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Pathways Through Financial Crisis: South Africa

Literature › Works

Cyrus Rustomjee (2006). Pathways Through Financial Crisis: South Africa. Global Governance 12. 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, politics ideology elections
Citation key rustomjee2006b

Argument

Rustomjee argues that the ANC-led government of 1994 inherited a combined political, macroeconomic, social-infrastructure and external financial crisis from late apartheid. It chose not to borrow from the IMF or World Bank, although it was eligible for both. Its response had three parts: minimal external borrowing, a budget-neutral Reconstruction and Development Programme (RDP) financed from departmental savings, and institutional reform (central bank independence, the Financial and Fiscal Commission, NEDLAC, a sovereign credit rating, trade liberalization). The author, a former IMF executive director, argues that this fiscal prudence and low external debt built resilience to later contagion shocks. He weighs three explanations for the non-recourse to the IMF and prefers the aversion to external debt, rooted in the 1985 crisis, over sovereignty or stigma. The piece is partly a policy-insider narrative and partly a defence of the 'home-grown structural adjustment' strategy.

Evidence and method

Official budget and macro data (GDP, saving, capital outflows, net open forward position), IMF lending history, government policy documents (RDP white paper, 1994 budget, Ten Year Review), a South African Reserve Bank announcement, and secondary literature (Boughton, Padayachee, Gisselquist, Seidman and Seidman, Desai, Bond). Largely descriptive, drawing on the author's insider knowledge.

Findings

  • A September 1985 debt crisis, caused by a maturity mismatch in private debt, started the financial sanctions that cut South Africa off from capital markets. (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 Reserve Bank's net open forward position (NOFP), built up after 1985, was a large inherited liability that threatened investor confidence. (p. 3)

    When South Africa's new government came to office in April 1994, the NOFP stood at US$16 billion—a level that risked default by the central bank on its forward commitments

  • Capital flight was heavy just before the transition, which constrained financing options for the new government. (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 (20.4 billion rand).

  • Late-apartheid macro performance was a four-year recession with falling real GDP. (p. 3)

    During 1989–1993, real GDP declined by 0.5 percent, 1 percent, and 2 percent per annum, respectively.

  • Access to IMF resources was narrowing by 1982. The US Congress tied quota increases to labour reform, and the 1982 vote was very close. (p. 5)

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

  • Political pressure linked IMF quota increases to apartheid labour legislation. (p. 5)

    the US Congress resolved that any increase in quotas would be contingent on South Africa improving its apartheid-based labor legislation.

  • The author's preferred explanation for avoiding the IMF is a general reluctance to borrow externally. (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 Reserve Bank's forward-cover strategy (the NOFP) acted as a substitute for IMF or capital-market borrowing. (p. 7)

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

  • The first post-apartheid budget ran a deficit of 6.6 percent of GDP, below the previous government's excessive deficits, and financed the RDP by a 2.5 percent levy on departmental budgets. (p. 9)

    Against many expectations, the budget proposed a deficit of 6.6 percent of GDP, contrasting markedly with the excessive deficits that had been run up by the previous government

  • The RDP Fund was built from compulsory departmental savings rather than new borrowing or expansionary finance. (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.

  • The 1993 final repayment under the 1985 standstill (about US$5 billion) reinforced ANC policymakers' caution about external debt. (p. 10)

    In 1993, as the country approached its political transition, the fourth interim standstill repayment arrangement following the 1985 moratorium was finalized, resulting in the repayment of approximately US$5 billion of foreign debt

  • Critics argue the adjustment programme won financier praise but did not deliver jobs or housing and water targets. (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.