South Africa’s Finance Minister Malusi Gigaba must be applauded for acknowledging, at a meeting this month of the ruling African National Congress, that it may be time to call for outside assistance to stabilise the economy.
Too many of his cabinet colleagues appear to be in denial about the seriousness of South Africa’s difficulties. Gigaba, in contrast, seems to realise how useful the IMF might be in restoring investor confidence and stopping the downward economic spiral.
While much of the world economy looks to be on the mend, South Africa is in trouble. Per capita income has been in decline for several years and its economy is in recession for the second time in eight years. Unemployment remains at over 27%. Meanwhile, the rand is floundering on the foreign exchange market and was hit further on 20 July when the Reserve Bank unexpectedly cut interest rates by a quarter point to 6.75%.
The country’s economic plight is attributable in part to investors’ lack of confidence in the government’s commitment to sound macroeconomic policies and to serious structural reform. Matters were not helped by President Jacob Zuma’s decision in March to fire Pravin Gordhan, the respected finance minister, or by proposals to alter the powers of the Reserve Bank.
Equally disturbing to investors are the growing divisions in the government and fears of state capture by private interest groups. It is unsurprising that two credit rating agencies have reduced South African government bonds to junk status.
In view of the favourable global economic environment, the country’s predicament is even more troubling. Interest rates have rarely been lower and capital flows to emerging markets have seldom been stronger. If South Africa’s economy is performing poorly in this environment, it will probably struggle even more when central banks start to normalise their interest rate policies and when the global economic environment becomes more challenging.
Investors, having been disappointed before, are unlikely to believe government promises about the future without concrete policy actions or external certification. This is where IMF assistance can hasten restoration of confidence.
The IMF could help South Africa in two ways. If it provided a foreign exchange loan, investors might feel more comfortable about the country’s ability to defend its battered currency. Even more importantly, it could help design a credible set of macroeconomic policies to address imbalances and structural weaknesses. Further assurance would come from the IMF acting as a respected external monitor of the country’s economic programme.
An IMF programme would not be popular politically within South Africa but the government does not appear to have any realistic alternative. The sooner Gigaba’s cabinet colleagues come to that conclusion, the better it will be for the country.
Desmond Lachman is a Resident Fellow at the American Enterprise Institute. He was formerly a Deputy Director in the International Monetary Fund’s Policy Development and Review Department.