South Africa, COVID-19, and the question of approaching the IMF

What could be expected if South Africa requires a bailout from the International Monetary Fund? Rebone Tau analyses this question in the context of the COVID-19 outbreak.

 

South Africa has been in a social, economic, and political crisis for years, characterized by the failure of the post-liberation economic model to deliver a more socially just society. Today, the country is still the most unequal society in the world: unemployment, precarious work, and extreme levels of poverty among 50 million South Africans exist in close proximity to a middle- and upper class of seven million that can afford a European or North American lifestyle. South Africa has been described as “the Democratic Republic of Congo with a Danish island”.
The last ten years were marred by the dysfunctionality of the Zuma era and the politics of “state capture”, which diminished the capacity of the state even more to act as the principal agent of socio-economic transformation by syphoning billions of rand into private coffers. State-owned enterprises like the national electricity producer and distributor ESKOM are on the brink of collapse. Sections of the ruling ANC are accused of enabling and profiteering. A culture of impunity still reigns.
The coronavirus will amplify the economic crisis in a country already in recession and lacking capacity. While South Africa has deep financial markets and internal and external sources of funding, an IMF programme is on the table. The debate around this programme has numerous levels that must be taken into account, economic as well as political. It is a tragedy that those who make the strongest case within the ANC against and IMF/World Bank programme are those with the most to lose from transparency and financial accountability. It places the Left in a problematic position, and we will continue to monitor developments as we do in this column.
—Jan Leidecker, Director, RLS Southern Africa

 

Following a recession in the second half of 2019, South Africa’s economy was already weak before the first case of COVID-19 in the country was announced in March 2020. In his Budget speech in February, Finance Minister Tito Mboweni forecast that the economy would grow by just 0.9 percent in 2020. He also said the budget deficit will widen to 6.8 percent of GDP in 2020/21 and South Africa’s gross national debt will expand to 65.6 percent of GDP by the end of 2020/21  (1).

However, the government’s measures to curb COVID-19’s spread, especially the five-week nationwide lockdown, are expected to have a considerable impact on the economy and the government’s fiscal position. In its April Monetary Police Review, the SA Reserve Bank projected the economy to contract by up to 4 percent this year – and this was before the lockdown was extended (2). Government spending may also increase to cushion the more vulnerable members of the public. Against this backdrop, the government may have to borrow even more – and the question of approaching the International Monetary Fund (IMF) has arisen in the last several weeks.

 

 

The debate in the
ANC and its alliance

 

In late March, Mboweni told a number of media publications that the National Treasury was considering approaching the IMF and the World Bank for funding “for health purposes” if South Africa ran out of funds to tackle COVID-19 (3). Perhaps anticipating strong resistance within the ruling African National Congress (ANC), he said the government “takes no ideological position” in approaching the two institutions.

South Africa has managed to sidestep the IMF and World Bank in its borrowing needs for many years now. This is partly because of the legacy of former President Thabo Mbeki’s administration, which had much lower levels of debt and had even achieved a budget surplus by 2008. Another major reason is the prevalent ideological aversion within the ANC and its alliance – the SA Communist Party and labour federation COSATU – to the IMF and the World Bank. Most leaders of the alliance view these institutions as instruments of Western imperialism. The other problem being due to structural adjustment programs, lending conditions that promote government aid driven interventions, which constrain productive capacity, the damage that aid has done to in developing countries is well documented.

Predictably, the alliance Secretariat, led by ANC Secretary General Ace Magashule, SACP First Deputy General Secretary Solly Mapaila, and COSATU General Secretary Bheki Ntshalintshali, issued a statement on 6 April rejecting Mboweni’s suggestion of approaching the IMF and World Bank (4). They reiterated the need to safeguard South Africa’s “democratic national sovereignty, fundamental right to self-determination, and independence.” Instead, they proposed that the government should explore sources of domestic finance, including “industrial retirement funds,” and approach the BRICS’ New Development Bank (NDB).

President Cyril Ramaphosa has not yet publicly expressed a view on Mboweni’s comments. However, as ANC Deputy President in 2017, he spoke against a suggestion that state power utility Eskom should approach the IMF for funding, saying this “would sacrifice our independence in terms of the economic management of our country” (5).

 

 

Main opposition
parties’ views

 

Beyond the alliance, the radical Economic Freedom Fighters (EFF), which is South Africa’s third largest party, also criticised Mboweni’s suggestion. It warned that the IMF and World Bank’s involvement will “worsen South Africa’s socio-economic conditions” (6). However, the main opposition party, the Democratic Alliance (DA), spoke in favour of approaching the IMF, saying the government should not place “petty ideological objections above the urgent needs of the [COVID-19] relief effort (7).

 

 

Possible scenarios

 

The IMF and World Bank have already extended assistance to more than a dozen African countries through their special COVID-19 facilities, including Kenya, Ethiopia, Rwanda, Tunisia and Gabon. However, these countries do not have the same level of ideological constraints as South Africa.

National Treasury’s Director-General Dondo Mogajane indicated on 6 April that South Africa will take up a $1billion offer from the NDB for COVID-19 relief measures (8). He said South Africa had not yet taken up a $50million special facility offer from the World Bank. Given the extension of the lockdown, South Africa’s funding requirements may increase significantly and the NDB’s facility may not be adequate.

Mogajane said National Treasury is exploring all funding avenues, including “all global partners” (9). This seemingly leaves the door open for possible IMF/World Bank assistance, although it remains unlikely. Should it indeed happen, it could cause further divisions in the ANC and its alliance, which would likely be unmoved should President Ramaphosa bring up the option for discussion.

 

Rebone Tau is Project Manager for Political Affairs at the Rosa Luxemburg Stiftung Southern Africa office.

 

References:
1) treasury.gov.za/documents/National%20Budget/2020/speech/speech.pdf
2) resbank.co.za/Lists/News%20and%20Publications/Attachments/9839/Monetary%20Policy%20Review%20%E2%80%93%20April%202020.pdf
3) timeslive.co.za/news/south-africa/2020-03-29-south-africa-may-approach-the-imf-for-health-funding-mboweni/
4) mediadon.co.za/2020/04/06/statement-of-the-alliance-secretariatlets-win-the-war-against-covid-19-and-turn-around-our-economy/
5) timeslive.co.za/politics/2017-12-01-imf-loan-for-eskom-a-pact-with-devil-cyril/
6) politicsweb.co.za/politics/loans-from-imf-and-world-bank-rejected–eff
7) da.org.za/2020/04/the-anc-must-stop-squabbling-and-go-to-the-imf
8) pressreader.com/south-africa/business-day/20200406/281496458396362
9) fin24.com/Companies/Financial-Services/coronavirus-new-development-bank-loan-helps-but-we-need-more-economists-warn-20200406