Cape Town - Whe it comes to the International Monetary Fund’s (IMF) engagement with South Africa, the devil is in the details.
Beyond the headline observations by fund staff and executive directors, there remains a fundamental divergence with the South African government, perhaps not in policy options per se, but in the commitment, depth and urgency with which policies are adopted and implemented.
This divergence is most marked in the structural reforms the fund has been urging successive finance ministers to adopt and implement to put the economy on the required GDP growth and recovery trajectory.
This has been festering since before the onset of the Covid-19 pandemic and the impact of the Ukraine conflict and its global shocks, including high inflation, steep price rises in fuel and food, and the high cost-of-living, and can be backtracked to the state capture era under the Zuma administration.
While state capture has been a contributory factor, the malaise besetting the South African economy is more fundamental in nature.
The latest IMF staff meetings with South Africa, from May 26 to June 2, as part of their routine economic surveillance, is no exception: “The economy’s recovery from the pandemic should continue this year as lagging sectors (tourism, hospitality and construction) gradually catch up. Mitigating the impact from Covid-19 and recent floods and preserving well-targeted social outlays are key priorities.”
IMF speak is an art in itself!
So is the National Treasury’s efforts to put a gloss on the state of the economy and its management.
Not that Finance Minister, Enoch Godongwana, is denying the difficulties. It is the emphasis, lack of urgency and remedial policies which are at odds with the fund’s surveillance and outlook for the South African economy.
True, Godongwana inherited the situation, which has been exacerbated by the effects of the pandemic and Ukraine. These impacts too have severely affected every economy on Earth.
The difference is that Godongwana is beholden to ideological constraints relating to public sector dynamics, including cadre employment and a bloated bureaucracy, a burgeoning public debt, high debt-servicing costs, the role of the private sector; and labour laws which are considered a dampener to inward FDI (foreign direct investment).
Indeed, say the IMF staff: “There remains a large gap between encouraging policy statements and reform implementation, which undermines the confidence and growth impact of those statements.”
To his credit, Godongwana seems to be confronting some of the governing ANC’s economic orthodoxy – reigning in public sector wages; questioning why black managers tend to be associated with failure and incompetence, especially in running municipalities, of which six out of 10 are in financial distress; and acknowledging the “scourge of public debt”, which stands at R4.3 trillion, projected to rise to R5.4 trillion over the medium-term.
Our debt-servicing costs average R330 billion annually, “among the largest portion of our spending”.
But he needs to go much further and much faster. South Africa, as the IMF stresses, remains one of the most unequal societies in the world, despite its formidable growth potential.
The Treasury’s riposte was that “the IMF staff acknowledges progress made in implementing structural reforms and encourages South Africa to deepen and speed up implementation of structural reforms to address a number of obstacles”.
The IMF, in its Article IV Consultation in February, in contrast spelt out in no uncertain terms the “considerable structural weaknesses, including rigid labour markets, lack of competition in product markets, governance deficiencies, and inefficient public-sector operations that constrained (the Treasury’s) efforts”.
In addition, the economy is “marred by high market concentration, excessive regulation, weak education outcomes and ageing infrastructure. South Africa has been unable to grow at the pace necessary to reduce poverty, while public debt spiralled. The private sector, notably SMEs, lacks a business environment conducive to investment and employment creation.”
So what are the basic concerns of the IMF?
South Africa needs to urgently remove obstacles to private investment and encourage competition to reignite economic growth in the medium term.
It needs to rein in unproductive public spending and use the temporary windfall revenues due to high commodity prices to reduce borrowing needs.
The electricity and transport sectors come in for particular criticism. “Frequent load shedding is an impediment to conducting business in South Africa. Similarly, failures in the transport system limit the gains from the commodity price boom. Rising inflation hurts the purchasing power of low-income households and negatively affects the country’s competitiveness and financing costs.”
The stubborn low growth is the overriding concern because of its implications on employment, poverty and inequality caused by binding structural constraints.
For South Africa to be able to afford to tackle the above metrics, the economy will have to grow by a minimum 5% a year over several years.
True, there has been some progress in addressing the scarring effects of state capture on governance and institutions, but deterring and eradicating corruption, especially in procurement processes, remains a work in progress.
The fund welcomes the conclusion of the digital spectrum auction, and changes in the licensing of generation capacity in the energy sector.
But it stresses that these actions need to be complemented by broad-based removal of regulatory barriers to investment and competition, while resisting detrimental protectionist policies.
Improving the functioning of the labour market and the quality of education are also essential to tackle South Africa’s high structural unemployment.
The fund warns that if the operations, finances, and governance of Eskom and Transnet are not decisively and quickly improved, they “will continue relying on government support and remain a constraint to economic growth and a threat to the sustainability of the public finances”.
There is a commendation of the SA Reserve Bank’s monetary-policy tightening, which is indispensable to keep inflation in check.
But urgent actions are needed to address shortcomings identified by the US Financial Action Task Force in the areas of anti-money laundering and combating terrorism financing, which would strengthen South Africa’s role as a financial hub.
Parker is an economist and writer based in London
Cape Times