Finance Minister Nhlanhla Nene has inherited problems he cannot solve alone, writes Craig Dodds.
Finance Minister Nhlanhla Nene steps up to the plate on Wednesday to deliver his first major speech since he took office – the Medium Term Budget Policy Statement (MTBPS) – and it may well come to define the rest of his term.
Sometimes called the mini-budget, the MTBPS is more significant than that name would suggest, setting the revenue and spending limits within which subsequent budgets must be contained for the next three years. It may lack the headline-grabbing pull of the February Budget, but it’s a critical statement of intent by the finance minister, essentially letting government departments know how much they will be allowed to spend and signalling to observers of the economy how much the government expects to collect in revenue, how much it expects to have to borrow and how serious it is about keeping spending within sustainable limits.
Nene’s speech will thus reveal a lot about the course he intends to set for the economy for the next five years. Each finance minister brings a personal style to the job, but the circumstances they face dictate the tone. Unfortunately, Nene inherits a set of circumstances that would crease the brow of any incumbent.
With the aftershocks of the global recession still rippling through the economy and an immovable unemployment rate, faltering growth and government borrowing approaching the limits of what is sustainable, the nation’s patience is wearing thin.
Promised jobs have not materialised, welfare measures, though they reach more people, are stretched thinner as inflation begins to bite and in many places the groaning machinery of state is being manifested in water shortages, blackouts, crumbling roads and uncollected garbage.
More than this, it is becoming increasingly evident – and more and more loudly expressed – that South Africa’s poor economic performance can’t be explained by global circumstances alone. Commentators cast their eyes longingly north of our border, where growth in sub-Saharan Africa makes ours look pedestrian, at best. Excuses are running out, on the one hand, while crises mount, on the other.
Eskom, on which the economy depends for the energy it needs to grow, is not only unable to keep up with demand, but finds itself in a financial hole from which Nene must somehow pluck it on Wednesday. He is set to announce the details of a rescue package, but he will have to be careful to avoid compromising the creditworthiness of the country in trying to shore up the finances of its energy company.
Somehow he must answer the question convincingly of where the money will come from, not only for Eskom, but for the R844 billion infrastructure plans for the next three years, the promised six million job opportunities by 2020, efforts to boost industrialisation, small enterprise, black economic empowerment and greater access to higher education, to name a few.
All these promises will begin to ring hollow if Nene cannot persuasively silence the doubters.
His biggest problem – the key to solving all the others – is GDP growth.
Nene’s predecessor, Pravin Gordhan, estimated in February it would be 2.7 percent this year, but the International Monetary Fund (IMF) now puts the figure at 1.4 percent – just over half Gordhan’s projection.
The government’s five-year plan – the medium-term expenditure framework – sets a growth target of 5 percent by 2019, but the IMF sees only 2.7 percent by that year.
That means projections of government revenue collection are likely to be out of kilter, requiring either more taxes or more borrowing, or both, to make ends meet.
As many critics of an exclusive focus on GDP growth have pointed out, it is not a sufficient condition for the creation of jobs and reduction of inequality.
Yet it is a necessary condition.
Growth of just 1.4 percent – should the IMF forecast prove to be accurate – would barely be keeping pace with population growth, slamming the door on attempts to cut the joblessness afflicting as many as half the country’s youth.
Poor growth also magnifies the debt pile relative to GDP, threatening to tip the country into a debt trap that it would take years to dig itself out of.
Across the spectrum, there is agreement the economy’s poor performance tops the list of challenges Nene must address.
Dr Iraj Abedian, economist and chief executive of Pan-African Capital Holdings, said if he had his way Nene would devote his entire speech to this topic.
In the absence of faster growth “the rest, really, is pretty much irrelevant”, he said.
Cosatu spokesman Patrick Craven said Nene’s speech needed to take forward, “much faster”, the government’s plans for restructuring the economy, promoting manufacturing industry and creating employment.
It should reject “conservative, cautious monetary policies, which have been putting the brakes on that programme”.
Responding to grumbling from ANC quarters about the failure of private local firms to follow the government’s lead and invest in productive capacity, Abedian said the term “investor strike” being bandied about was “an intellectual oxymoron” and, instead of blaming investors, Nene needed to ask why investment was lagging.
“Nobody is in the private sector for not investing – it’s like a politician who goes to meditate in a cave, I haven’t seen any of them,” Abedian said.
“So if there’s a lack of investment the government has to look in the mirror and say, why is investment not taking place. Is it because there’s no energy? Is it because there are no water permits, if there is no steel, is it because there is no rail capacity, no port capacity?
“And then, the mother of all, if there is no investment and people are doubtful, is it because there is uncertainty in the economy?”
Both flagged slow delivery of public infrastructure, despite massive spending in this area as a key contributor to the problem.
“The problem of infrastructure globally, and especially in South Africa is that it’s a buzzword, but if you want to do it properly and productively, you need to completely depoliticise it,” Abedian said.
“That means doing proper project design, proper project management, careful budgeting, on-budget completion, on-time completion.”
South Africa had failed on each of these scores with Eskom’s big new power stations a disastrous example.
“Medupi is, six years later, still nowhere except in political promises. Kusile we haven’t even talked about. So infrastructure, like all other slogans, doesn’t create growth, it’s the actual delivery, on time, on budget, that matters.”
The Eskom crisis was no longer just about the financial mess, but more “a question of the credibility of the management of the institution, the operational efficiency of Eskom”, Abedian said.
“Eskom is in the emergency room, flat on the stretcher.”
Craven said infrastructure investment was clearly necessary, “but it’s proceeding too slowly and we have to get to the bottom of the cause for that”.
“Is it just incompetence, is it corruption? Why are we not moving ahead faster, when it’s becoming so urgent in areas like energy and transport.”
Poor returns on spending in the public service were another concern, according to Abedian.
“The problem is that we’ve seen, year after year, now going into the second decade, that the political leadership and the top management of the public sector are unable to extract value for money from the money that is spent.”
This was not a question of corruption and abuse, but “pure, legitimate spending on teachers who do not generate competent scholars, nurses and hospital administrative people who get paid and yet the quality of public health services leaves much to be desired, policemen and commanders who get their market-related salaries, and yet the level of protection against crime and social misbehaviour gets worse, not better”.
All of this illustrated the limits of Nene’s ability to turn things around on his own.
While finance ministers all over the world tended to say the right things, Abedian said, they needed the backing of their cabinet colleagues to make a difference.
“And of course, ministers of finance have asymmetric power: they can destroy the economy, but they cannot build it.
“You borrow too much, you tax too much and you squander too much, you can certainly destroy the economy. But if you want to rebuild it there are forces outside your control that you have to bring into the ambit of influence,” Abedian said.
On Wednesday, Nene will walk this tightrope.
Saturday Star