- Finance Minister Tito Mboweni was asked whether ANC leadership was on board with engagements with multilateral institutions.
- The relationship between the IMF and developing countries in particular, has been subject of much debate and academic research, with questions arising over the relationship between the lender and borrower.
- The process of negotiating an IMF loan is a tricky one, seeking to find the appropriate balance between the legitimate needs of both parties.
Sometime during a media briefing after the delivery of the June emergency budget this week, Tito Mboweni was asked the simple question of whether the ANC leadership has 'blessed' his current series of engagements with multilateral institutions.
These institutions – the IMF, the World Bank and the New Development Bank – have become important for all South Africans simply because we need money. The question around the blessing or otherwise of the ANC was most relevant because of the longstanding tensions that exist between the lending institutions and the nations that borrow from them.
The relationship between the IMF and developing countries in particular, has been subject of much debate and academic research. At the core of the problem, is the question of expectations between the lender and the borrower.
Generally, the relationship between the IMF and a borrowing country is captured through a letter of intent that is then linked to a memorandum of economic and financial policies. Such a letter is supposed to outline the planned reforms that each country commits to implementing as a condition of accessing IMF financing.
In its own explanation of the process, the IMF states that the borrowing country has the responsibility to select, design and implement policies that will make an IMF-supported programme successful.
Far less explicit in this statement, is the reality that countries only approach the IMF as a last option rather than a preferred choice. Part of the reason emanates from the tensions that may exist between the political ambitions of those in charge of a country’s finances, and the political consequences of the IMF programmes.
The nature of the conditions that find their way into the letter of intent and the memorandum of policies, are anecdotally designed to protect both parties. By insisting on the reforms as a condition of accessing funding, the IMF seeks to force the borrower to institute the painful changes that are – in the opinion of the IMF – going to lead to better long-term outcomes.
In the absence of such conditions and given the fluidity of politicians when it comes to sticking to agreements that are politically-sensitive; the funding may well end up being utilised for activities that do nothing to alter the trajectory of the borrowing nation’s public finances.
For the IMF – as an institution that lends with the expectation of a repayment – the conditions are designed to "safeguard IMF resources by ensuring that the borrowing country’s balance of payments will be strong enough to enable a repayment of the loan".
This state of affairs therefore means that the process of negotiating an IMF loan is a lengthy war of attrition seeking to find the appropriate balance between the legitimate needs of both parties. The wrong result is the one that ends up with the borrowing country signing up for the type of conditions that prioritise short-term financial benefits but result in long-term socioeconomic dilemmas.
Cutting the civil service and social expenditure may indeed generate better financial indicators in the short-term, but if they worsen an existing unemployment crisis and widen social inequalities, then the borrowing nation is worse off.
In developing countries – where the state still plays a significant role as an employer and custodian of large enterprises – the conditions are felt more acutely if they force the state to decrease its participation in the economy and the job market. In a week where Stats SA released data that indicated record unemployment rates and bleak medium-term prospects, the dilemma facing Mboweni is a classic template of these tensions.
His prediction that South Africa will soon hit record budget deficits unless things are done differently, means that a sovereign financial crisis is indeed looming large.
This sense of desperation, however, should not lead to the country replicating the mistakes of other nations. The requested funding – up to US$4.2 billion – needs to be deployed in a manner that seeks to arrest the short-term crisis and also focuses on the long-term viability of the nation. President Cyril Ramaphosa’s infrastructure summit this week may be one element that Mboweni should pay attention to.
The investment in infrastructure achieves multiple positive outcomes. Firstly, the construction sector is high-impact sector on the job market. According to Stats SA, the construction sector represents just 3.6% of nominal GDP contribution but represents 8.2% of the employment in South Africa.
This essentially means that the sector is a large-volume employer and in a country where so many people are job-idle, represents an opportunity to do something impactful at a lower unit cost. Secondly, given our well-documented infrastructure backlogs, an investment drive is overdue and will do a lot to eliminate a lot of our frustrations.
Thirdly, if done right, the investment in social and economic infrastructure can generate returns that exceed the cost of IMF loans. The challenge we have is that the track record of Tito’s blessers in sticking to commitments is patchy and peripatetic. The asking of the question on whether he has the blessing of the ANC in approaching the IMF, is really a question of whether the ANC has the appetite to stomach the difficult and contentious elements of the letter of intent that is currently being drafted.
If Mboweni returns with a letter that makes politically unpalatable demands that imply a loss of autonomy on public finances (the loss of fiscal sovereignty), that blessing may evaporate sooner than our capacity to find alternatives. And if he finds a letter that finds acceptance in the political milieu – we may just be able to navigate our way through the crisis. However, the question will always be – at what cost?
Khaya Sithole is an accountant, academic and activist who writes and Tweets on finance, economics and politics. Views expressed are his own.