds it. The first risk is that the new regime has a massive negative impact on the country’s financial credibility. This will be hard to repair under the current political leadership. It will be even more damaging if the governing African National Congress does nothing to correct the situation.

Secondly, it is widely believed that Nene was removed because he refused to allocate national resources carelessly. There is therefore a distinct possibility that his successor was chosen because he is not expected to be so careful.

The country’s fiscal status could deteriorate, further damaging our reputation. This will further weaken the currency, raise the cost of borrowing and discourage local and foreign investment in an already investment-starved environment. It is a very serious situation.

* Caroline South is editor of The Conversation Africa

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