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Pathways Through Financial Crisis: South Africa

Literature › Works

Cyrus Rustomjee (2006). Pathways Through Financial Crisis: South Africa. Global Governance 12(4), special issue 'Understanding Pathways Through Financial Crises and the Impact of the IMF'. Lynne Rienner Publishers.
Type journal article
Scope Post-1994 South African economy
Method policy analysis
Period studied 1957–2004
Regions South Africa
Themes macro fiscal finance debt, sanctions divestment, transition post apartheid, business and state, inequality poverty unemployment
Citation key rustomjee2006

Argument

The article argues that South Africa's new democratic government in 1994 inherited a quadruple crisis: macroeconomic, financial, social and infrastructural. It resolved this without borrowing from the IMF or World Bank. The author gives three explanations for non-borrowing: sovereignty, IMF stigma, and above all a reluctance to rely on external debt, rooted in the 1985 debt crisis and the 1993 repayment of the standstill debt. The government substituted a 'home-grown structural adjustment programme' of fiscal prudence, RDP financing from departmental savings, trade opening, a sovereign credit rating, central bank independence, fiscal federalism and corporatist institutions such as NEDLAC. The author, a former IMF executive director, presents this as a successful pathway that helped the country withstand later contagion crises. The article also reviews apartheid-era IMF lending and the 1985 debt crisis as background.

Evidence and method

Official and IMF statistics, SARB announcements and government policy documents (RDP white paper, budgets, ANC and MERG documents). Secondary literature on IMF lending to apartheid South Africa (Boughton, Padayachee, Seidman and Seidman, Gisselquist) and on critics of post-1994 policy (Bond, Desai). The author's own insider experience, though no interviews or archives are cited.

Findings

  • The 1985 debt crisis was caused by a maturity mismatch in private debt rather than overborrowing. (p. 3)

    In September 1985, the country experienced a debt crisis brought about by a mismatch in the maturity structure of the country's private sector debt.

  • Chase Manhattan's refusal to roll over loans, prompted by political violence and regime intransigence, triggered escalating financial sanctions. (p. 3)

    Chase Manhattan Bank refused to roll over its loans, alarmed by increasing violence and the stubborn refusal of the apartheid government to agree to any political change.

  • The Reserve Bank's forward book left a very large net open forward position at the transition. (p. 4)

    When South Africa's new government came to office in April 1994, the NOFP stood at US$16 billion

  • Capital flight in the run-up to the 1994 election was heavy. (p. 4)

    In the twenty-one month period immediately preceding the installation of the Mandela administration in April 1994, the country had witnessed a capital outflow of R20.4 billion

  • IMF lending to apartheid South Africa was politically contested; the 1976 drawing came right after Soweto. (p. 6)

    The drawing occurred barely five months after the Soweto uprising, prompting the Italian executive director at the IMF to accuse staff of rigging the Fund's statistical formulas to suit South Africa's needs.

  • The 1982 IMF standby/CFF drawing passed narrowly and was the last standby drawing. (p. 6)

    In 1982, South Africa squeaked through with just over 51 percent of the vote in securing its combined SBA and CFF drawing.

  • The author's preferred explanation for avoiding the IMF is a general aversion to external borrowing. (p. 8)

    A third, and far more compelling, argument to explain the reluctance to borrow from the IMF is the general reluctance of the post-1994 authorities to rely on any external borrowing at all

  • The SARB governor described the forward book as a surrogate for IMF or capital-market borrowing. (p. 8)

    surrogate for what would have been IMF or other international capital market borrowing.

  • The first post-apartheid budget ran a sizeable deficit, though far smaller than expected in the context of apartheid-era excesses. (p. 10)

    Against many expectations, the budget proposed a deficit of 6.6 percent of GDP

  • The 1985 moratorium had reduced the central government's foreign debt share, leaving the new government with little external debt. (p. 12)

    from a peak of 12 percent in 1985 when the moratorium was declared, to 2.1 percent at the end of June 1994.

  • Apartheid-era monetary policy relied on high real interest rates to attract capital and curb imports. (p. 14)

    The old apartheid order had maintained high real rates of interest to attract as much external capital as possible

  • The conclusion states that IMF financing was not needed to resolve the crisis. (p. 17)

    IMF financing proved unnecessary for crisis resolution.