04 AUGUST 2020
IMF loan goes wider than just helping to balance the budget
by Raymond Parsons: Professor at the NWU School of Business & Governance and a former special policy adviser to Busa.
As widely expected, the International Monetary Fund (IMF) has approved a Rapid Financing Facility (RFF) of about R70 billion to help SA deal with the socio-economic impact of Covid-19. The recent supplementary budget made it unavoidable that SA would need recourse to additional foreign borrowing in current economic circumstances, especially as a result of the coronavirus. It should be recalled though that, whereas many other economies the coronavirus interrupted positive growth, for SA it deepened an existing recession, in an economy that already had very weak economic and fiscal pre-conditions.
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 SA over a very difficult economic and fiscal situation badly aggravated by Covid-19. Yet in securing the special IMF loan SA has apparently willingly made commitments which 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.
The existing policy commitments have therefore in effect become a self-imposed ‘structural adjustment agenda’ for SA and against which the country’s future economic performance will be tested. This means that the policy pledges made in the supplementary budget must steadily be met and that SA actively seeks to remedy chronic problems such as the excessive public sector wage bill, widespread corruption, poor delivery, weak infrastructural development and dysfunctional stateowned enterprises.
The timing of the IMF loan therefore again emphasises the extent to which SA 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 is 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.
The assurance by Finance Minister Tito Mboweni that the RFF funds will indeed be dedicated to alleviating the devastating burden which 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 SA 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.
The immediate economic recovery in SA broadly hinges on trends in the world economy, the efficacy of the economic support measures taken so far, and the successful implementation of the lockdown exit strategy. The IMF loan helps SA to better manage this process. But it also highlights the present watershed apparent in SA’s future economic direction. Hence the time now bought must be used wisely and soon. Drift is the enemy of delivery. And additionally the IMF’s special loan must also eventually be repaid within 3 to 5 years.
That said, Finance Minister Mboweni has already warned that, if current fiscal trends persist, SA 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 SA averts that outcome. The urgent implementation of pro-growth economic reforms can help SA to ultimately ‘grow out of its debt’, if it plays its cards well. The challenge now is to prove the sceptics wrong.