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Neither debt nor growth are SA’s problems

Redge Nkosi is an executive director of Firstsource Money. Supplied

Redge Nkosi is an executive director of Firstsource Money. Supplied

Published May 11, 2022


By Redge Nkosi

SOUTH Africa’s sovereign debt and economic growth have excited considerable attention in the recent past and continues. The received narrative is that the country has a debt and growth problem.

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The narrative presumes that fiscal, monetary and related macroeconomic policies are sound, therefore, the high debt of about 80 percent to gross domestic product (GDP) and the decade and half sluggish growth of about 1 percent are a consequence of misguided spending and state entities’ inefficiencies? Can it be this simple?

In responding to a parliamentary written question from the Economic Freedom Fighters, Finance Minister Enoch Godongwana lamented that gross debt had grown to R4.3 trillion from R2.5trl in the past five years.

At a Public Service Summit in March, Godongwana had said debt service costs were expected to be close to R500 billion per year in the next fiscal year. Growth is projected to be a meagre 1.5 percent in few years to come. Debt and growth must, therefore, be our Achilles heel.

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This highly received erroneous narrative generates highly simplistic policy prescriptions from those that popularise it: cut debt (fiscally consolidate) to reduce debt, and structurally reform the economy to grow beyond the chronically stunted growth.

Careful economists have long rejected these fallacious prescriptions as false medicine for a false ailment that will only aggravate the malaise causing unnecessary economic dislocation as we now witness. It is policy witchcraft. To be sure, fiscal consolidation started a decade ago (2012), we have yet to see debt come down. And Treasury’s own estimates show that even after the wrenching structural reforms, the economy will remain comatose.

Sharing the same prescriptions with local analysts are the ever overbearing International Monetary Fund (IMF), the World Bank (WB) and the Organisation for Economic Cooperation and Development (OECD). Their unrelenting neo-colonial project of economic extraction from South Africa finds support among locals. Could these institutions be viewing us local supporters as “useful idiots” in aid of their project?

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If debt and growth are not the problems, what could possibly be the real problems that lead to poor growth and high debt outcomes?

What Treasury, Reserve Bank, market watchers and others never mention and fail to appreciate, yet are central to both poor economic growth and debt build up, is the debt policy. South Africa’s debt management policy is atrocious and one responsible for the poor multipliers so often claimed to be so low in South Africa.

To discern this policy is to fully appreciate both its macroeconomic and macro-financial design intricacies. For this, it requires the abandonment of dead and misleading theories that are well entrenched in scholarship and religiously followed by local economic noise makers. I will return to this later.

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In regard to structural reforms, South Africa should rather call this exercise as “SOE (state-owned enterprise) asset disposal and private interests’ policy”, akin to what happened to Telkom.

To substantiate a claim for the need for structural reforms with a view to higher growth/productivity and or employment, technical evidence-based economic analysis has to been done, which has never been done in South Africa or even suggested.

First, across sectors, is to determine the percentage level reform we are already at, degrees of restrictiveness of product or labour market regulations before suggesting what sort of reforms are necessary and up to what percentage level should we get to, when and why. All these must be consistent with South Africa’s level of development and developmental challenges it seeks to address.

Performing structural reforms, (institutional or regulatory) such as product or labour markets regulations can be very detailed and highly technical, with significant resistance to empirical measurement. Setting up empirical regulatory quantitative indicators as proxies for these reforms and their progress over time in the numerous domains of regulation is arduous and one not done here.

Without these and related aspects, no project on structural reforms can be deemed to have started, unless by simply lifting from foreign parties.

To rely on OECD’s concocted story, as is the case here, is to surrender to OECD’s deep political desires of not just economic extraction but ownership of the South African economy.

So, the call for structural reforms is an ideologically camouflaged call for the break-up and disposal of SOEs, introduce private players and break unionism none of which has any possibility of raising the path of potential output. That’s why the economy will remain stagnant even after reforms.

But efficiencies for SOEs can easily be achieved without the noise on reforms, just as Eskom kept lights on before this pathetic current sheltered management.

In regard to debt policy, South Africa’s fiscal and monetary operations are umbilically joined by the debt management policy it employs. South Africa itself has no debt policy of its own. It uses IMF/World Bank market-based designed guidelines.

Had market watchers and others appreciated the intricacies of this debt policy, they would be pointing to it as the problem and not the debt itself. Without this policy, South Africa’s high debt (central government and SOEs) could not just be cut by over half, but also promote growth, obviate the need to borrow abroad and avoid austerity while stabilising the economy.

The debt policy elevates, monolithically, a single monopolistic funding option, which by its design, not only is debt expensive, leaves fiscal policy unmonetised, discourages domestically generated growth, hence encouraging fiscal retrenchment (to reduce the debt to GDP ratio), while allowing only one undependable exogenous avenue for macroeconomic policy to deliver growth.

Under this debt policy therefore, the stimulative effect of fiscal policy is far smaller than otherwise, hence the low multipliers lamentations from Treasury, SA Reserve Bank, and others which they erroneously ascribe to the high debt, high tax to aggregate demand dynamic, instead of the policy regime itself.

And given the debt policy’s link to monetary policy, financialisation is encouraged which of itself sucks out the economic air necessary for the productive sector to thrive - hence a de-industrialising South Africa.

It is through this debt mechanism, along with South Africa’s exceptionally poor monetary policy that this economy is decidedly engineered to serve only the local elite and foreign interests. It is economic puerility to point to debt and growth as South Africa’s problems.

That the said macroeconomic management approach of the type used by South Africa inhibits growth was long raised by the high priest of neoliberalism, Milton Friedman, whose entry in the Encyclopaedia Britannica is categoric about it. His view was not just corroborated by recent empirical research from senior officials from the Reserve Bank of Germany (Deutsche Bundesbank) and the Bank for International Settlements, (the reserve bank of reserve banks), but also by the St Louis Federal Reserve Bank officials.

So, South Africa’s real problem is the macroeconomic regime imposed on the country by the very foreign interests that are behind the so called “structural reforms” agenda. Debt and growth are mere outcomes of the debt and related incompetent macroeconomic policies.

Unless urgently reviewed and changed, economic prospects will remain dim and the noisy hunt for other narratives as our problems will never end.

Redge Nkosi @redgenkosi is an executive director of Firstsource Money and founding executive board member of the London based Monetary Reform International.


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