The reasons the IMF approved SA’s request for a R70bn loan deserve more attention than the seemingly favourable terms on which it is being offered. The letter of intent foresees that there’ll be a rapid rise in demand for foreign exchange due to shifts in portfolio flows (and maybe a rise in import requirements). But is such a situation likely?
The June release of selected data by the Reserve Bank indicated that SA had gross dollar reserves of $52.8bn, about seven months’ import cover. This is important, as our economy relies on imports of fuel, machinery, pharmaceuticals and other goods to function. Yet as data released by the SA Revenue Service (Sars) last week showed, imports slowed 18.9% in May.
Sars said earlier this year that “the year to date trade deficit of R330m was an improvement from the R8.87bn deficit in the comparable period in 2019”. Our strong import cover and a strong trend of slowing imports (and improving terms of trade) indicate that the balance of payments rationale for the IMF loan needs stronger interrogation.
Yes, the supply chain disruptions from Covid 19 have affected the value chain and have already had regional spillovers. But if the rationale is that we need to strengthen our war chest in anticipation of a surge in imports of fuel, pharmaceuticals or something else, this should be stated explicitly. While it is prudent to assume export growth will be muted for a while, domestic demand for imports has also suffered from weak demand.
The IMF letter of intent reads that the balance of payments crisis could occur due to outward portfolio flows that might encourage economic actors (including the government) to draw down the foreign exchange reserves. Yet noted in the same document are the Reserve Bank’s actions in stabilising markets where funds have exited, without any mention of the state of existing gross national reserves, which play a similar stabilisation role.
By tying their hands with IMF conditionality … [they] increase their bargaining leverage with domestic opponents of economic reform
— James Vreeland, Princeton academic
When Pakistan went to the IMF in July 2019 it had less than two months’ import cover; Nigeria had less than four months when the IMF approved its rapid financing instrument in April 2020. So SA’s acceptance of the loan does not occur in an unprecedented balance of payments crisis. That some might foresee such a crisis in future due to Covid-19 is moot. We do not need to max out our full quota with a lender of last resort.
If the subtext of this loan is not a looming crisis, as is suggested, then what might the reason be for all the noise about the loan and its rapid approval? The loan is premised on SA’s self-acceptance of a reform path that is no different from the IMF’s own policy posture.
In effect, we’ve accustomed ourselves to the medicine even before the doctor has needed to administer it. As Princeton academic, James Vreeland suggests, we are not just overzealous patients but willing participants in a game with clear political objectives: “by tying their hands with IMF conditionality ... [they] increase their bargaining leverage with domestic opponents of economic reform”.
The IMF and some in our policy-making circles agree on “easing the regulatory burden on hiring and firing”; on zero-based budgeting; on fiscal rules to contain debt; and on seeing collective bargaining as an unnecessary constraint to long-run growth. So, rather than imposed “conditionalities”, what is in the letter of intent are agreements on the terrain to push through the contested reforms.
That is why some welcome or preach the inevitability of the loan, rather than urgently wish for it to be repaid. It clears the way for a domestic version of structural adjustment, and we are no strangers to that.
• Cawe (@aycawe), a development economist, is MD of Xesibe Holdings and hosts MetroFMTalk on Metro FM.
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