Cape Town - The playbook is predictably familiar, as if the International Monetary Fund (IMF) enjoyed a Groundhog Day tryst with South Africa. The fund’s 2023 Article IV Consultation Report with South Africa, published on Tuesday, does not disappoint.
Even the National Treasury’s response followed the script, almost to the letter: “The National Treasury appreciates the productive engagement with the IMF and is aware of the downside risks to economic growth, and the government is working on further measures in this regard.”
International gatekeeper organisations such as the World Bank/ IMF group, the UN conurbation, the OECD, the Basel Committee for Banking Supervision and Regulation, the Bank of International Settlements, and the World Trade Organization often come up against growing push back –some justified and some ideologically gratuitous – from countries across the political and economic status spectrum.
On the one hand, right-wing Conservative MPs in the UK have scoffed at the pessimism of IMF growth, inflation and jobless forecasts about the UK economy during the past few pandemic years – a feeling of fund entitlement (some would call it hubris), which many ANC government officials would concur with pertaining to its analysis on South Africa.
On the other hand, developing countries lament the perceived hegemonic dominance of the global economy, the above gatekeeper organisations, terms of world trade and global sovereign debt, entrenched and ever-rising inequality and flows of FDI by the developed economies of the Global North.
World Bank/IMF apparatchiks would be offended by the characterisation of their organisation as a US/ EU-influenced institution. The reality is that there is a whiff of a stitch-up between the US and EU post-Breton Woods in that the head of the Bank is “traditionally” an American and that of the fund a European. The US is also the single largest equity subscriber to the group.
Nevertheless, all countries would ignore the IMF Article IV Consultation reports and the Financial Sector Action Plans (FSAP) at their peril.
They still form the go-to unintended reference point for the financial services sector and inter alia other sectors, which could impact a matrix of metrics, especially cost of finance and the pricing and yields in the global bond market, where sovereign spreads for South Africa remain higher than pre-Covid levels.
Two other important issues stand out in the relationship between the World Bank/IMF group and their member countries.
Firstly, very often, there is a disconnect and dissonance between the outlook of the IMF staff and the authorities of the very countries they are assessing.
“The (South African) authorities,” observes the Article IV report, “are somewhat more optimistic than (IMF) staff on the growth outlook, but agree that it is subject to significant uncertainty.”
The other disconnect is the lack of frankness, short of naming and shaming on political, economic and financial governance issues, especially where government leaders, ministers and heads of agencies are clearly implicated.
This is particularly so in the fight against corruption and money laundering, especially relating to the troubled, debt-ridden electricity utility Eskom, which the IMF staff have identified as a redline for economic and societal transformation.
“Eskom is not just a feeding trough for the ANC. There have been instances where there has been a link, and one can’t deny that, between institutions like Chancellor House (the ANC’s investment arm) and some of the projects that have been undertaken,” stressed Public Enterprises Minister Pravin Gordhan to Parliament’s standing committee on public accounts in May.
Not a word from the IMF staff about the need for the separation between party and state in the economy to avoid conflict of interest and corruption, which Gordhan has admitted is “inadequate.” One can understand the realpolitik implications for the IMF staff in their discourse, but they are negotiating from a position of strength.
This brings us to the second issue – that of IMF double-speak with the mixed messages in its staff report, both in form and substance. The latter assumes a carrot-and-stick approach.
“While recognising South Africa’s strong fundamentals,” the IMF executive directors noted, “the post-pandemic recovery is petering out amid several shocks, exacerbating economic and social challenges in a context of elevated poverty and inequality”.
They stressed the urgency of reforms to promote the sustained and inclusive growth needed to address these challenges.
Yet, the 2023 Article IV staff report maintains that “South Africa has weathered the most recent shocks relatively well, thanks to its strong fundamentals, but far-reaching reforms remain essential”.
“South Africa’s large external asset position, diversified economy, flexible exchange rate, deep and resilient domestic financial system with low foreign exchange (FX) vulnerabilities, and a favourable public debt composition are sources of strength, allowing the economy to absorb external shocks without recourse to FX intervention or other IPF tools.
“These features also provide a favourable base for growth, as fiscal and structural challenges continue to be tackled, including through Operation Vulindlela.”
In a nutshell, what Finance Minister Enoch Godongwana is getting right, according to the IMF, includes reducing the fiscal deficit to 4% of GDP in FY23/24 and to 3.2% of GDP by FY25/26, largely through increased tax revenues and a curb on public expenditure.
The caveat is that despite the declining fiscal deficit, public debt, says the fund, is projected to increase from 71.4% in FY22/23 to 73.6% of GDP in FY25/26 due to the government’s debt relief to Eskom, the weakening mineral revenue, wage bill pressures, and rising debt service.
Headline inflation has risen to 6.8% – above SARB’s 3-6% range, largely due to food and energy price inflation –but it is projected to settle midway between SARB’s target by end 2024.
IMF executive directors commend SARB’s commitment to price stability and endorse the pace of monetary policy normalisation, which should bring inflation back within the target.
They also welcomed the resilience of the financial sector, particularly amid the recent global financial market volatility.
Whatever expectations Godongwana has – and he has proven to be pragmatic with a good grasp of the country’s macroeconomic challenges and respected by his peers – he knows the enormity of his task.
Take, for instance, GDP growth. The IMF projects this at 0.1% in 2023 on the back of the increase in the intensity of power outages, weaker commodity prices and the prevailing global economic environment.
Annual growth is forecast at 1.5% over the medium term, but this, says the IMF, ‘‘would be too low to create enough jobs to absorb the new labour market entrants”.
Business and consumer confidence and investor sentiment remain weak.
The IMF warns that “far-reaching reforms are urgently needed to durably lift potential growth, create jobs, and reduce poverty and inequality.
Without further such reforms, income per capita is set to continue falling, while rising public debt will leave less room to deal with shocks, including climate shocks, and meet spending needs on social safety nets, health, education, and infrastructure.”
The elephant in the room, however, remains “the most urgent priority to resolve the ongoing energy crisis, which is impacting economic performance across the board”.
Other priorities include “forcefully tackling corruption and governance weaknesses”, which “would promote private sector investment, particularly in the network industries that are dominated by inefficient SOEs”.
In the medium-to-longer term, South Africa’s energy security and green transition depend critically on the participation of the private sector, which, in turn, depends on a steadfast implementation of the government’s energy transition plan and fiscal support for affected communities and workers.
Godongwana’s riposte, in general, is predictable. He knows the potential and limitations of the government’s structural reforms against the background of the looming general election in 2024.
One area we could see genuine progress is the modernisation of the government’s procurement system, with the technical help from the World Bank, IMF and the OECD.
Here the approval of his draft Public Procurement Bill, which aims to create a single framework for public procurement to eliminate fragmentation in the laws, and rooting out corruption and fraud in the process, assumes a much greater importance, subject to the usual caveat of effective implementation and enforcement.
Parker is an economist and writer based in London