IMF loan goes wider than just helping the budget
“The welcome special loan facility from the International Monetary Fund (IMF) to help South Africa deal with the socio-economic impact of Covid-19 goes wider than just helping to balance the budget.”
Prof Raymond Parsons, well-known economist and academic from the NWU Business School, says that – as was widely expected – the IMF has approved a rapid financing facility (RFF) of about R70 billion to help South Africa deal with the pandemic’s socio-economic impact.
He says the recent Supplementary Budget made it unavoidable that South Africa would need recourse to additional foreign borrowing in the current economic circumstances, especially as a result of the coronavirus.
“However, it should be recalled that, whereas in many other economies the coronavirus interrupted positive growth, for South Africa it deepened an existing recession in an economy that already had very weak economic and fiscal preconditions.”
Prof Parsons says that, against this background, the IMF’s special loan facility is a cheap source of finance and formally excludes the IMF’s usual stringent structural adjustment conditions.
“Its basic purpose is indeed to be an emergency loan intended to tide South Africa over a very difficult economic and fiscal situation that was badly aggravated by Covid-19. Yet, in securing the special IMF loan, South Africa has apparently willingly made commitments that will enable it to repay the debt. To do so there must therefore now be demonstrable urgency and resolve in stabilising the policy outlook for the economy and investors.”
According to Prof Parsons, the existing policy commitments have in effect become a self-imposed “structural adjustment agenda” for South Africa against which the country’s future economic performance will be tested. “This means that the policy pledges made in the Supplementary Budget must be met steadily and that South Africa actively seeks to remedy chronic problems such as the excessive public-sector wage bill, widespread corruption, poor delivery, weak infrastructural development and dysfunctional state-owned enterprises.”
He says the timing of the IMF loan therefore again emphasises the extent to which South Africa has reached a defining fork in the road in dealing with these challenges, and that a clear sense of economic direction is now imperative. “Efficiency, stability and consistency in official decision-making are now required to begin to reduce policy uncertainty, even before the pandemic is over, so that sustained job-rich growth can eventually take over where short-term economic recovery leaves off.”
Prof Parsons says the assurance by Finance Minister Tito Mboweni that the RFF funds will indeed be dedicated to alleviating the devastating burden the pandemic has thrown on the economy is welcome. “The credibility of what has already been promised in terms of overall economic and fiscal policy is nonetheless now at stake. How South Africa will fare post-Covid-19 now depends not only on how quickly its economy and society recover from the present Covid-19 lockdown, but also on how soon it can break out of its low growth trap through a tangible commitment to implementing pro-growth structural reforms.”
According to Prof Parsons, the immediate economic recovery in South Africa broadly hinges on trends in the world economy, the efficacy of the economic support measures introduced so far, and the successful implementation of the lockdown exit strategy. He says the IMF loan helps South Africa to better manage this process. However, it also highlights the present watershed apparent in South Africa’s future economic direction. “The time bought now must therefore be used wisely and soon. Drift is the enemy of delivery. In addition, the IMF’s special loan must also eventually be repaid within three to five years.”
“That said, Finance Minister Mboweni has already warned that, if current fiscal trends persist, South Africa faces the danger of a sovereign risk debt crisis by 2023/24. Tough decisions and good overall economic steersmanship are therefore still needed to ensure that South Africa averts that outcome. The urgent implementation of pro-growth economic reforms can help South Africa to ultimately grow out of its debt, if it plays its cards well. The challenge now is to prove the sceptics wrong.”