The world is changing fast and to keep up you need local knowledge with global context.
By Felicity Duncan
South Africa, the IMF has confirmed, has not sought and does not need an IMF bailout. That is true, for now. But even the most optimistic observers agree that SA needs to work a lot harder in the areas of reform, corruption, and implementation if it’s going to pull itself up by its bootstraps.
So, let’s imagine that SA doesn’t manage to overcome its factional politics and special interests and implement necessary reforms. And let’s imagine that, as global growth slows, this failure to act pushes debt higher, to the point where no one wants to lend to SA anymore except at unsustainably high interest rates. And let’s imagine that, to keep the lights on at Eskom and public sector workers paid, government is forced to apply to the IMF as the lender of last resort.
What kind of T&Cs would come along with an emergency loan? Would they, on balance, be good for SA, or would they further hamstring the country as they have done elsewhere?
To guess at what the IMF may demand, we can look at its Staff Reports on SA, at the courses of action that the Fund has suggested – repeatedly – that the county pursue.
The IMF’s suggested reforms are:
- Tackle corruption and improve governance;
- Improve competition in product markets;
- Restructure weak state-owned enterprises (SOEs);
- Reform labour markets;
- Improve education;
- Leverage digitisation.
The governance and corruption reforms the IMF suggests are broadly in line with what Cyril Ramaphosa and his team are already trying to implement. They include requiring clear asset disclosures, enhancing the independence of policing and prosecuting units, seizing assets that are the product of corruption, fixing up the mess at SARS, and jail time for those found guilty of corruption.
These are crucial reforms, because corruption in SA has reached such epic proportions that it is now a significant drag on economic growth, not to mention a major factor in our national political paralysis.
If the IMF bails out SA, it will expect a lot more action on the corruption front. More importantly, however, the IMF will be expecting a number of market reforms.
Deal with SA’s lamentably uncompetitive product markets
It doesn’t matter how you slice it – SA has uncompetitive product markets. Most sectors are dominated by a handful of big firms, and a quick browse through the Competition Commissions investigations will show you the extraordinary lengths these firms go to to keep out competitors.
Weak competition is a major reason behind SA’s lack of employment, slow growth, and general economic malaise. In the absence of competition, firms in a given sector earn higher profits without improving efficiency or quality (there’s no one else to buy from and prices can easily be inflated). Only when markets are competitive are firms incentivised to do more with less, to cut prices, to raise productivity, and to fight for market share. This is better for consumers, employees, and the owners of capital.
The problem is even worse in product markets dominated by SOEs, like electricity. And ham-handed regulation, that imposes costs without improving efficiency or quality has hurt markets.
The IMF would likely demand the following:
- Revision of the mining charter with extensive industry consultation;
- Faster, more flexible sale of broadband spectrum through open and transparent auctions;
- Restructuring social grants to cut out expensive middlemen who soak up too much of beneficiaries benefits;
- Widespread reform and restructuring of SA’s SOE cash sinkholes, including Eskom, Denel, Transnet and others, including partial privatisation – the IMF believes that the government does not have the financial resources to repair problems in this sector and will have to involve private capital;
- Clarity on land reform.
Address labour market weakness
Wages in SA are too low. Unfortunately, however, the wage increases that unions are negotiating are far in excess of productivity growth. That means that, by definition, they are unsustainable, plus they price labour out of the market, leading to persistent, high unemployment.
Further complicating the situation, SA’s poor-performing schools are turning out graduates who lack the skills to contribute to productivity growth.
The IMF would probably require:
- Ending the ruling that negotiated wage settlements apply to the entire industry sector, allowing employers and employees to negotiate wages on a firm-by-firm basis;
- Reducing barriers to firing people for performance reasons and bringing them more in line with international norms;
- Rules enhancing teachers’ accountability, including punishment for absenteeism, and enhancing teacher training;
- Improving access to books and other learning essentials at struggling schools;
- Easing restrictions on skilled immigration to deal with immediate skills shortages.
SA’s public debt is rising fast. The IMF would expect the country to implement measures to stop the accumulation of debt and to pay off what has already been accumulated. This means more revenue (taxes) and less spending.
In particular, the IMF would likely suggest:
- Cuts to the public sector wage bill, which is much higher than that of comparable emerging markets even though SA has fewer public sector workers (as a percentage of the population) than its peers;
- A crackdown on informal economy action aimed at tax evasion.
Various other IMF proposals would include things like enhancing competition in financial services and easing visa rules to encourage tourism. The IMF, in short, wants a South Africa that is more accountable, less corrupt, more competitive, and more efficient.
The IMF does not, importantly, suggest cutting social spending or eliminating any social grants (although it does suggest being smarter about educational subsidies, which are not always well targeted).
In the past, IMF conditions have required governments to make major cuts in their aid to the poor, which has hurt social stability and long-term growth – not to mention cut short human lives. The IMF has not recommended these measures for SA. Instead, it sees SA as a country with enormous growth potential constrained by poor regulation, rigid and anti-competitive markets, uncertainty, and corruption. There’s no reason why SA can’t tackle the IMF’s suggested reforms now, before they stop being gentle suggestions and become iron-hard conditions.
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