There's still time to implement South Africa's reforms, says Afreximbank chief

African Review (AR): In your opinion, is a IMF bailout likely in South Africa or do you think there is still time to cut back on expenditure and find ways for growth? 

Hippolyte Fofack: There is still time to implement the reforms needed to improve public expenditure management and strengthen the foundation of macroeconomic stability for a speedy economic recovery in the most industrialised and complex economy on the continent. The pressure to accelerate the pace of economic reforms is dictated by the challenging economic environment. The most complex African economy has been reduced to rotational blackouts and load shedding to regulate access to power, a move that has been constraining the drive for productivity growth, ongoing efforts to boost investor confidence and expand industrial production and manufacturing output to raise employment opportunities and make a dent on poverty alleviation. 

Brandishing the threat of an IMF bailout further highlights the scope of challenges facing the South African government and sensationalises the problem in a world where such an option is always considered as the last resort. While such a threat is likely to put more pressure on the government the chances of it materialising are very slim. Despite all the challenges, the country still enjoys tremendous growth potentials: very deep and highly liquid financial markets; low exposure to foreign currency risks; broad-based and highly diversified economy; solid domestic investor base; highly diversified geographical destination of trade, including intra-African trade which is mitigating its exposure to adverse global shocks. 

The reforms aim to unlock these potentials and set the country on a path of robust economic growth and fiscal sustainability. But to be sure the politically toxic nature of an IMF bailout is certainly the most important consideration against it. The fact that such a move could be a political suicide is perhaps the most important deterrent. No leader would want to be remembered as the first who took such a path in a nation with a very proud history.     

AR: Therefore, do you think the South African economy has enormous potential?

HF: Energy has been a major drag on growth, preventing most industries and sectors to operate at full capacity. Despite these energy-related and other constraints the country has tremendous potential, both in terms of trade and economic growth. Regarding the former, it is the leading intra-African trading nation, accounting for about 25 per cent of total intra-regional trade (more than US$160bn according to most recent estimates). Its gains from expanding cross-border trade are likely to increase even more during the implementation of the African Continental Free Trade Area (AfCFTA) agreement in a region where industrial products and manufactured goods account for the lion’s share of cross-border trade. 

Regarding the latter, growth prospects, although South Africa’s growth forecasts for 2019 have been downgraded to about 0.7 per cent, conservative estimates put the country potential growth above 3.7 per cent. Closing the large negative output gap which reflects under-utilisation of factors, is a majority priority and has informed the battery of economic reform measures contemplated by the government as well as the new growth strategy it released last month. More than closing the rather large output gap to set the country on a strong growth footing, that strategy has the ambitious goal of tackling the triple objective of secular stagnation, rising unemployment and high inequality in a country which has one of the highest Gini coefficients in the world – 63 per cent. 

AR: How optimistic are you in regard to these reforms in making a significant change in solving the Eskom crisis?

HF: The current government was elected with the mandate to implement these reforms. The challenge with Eskom crisis is the urgency of its resolution and the decreasing political capital associated with lack of progress, an incentive on the reform path. As long as load shedding and rotational blackouts continue to be in effect progress made by Eskom management to improve the generation and distribution of power are not likely to be perceptible, especially for households and corporations confronting lower productivity. 

Yet there has been some improvement as reflected in the decreasing frequency of load shedding and improving plant maintenance which has become more systematic and is sustaining the generation of power. For instance, there has been significant improvement in plant performance and the recovery of diesel tank levels at the open cycle gas turbines. Better management of dam levels at pumped-storage schemes is another area of notable progress. At the institutional level, progress has equally been made in the process of unbundling Eskom by separating generation, transmission and distribution functions into three separate business entities. 

Although unplanned outages are still happening electricity generation is increasingly stable and risks of load shedding are decreasing. Ongoing efforts to raise power generation and diversify the sources of energy as well as the adoption of a programme of power plant maintenance should ease the transition towards more stability in power generation and access to electricity at the household and corporate level. 

AR: What about the fear of job losses from the trade unions?

HF: Public sector reforms are always very challenging because they are often associated with expenditure cuts and switching policies which have implications for income and employment − hence the source of resistance to reforms. Understandably, public sector reform will be even more difficult in a context of high unemployment rates. Although the government has taken the option to unbundle Eskom the three separate entities, which will emerge, are going to remain government-owned. This may well be the transitory measure needed to reassure trade unions and accelerate the pace of implementation of reforms. Eskom becomes the achilles’ heel that the government has to resolve to lift economic growth above the current anaemic rates and fully take advantage of growth potentials associated with the African Continental Free Trade Area (ACFTA). 

AR: There is still hope then, would you say? 

HF: As the most industrialised economy on the continent with one of the most liquid capital markets in the world, the country has tremendous potential. The government is working to address one of the most important binding constraints on its growth trajectory − access to energy which cuts across all sectors and has implications for productivity growth and output expansion. 

In addition to the Integrated Energy Plan (IEP), which is a mix of renewable and non-renewable sources of energy, the government is also part of the Southern Africa Power Pool and has been procuring an increasingly large amount of its power from the Inga Dam in the Democratic Republic of Congo. This regional approach to energy generation, transmission and distribution championed by South Africa is positioning the country as leader in the sector and could catalyse the emergence of a continental power pool that will make individual countries’ power generation industries more competitive.

Equally important, there is a strong commitment within the current administration to do what is right to set the country on a growth path. It has made the promotion of good governance the cornerstone of its new growth strategy and tackling inefficiencies in the management of public utilities and enterprises a priority. 

AR: Why is there a need for labour-intensive employment in the manufacturing sector?

HF: South Africa has one of the highest unemployment rates among the G20 countries, averaging 28 per cent nationwide in the second quarter of 2019, a slight increase from the previous one. Unemployment rates are at Great Depression era levels and the rates are even higher for those in the low-income bracket at around 35 per cent. Reversing the current trend and reducing the rate of unemployment is a priority for the government. 

In addition to the implementation of ongoing reforms to improve the business and policy environment with the view to boosting growth in the medium and long term, the country should also invest in labour-intensive industries and sectors that provide goods and services requiring large amount of labour to absorb the surplus of labour entering the labour market every year. Interestingly, the new growth strategy unveiled by the government last month aims to boost growth and create millions of jobs through a combination of long-term interventions boosting competitiveness and short-term interventions in labour-intensive industries and sectors such as infrastructure, agriculture, mining, tourism and hospitality and food services. 

AR: Why will the ACFTA be a “great catalyst” for the country?

HF: The AfCFTA which will create one of the largest free trade areas in the world − 55 countries with a combined consumer and business spending forecast to exceed US$6.7 trillion within a decade − will be a great catalyst for the most industrialised economy on the continent. Industrial products and manufactured goods dominate intra-African trade. While more than 61 per cent of Africa’s exports inside the continent are non-extractives, more than 75 per cent of Africa’s exports outside the continent are extractives. 

The rules of origin which grants preferential market access to goods manufactured in Africa will be both an industrialisation accelerator and a driver of industrial output expansion for existing industries. South Africa already accounts for more than 62 per cent of total exports within the Southern African Development Community (SADC), and the much larger continental market governed by the AfCFTA agreement will provide the opportunity for it to take advantage of economies of scale and expand its trade wings further north across the whole region. 

Afreximbank is a pan-African multilateral trade finance institution which was created in 1993 by the African Development Bank.