An IMF loan might just be the right medicine for South Africa right now - Daily Maverick

15 April 2020 - Should South Africa go to the International Monetary Fund (IMF) to borrow money? This question has gained sudden traction during the Covid-19 lockdown through (among others) debate between RW Johnson and Peter Bruce, and, higher up, between Finance Minister Tito Mboweni and the rest of the ANC. There are three ways to think about this, two relatively well-known and one shockingly overlooked.

Gabriel Crouse

Should South Africa go to the International Monetary Fund (IMF) to borrow money? This question has gained sudden traction during the Covid-19 lockdown through (among others) debate between RW Johnson and Peter Bruce, and, higher up, between Finance Minister Tito Mboweni and the rest of the ANC. There are three ways to think about this, two relatively well-known and one shockingly overlooked.

First, there is the battle between those for whom sovereignty is the “ace” priority and those who think saving lives and livelihoods matters more.

Mboweni said, a month ago, that SA should approach the IMF to request a loan “if we run out of finance for health interventions”. His case could not be more limited or clearer – saving lives matters more than whatever compromise to our fiscal sovereignty an IMF loan would entail.

Mboweni knows and made it known that saving lives matters more than saving face.

Not so the ANC. The Tripartite Alliance issued the following response: “The Secretariat is very concerned by the suggestions, conveyed through the Minister of Finance, that South Africa should approach the IMF (or the World Bank) for ‘assistance’. The suggestion is rejected.”

Instead, the “ruling alliance” went on to say that “the Secretariat reaffirms the need to safeguard South African sovereignty, the fundamental right to self-determination, our independence, which are non-negotiable even in the midst of crisis”.

Even if it meant we could not afford life-saving medicine, the alliance effectively said it would rather let people die than go to the IMF. Never forget that.

Uncurbed, Mboweni has gone on to say that he will discuss a medical-based loan with the IMF.

At the second level, there is the debate about a bigger IMF loan with broader terms, not just to save lives from Covid-19 but to save South Africans from the poverty newly created by this crisis. Economist Dawie Roodt estimates that more than 1.1 million jobs could be lost this year, with a GDP contraction of 6%. “Poverty is the biggest killer on earth,” Roodt added at a recent media briefing with the Institute of Race Relations, and something must be done to reverse the poverty slide.

One obvious answer is to let South Africans who can work safely get back to work by breaking the artificial regulatory line between “essential” and non-essential services, as the IRR argues must be done.

Another is cutting the patronage network which, as Markdata and IRR surveys have long shown, would also be hugely popular across most of the population. But cutting patrons would infuriate the very elites in the tripartite alliance, the EFF, and in the mainstream media, who benefit from the value-grab ideological and economic status quo that led us into recession.

RW Johnson has long held that the IMF can be used as a political tool to address this exact challenge. President Cyril Ramaphosa could use it to deflect charges that he is vindictively trying to remove Zuma loyalists from the civil service and SOEs by letting the “independent” outsider temporarily call the shots on what gets liquidated, privatised or downsized, and what does not. As the headline of a Johnson piece in 2019 put it, The IMF can do what the ANC can’t.

The alternative is to free mismanaged assets ourselves. As Bruce notes, “Ramaphosa would have to put himself in harm’s way. He would have to fire two of his most powerful and most senior ministers”, namely Pravin Gordhan and Gwede Mantashe, from his Cabinet to unblock the path to reform. Under Ramaphosa, Gordhan has “clearly been a brake on reform”, notes Bruce belatedly, while Mantashe has been “abysmal” in the energy portfolio.

Could Ramaphosa survive after tossing these ministers? Yes. With more than a million South Africans set to lose their jobs, tens of thousands of businesses set to close down, middle-class investments wiped out on a JSE that has lost trillions, pensions squeezed by interest-rate cuts, and some of the richest citizens voluntarily donating billions – only the blindest ideologues could demonise “white monopoly capital” or say the rich just get richer right now. The private sector, black and white, is bleeding dry.

In addition, as unemployment benefits are boosted, the argument could not be stronger to ensure that the public sector shares the pain with everyone else.

If the Tripartite Alliance were to threaten major strikes, sabotages and shut-downs and a political coup against Ramaphosa in this crisis, the mask would have slipped off entirely, exposing a naked elite with no concern for “the people” they claim to protect.

Additionally, Ramaphosa seems to have learnt how to use a microphone, to address the nation directly, and talk sense to wide applause.

What does a long-term strategist truly dedicated to reform do when confronted by a once-in-a-lifetime pandemic? Surely he sees the opportunity to break the back of kleptocracy. If the president were truly waiting for a “big mandate” to enact reform, the combination of his delivery of the ANC to victory in 2019 and the national state of disaster in 2020 is it. It won’t ever get bigger.

Just as the IMF need not be used as a political tool to fire complacent enemies of progress, since the pandemic has given the president newfound powers, so too it might not be needed as an economic tool to deliver that progress into material reality.

Dawie Roodt points out that at this stage the South African Reserve Bank (led by my nominated person of the year in 2019, Lesetja Kganyago) has large dollar reserves. We are not close to a balance-of-payments currency crisis, in which the IMF is usually called upon to intervene.

Moreover, as Roodt points out, most of what South Africa needs to pay for to reignite the economy will be in rands, but the IMF only lends dollars. So, in that sense “we don’t need the IMF”.

But this leads me to the third argument for taking an IMF or any low-to-zero interest dollar-denominated loan. South Africa could score big.

Since late 2017 until the beginning of 2020, the rand hovered between a little less than R13 to the dollar up to a little over R15 to the dollar. Now it is trading around R18 to the dollar.

But even when it was much stronger, between R13-R15 to the dollar, a wide variety of economic analyses found it to be fundamentally undervalued, with a solid, accessible exposition, here, of why its “fair trade” value might have been closer to R10.

To be sure, the rand’s fair-trade value will now be weaker due to the downgrades in employment and GDP expectations, but how much weaker is a matter partly in government hands as I will point out shortly.

First, what about the dollar? It has been volatile, but as a “safe haven” asset in times of trouble, dollar paper assets have been trading above a five-year average performance. Once the Covid-19 pandemic abates, the Fed and the US government (whether Democrat or Republican) will hope to soften the dollar to return US exporters to competition.

In short, the rand is stunningly weak, and the dollar is unusually strong. That sets up an opportunity to make money by selling dollars to buy rands in the expectation that there will be some reversion to the norm, at which time reversing the position (turning the rands back in dollars) will realise a profit.

Now I am not a financial adviser, so I have no recommendation to private investors in this regard. But notice the fundamental difference between private investors and the government. Only the latter can redraw policy to drive growth and cut the patronage network, but both should have a powerful influence on the rand.

Here is a very rough example of how that could play out. If SA borrowed $10-billion and turned that into R180-billion, then enacted genuine policy reform which, in its side-effect of saving lives and livelihoods, strengthened the rand just as the dollar eased then the market exchange rate could return to R15 to the dollar in the next six quarters. SA would then only require R150-billion to pay back the $10-billion loan. The difference, R30-billion, would be a straight boon to the economy, just when it is most needed.

There are obstacles to this worth expanding on, but none loom so near and so dear as Gordhan and Mantashe, both of whom need to be fired if anything like real reform, with or without the IMF, is to be turned from a “long-term” theory into reality. So, again, everyone’s minds turn back to Ramaphosa, the great enigma onto whom millions projected hope that remains unrewarded.

Will he, won’t he? Only time will tell. Ramaphosa’s pre-Easter lockdown extension speech said nothing specific about how the government intends to pay for what could be hundreds of billions in expected revenue shortfall. This real problem has to be faced urgently.

As political analyst Tshepo Kgadima put it, South Africa is drinking at the “last chance saloon”. If Ramaphosa continues to swill the ideology of patronage ever after rather than accept, and dispense, the harsh medicine we need now to save this country, his legacy will be as ash to the grave. 

Gabriel Crouse is a writer and analyst at the IRR