The late Indian nationalist leader, Jawaharlal Nehru, once famously observed: “History is almost always written by the victors.” Taking cue, during a lecture on global financial crises and reform delivered to our class at Harvard University in 1999, Professor Jeffrey Sachs had this to add: “Financial history, it seems, is written by the creditors.” Indeed, during the late 1990s the debate regarding debt relief and poverty alleviation the creditors, namely, the G-7 countries (the Paris Club), the World Bank and the International Monetary Fund (IMF), were literally dragging debtor nations screaming and kicking to the debt resolution scheme – the Highly Indebted Poor Countries (HIPC) Initiative. In defense, debtor nations cried foul and were not short of scapegoats for their predicament, the usual ones being colonialism, neo-colonialism, imperialism, international capital, globalization, the weather, and so forth.
Incidentally, the practice of scapegoating by nations in the face of crises has got precedence that can be traced back to the beginning of the first century, notoriously with Roman Emperors. In AD 64 during the reign of Roman Emperor Nero, Christians were blamed for the great fire of Rome which the emperor had started himself. Similarly, in AD 112 Roman Emperor Trajan was advised by his lieutenants that the cause of a slump in the agricultural markets was attributable to Christians who had formed a secret society and refused to offer sacrifice to the god-emperor. Fast forward to the 21st century in South Africa today, the main scapegoats for its predicament are apartheid and “white monopoly” capital (a derogatory term for capitalism).
On attaining democracy in 1994, South Africa became a member of the IMF and the World Bank. The initial stance of the government then was to manage the economy well to stay clear of the conditionalities of the IMF/World Bank facilities. Buoyed by the democracy euphoria, the lifting of international sanctions, and capital inflows and increased foreign direct investment, the strategy worked well for some years. However, the fortunes have turned into misfortunes due to several factors including, among others, public finance mismanagement, corruption, governance problems, rising debt levels, persistent unfulfilled structural reforms, and structural constraints, such as high unemployment, skill deficits and power shortages. These misfortunes or rather challenges have reached a magnitude whereby their resolution could require external financial assistance from the IMF.
Typically, a country approaches the IMF for a bailout when it faces severe economic problems which it cannot resolve on its own. Such severe economic problems include one or more of the following:
- Fiscal crisis: When a country has persistent large budget deficits, expenditure exceeds revenues, large public debt, and inability to meet its financial obligations.
- Structural economic issues: These are deep-seated structural problems such as bad governance in institutions, corruption, labour market inflexibility, an uncompetitive economy, etc.
- Balance of payment crisis: When external payments – exports, imports and debt servicing become unsustainable and causing shortage of foreign currency reserves.
- Currency depreciation: Sharp devaluation of the national currency leading to economic instability and hence making it difficult to service foreign debt or importation of essential goods.
- High inflation: That is runaway hyperinflation. This can erode a country’s purchasing power and destabilize the economy.
South Africa is currently facing the first two problems, namely, a fiscal or debt crisis and unresolved deep-seated structural problems. If these two problems remain unresolved, they will trigger the other three problems: a balance of payment crisis, currency depreciation and high inflation.
The magnitude of the fiscal crisis is better illustrated by the rising debt burden which has risen from being R500 billion in 2006 (30% of GDP) to about R5 trillion by 2023 (72% of GDP). These published debt levels are underestimated because they do not include, firstly, the government guaranteed debt of State-Owned Enterprises (SOEs) many of which are broke and are baying for government bailout. So far Eskom has been promised that R254 billion of its debt will be taken over by the government. Secondly, they do not include billions of rands of debts owed by municipalities to electricity and water utilities for which they would want to be bailed out by the government. Thirdly, they do not include government debt for unpaid private suppliers, many of which are Small Medium Enterprises (SMEs) beneficiaries of the preferential procurement policy whose business sustainability could be now under threat. Then, there is this linkage between public debt and private debt. The ramped-up government borrowing of at least R100 billion every quarter is from banks and is crowding out private borrowing. That means private sector firms and households in distress would struggle to get bridging finance as banks prefer to take less risk government bonds which due large-scale government borrowings they are in abundance and offering good yields (thanks to their junk status). For all intents and purposes, government borrowings are already unsustainable if the foregoing factors are considered.
The resultant debt crisis is a perfect storm coming on the eve of impending elections in mid-2024 and tepid economic growth, thus making its resolution a herculean complex task. It has now morphed to create a mismatch between the balance sheets of public entities and the real value of assets. That is there are large mismatches between the debt that was used to finance assets and the value at which they were purchased using debt. The value of the infrastructure at which, for instance, Eskom and Transnet, purchased their assets is continuously decreasing due to negligent destruction, vandalism, and lack of maintenance. However, the debt at which these assets were purchased is still a liability in their balance sheet and is increasing in tandem with higher interest rates that need to be paid. If not addressed this mismatch will growth to the point that when the government finally decides to go for privatization, these assets will be for a fire sale.
Regarding deep-seated structural problems, South Africa’s response has been akin to an ostrich sticking its head in the sand as the imperative for reform has been acknowledged for decades but no actions have been taken. Bad governance in key public institutions took root unchecked during the “State Capture” era. It also corrupted Eskom leading to the existential energy crisis that is exacerbating the fiscal crisis. Labour market inflexibility, which has since the dawn of democracy has proved intractable and sacrosanct, is now like the hangman’s noose ready to exact catastrophic consequences. It has now assumed unexplained irrationality in that labour seems prepared to price itself out of employment in an environment of high employment. In the public sector, wage inflexibility is exacerbating the fiscal crisis. It has stalled the National Economic Development and Labour Council (NEDLAC) to produce a compact as labour unions won’t trade-off wage increases with job growth. Meanwhile, infrastructure decay, especially in logistics is increasing rendering the economy uncompetitive and jobless.
The question is: Can these two intertwined crises – fiscal crisis and structural issues – be addressed in the short – to medium-term? In the short term they are unlikely to be resolved for at least two main reasons. The first reason has to do with the political climate that will become increasingly volatile ahead of the 2024 general election. The ruling party will shy away from any meaningful austerity measures that may contribute to them being voted out. The second reason is that the stakeholders in NEDLAC seem to have irreconcilable differences that have prevented them from achieving a social compact on the way forward for more than a year now.
What about in the medium-term? Before sketching out the prognosis going forward, let us go back to history. In 1977, the don of Oxford, Emeritus Professor RW Johnson, published the book entitled: How Long Will South Africa Survive? At the time the book argued about the survival prospects of apartheid. Two decades later, apartheid was history. Notwithstanding its death, it still serves as a scapegoat for non-achievement of post-democracy promises. Twenty years into democracy, RW Johnson re-published the same title but with a different theme/ question, namely, “whether South African nationalism would be able to cope with the challenges of running a modern industrial economy”. After making an incisive analysis of the trajectory of government policies, he predicted that the government would mismanage the economy and would eventually approach the Bretton Woods institutions for assistance. Given the multiple crises besetting the country now, we could be closer to that point. However, it can be argued that between now and elections in mid-2024, the approach that would be taken by government to these multiple crises will be to muddle along merely treating symptoms akin to filling in potholes with sand here and there. It is the administration that will emerge victorious in the 2024 elections will be saddled with two stark choices.
The first choice will be to voluntarily undertake painful fiscal and structural reforms. Suppose the present administration (the Tripartite Alliance) emerges victorious in the 2024 elections. It will attempt to voluntarily implement reforms. Unfortunately, it may not succeed because of vested interests. Organized labour, especially in the public sector which is bloated will fiercely resist retrenchments, wage freezes or haircuts which are crucial elements of any reform programme. Socialists in the Tripartite Alliance will also fiercely resist privatization of some inefficient SOEs and will be supported by organized labour. Beneficiaries of the preferential procurement policy will sabotage reforms that substantially takes away this benefit. On the other hand, this benefit may no longer be given by a government and SOEs that are broke. It would seem a Tripartite Alliance government will struggle to implement reforms; the present impasse at NEDLAC is testimony to these. The result could be economic paralysis and potential state failure.
Suppose a new administration emerges that is not encumbered by a tripartite arrangement. Such an administration has a better chance of voluntarily effecting reforms but not without serious problems. There will still be resistance from organized labour, but its resistance will be from a defeated position. The painful reforms the new administration will try to implement are likely to cause social unrest. Again, economic paralysis and state failure cannot be ruled out in this scenario.
The second choice will be to seek a bailout from elsewhere. For the Tripartite Alliance administration, the first institution that will be approached will be the BRICS New Development Bank. However, this institution has limited resources to be able to bail out a country. In the end South Africa will have drag itself screaming to the IMF for bailout because in the absence of voluntarily implementing painful reforms, the crisis will get to a stage when the government will struggle to pay salaries and social grants and igniting social unrest consequently.
Crucially, IMF bailouts come with conditions and are subject to strict monitoring to ensure that the country implements reforms. On the positive side for South Africa, in addition to instilling fiscal discipline, is that the IMF bailout can be negotiated to include a social welfare safety net to enable the country to continue honouring social grants which are critical means of livelihood in South Africa today. According to the General Household Survey for 2022 by Stats SA, social grants were the second most important source of income (contributing 50.2%) for households after salaries (59.7%).
Going forward, South Africa’s economic and financial crisis will get worse and may not be resolved without recourse to a bailout. On a balance of probabilities, the government will have no choice other than approaching the IMF for a bailout. It is only a question of when. The earlier the better as the country faces a race against time to curb the risk of civil disorder fuelled by poverty, unemployment, and inequality.
