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Pathways Through Financial Crisis: South Africa

Literature › Works

Cyrus Rustomjee (2006). Pathways Through Financial Crisis: South Africa. Global Governance 12.
Type journal article
Scope Post-1994 South African economy
Method policy analysis
Period studied 1957–2004
Regions South Africa
Themes transition post apartheid, macro fiscal finance debt, sanctions divestment, business and state
Citation key rustomjee2006a

Argument

Rustomjee argues that the incoming ANC government of 1994 inherited a quadruple crisis (political, macroeconomic, financial, social-infrastructure) and chose a 'home-grown' adjustment path instead of borrowing from the IMF or World Bank. The path combined fiscal prudence, an innovative RDP financing device, minimal external debt, trade opening, a sovereign credit rating, central bank independence and corporatist institutions such as NEDLAC. He explains the non-recourse to the IMF mainly by a post-1985 aversion to external borrowing, with sovereignty and the stigma of IMF support as lesser factors. This path is credited with helping South Africa withstand later contagion shocks. The article is a policy narrative by a former IMF executive director, with brief acknowledgement of critics.

Evidence and method

Official macroeconomic statistics (GDP, saving, capital outflows, current account, debt), IMF lending history and secondary literature (Boughton, Padayachee, Seidman, Gisselquist), government budget and policy documents (RDP white paper, 1996 macro strategy, Ten Year Review), and the author's insider knowledge. No archival or survey work is cited.

Findings

  • The 1985 debt crisis stemmed from a maturity mismatch in private debt, and Chase Manhattan's refusal to roll over triggered escalating financial sanctions. (p. 2)

    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.

  • The apartheid central bank's forward-cover operations left a large net open forward position that constrained confidence in 1994. (p. 3)

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

  • Capital flight was heavy just before the transition. (p. 3)

    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

  • Saving fell sharply from the 1980s to 1994. (p. 3)

    During the 1980s, the ratio of gross domestic saving to GDP had averaged approximately 24.5 percent. However, from 1990, this ratio contracted sharply

  • IMF access for apartheid South Africa narrowed after 1976, with the last standby drawing in 1982 passing narrowly in an executive board vote. (p. 5)

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

  • The 1994 government chose not to use IMF or World Bank resources although it was eligible, with reluctance to borrow externally the most compelling reason. (p. 7)

    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 RDP was financed by levying savings from departmental budgets rather than by deficit expansion. (p. 9)

    all departments of national government were obliged to pay back, immediately after the relevant departmental appropriations had been made, an amount equivalent to approximately 2.5 percent of departmental appropriation.

  • Central government foreign debt was very low at the transition because of the post-1985 moratorium. (p. 11)

    the foreign debt of the central government had declined, as a percentage of total central government debt, from a peak of 12 percent in 1985 when the moratorium was declared, to 2.1 percent at the end of June 1994.

  • Critics argue the home-grown adjustment programme won financiers' praise but did not deliver employment or targets for housing and water. (p. 12)

    it did not contribute to employment generation in the first decade after democracy and fell short of achieving targets for the delivery of housing and water.

  • A sovereign credit rating closed the chapter on financial sanctions. (p. 13)

    it set the seal on South Africa’s reemergence in international capital markets and represented the final seal in the process of closing out financial sanctions.