The Left alternative to the IMF: A reply to RW Johnson

Patrick Bond on why SA should indeed declare force majeure on our international "odious debt"

In his “Law of the Jungle” essay criticising “alternatives, punted by the Left, to relief funding from the IMF and World Bank,” Bill Johnson is wrong, not only in repeatedly misleading readers about the character of a foreign debt policy debate that South Africa needs to engage with far more openly (as are many other countries).

This debate should be about whether, on the one hand, to borrow $5 billion in coming weeks from the International Monetary Fund and allied multilateral lenders (including the two set up since 2014 by the Brazil-Russia-India-China-SA BRICS bloc); or on the other, to conserve increasingly scarce foreign exchange by carefully declaring force majeure on repayment of a far greater amount: the international bankers’ “Odious Debt” (a legal term meaning “clearly against the interests of the population”).

Today, $185 billion in foreign debt (R3.44 trillion) is owed by the South African state, parastatals and private sector, which the SA Reserve Bank is responsible for acquiring forex to service. This is a massive increase from the $22 billion the new democracy faced in 1994. A full debt audit is needed to judge what the subsequent loans were used for, since in 2009, the foreign debt was only $79 billion. Indeed a full $100 billion of additional foreign debt was contracted during the “nine lost years” of Jacob Zuma.

How much of a weight is this on us – and our future generations? In 2009 the foreign debt/GDP ratio was 22% and today it is 67% (PW Botha was forced to default in 1985 when the same ratio was only 41%).

Of course the debate is not about defaulting on domestically-owed government debt, which no one has suggested (contrary to Johnson’s allegation). Nor is it really about onerous conditionality, either, since the IMF’s $4.2 billion potential transfer would technically come with pressure only to improve SA’s “Balance of Payments”* – although yes, critics point out that all new foreign debt adds additional pressure to toe the New York credit rating agencies’ line (one increasingly and unconscionably hostile to the vitally-needed fiscal stimulus that will protect us from the Covid-19 pandemic).

South Africa may in any case need to declare to foreign creditors a force majeure (inability to honour a contract due “an act of God”), as did Eskom this month against suppliers of both coal and renewable energy due to declining electricity demand.

It is absolutely critical to recognise that, according to the UN Conference on Trade and Development’s most recent world economy report, $6 billion in liquid assets fled South Africa between late January and mid-April, thus reducing even further the SA Reserve Bank’s foreign reserves, which were down to $45 billion in February, the last count available.

So this is the time to pose tough questions about South Africa’s dwindling forex. Who could disagree that repaying corrupt foreign lenders should take a back seat to health-related imports and other critical inputs that are not yet Proudly South African (given that the localisation of manufacturing production again called for by President Ramaphosa on April 21 is really only just beginning)? (Even toothpicks I buy at any of the main shops are still “made in China”.)

Indeed, given the scale of the economic catastrophe unfolding, it would be sensible to immediately tighten existing exchange controls, so as to both have forex space to lower interest rates (without sabotage in the form of a run on the currency), and to assure that interest, profits and dividends normally paid abroad, are in future redirected into local accounts.

Such capital controls – including what was in 2008-09 a 75% local-content requirement for institutional investors – allowed South Africa to survive the world’s last financial meltdown, as commentators typically at opposite ends of the spectrum like Johann Rupert and Jeremy Cronin could agree at the time.

British economist John Maynard Keynes put it simply: “In my view the whole management of the domestic economy depends on being free to have the appropriate rate of interest without reference to the rates prevailing elsewhere in the world. Capital controls is a corollary to this.”

For South Africa to rebuild a sufficiently strong capital control defense mechanism now would entail, at minimum, setting up a Finrand-type dual-rate payment system, to penalise firms’ outflows. Recall that the Reserve Bank implemented this system from 1985-95 to avoid a full-fledged economic meltdown.

That was the period when democracy was turbulently birthed, so the Finrand protective device was vital, given how few of the major investors controlling inflows and outflows of finance initially trusted Nelson Mandela and his team.

Questioning – not coddling – financial corruption

A substantial share of the current foreign debt’s legitimacy really should be questioned, just as the Jubilee South Africa movement led by Archbishops Desmond Tutu and Njongonkulu Ndungane condemned repayment of residual apartheid loans more than two decades ago. Mandela also expressed regret  about repaying apartheid-era debt instead of meeting society’s basic needs.

Moreover, Johnson neglected to remind readers that Eskom’s two new coal-fired mega-projects, Medupi and Kusile, were so obviously criminal as to attract U.S. Foreign Corrupt Practices Act prosecution. (Because of South African prosecutorial sloth, instead of paying its R360 million fine to the South African taxpayers and electricity consumers, in 2015 Japanese energy corporation Hitachi settled out of court with the U.S. government’s Securities and Exchange Commission, so Washington got the stash.)

The Medupi power plant was financed partly by a $3.75 billion World Bank loan, as well as by the African Development Bank and BRICS New Development Bank (NDB) between 2008-19, while Kusile’s Hitachi boilers were partly financed by the China Development Bank in 2018. Demands to default on this particular Odious Debt come from leading trade unionists, investigative journalists, governance researchers and economic justice campaigners.

Corruption-addled Medupi is the most extreme case not only because it is the single largest mega-project in South African history, but because it involved massive, openly-acknowledged bribery of the ruling party, so brazen that even Business Day advocated against the World Bank loan to Eskom. The loan was the Bank’s largest ever, granted on commercial terms during the presidency of the bizarre neoconservative Robert Zoellick.

Observers like Johnson may be tempted to downplay or even fudge such graft with loaded insinuations: “Doubtless the Bank knew there was much corruption surrounding the project but that is unfortunately all too often the case in the Third World and law and order is the responsibility of the host government, not the Bank.”

To be sure, the World Bank cared little for law and order in this case. Its so-called “Vice President-Integrity” at the time was none other than Leonard McCarthy, whose incriminating “Spy Tapes” phone calls in 2007-08 allowed prosecutors to plausibly claim him biased, and let Zuma off the hook for 783 counts of corruption. The bank’s Integrity Unit, headed by McCarthy, flippantly dismissed a 2015 complaint against Hitachi by the Democratic Alliance. And subsequent evidence of $10 billion worth of Eskom corruption, in large part implicating Bank-financed activities at Medupi, went uninvestigated by McCarthy and his successor.

There are many other areas where South Africa’s foreign debt can be questioned. The National Prosecuting Agency (NPA) is this week finally taking on Regiments for facilitating Transnet corruption. By logic the prosecution will extend to Regiment’s China Development Bank links.

Recall that in March 2013 at the BRICS Durban summit, the Beijing bank announced its intention to finance $5 billion worth of the notorious China South Rail locomotives, corruption which cost Transnet customers at least R16 billion (only a fraction of which has been repaid by the Beijing firm).

As for the BRICS NDB as an “alternative,” oops. In 2016, the NDB also agreed to a major Eskom loan arranged by Molefe. That particular deal floundered, and NDB vice president Lesley Maasdorp admitted its corrupt character to Euromoney last year (but the NDB rebooted it in 2018 anyway). Another notable NDB loan to South Africa in 2018 was to expand Transnet's Durban port-petrochemical complex, but it too was foiled by alleged corruption involving an Italian construction company and Durban’s most infamous tenderpreneur, Shauwn Mkhize.

And as I’ve found during more than a dozen enquiries, there is simply no capacity or political will within the BRICS – especially the NDB Ombuds office – to consider, much less resolve, these corruption-financing explosions.

In arguing the case for public debt default on international loans, the world’s foremost expert, Dr Eric Toussaint, is optimistic: “The call for suspension or the cancellation of debt payments has come to the fore again in the context of the global health crisis. In mid-March, a dozen former Latin American presidents launched an appeal to this effect. On 23 March, a large majority of members of the National Assembly of Ecuador called for a union of Latin American governments to suspend debt payments.”

Although Ecuadoran president Lenin Moreno – who is rather too close for comfort to Donald Trump – rejected his parliament’s recommendation, the same spirit of debt rebellion motivates some African governments, according to Toussaint: “ At the end of March, representatives of the Economic and Monetary Community of Central Africa, which includes 6 countries, asked for the cancellation of their countries’ external debt. On 4 April, Senegal’s President Macky Sall called for the cancellation of Africa’s public debt.”

There are scores of historical precedents (not limited to pandemics) when governments recognised international loans as illegitimate or simply unrepayable. Former U.S. banking regulator Bill Black remarked in 2013, “It is common for nations to default on debt when they are in a debt-trap that would lock them in deep poverty. Scores of nations that found themselves in debt-traps defaulted on their debts in modern times.”

A new wave of foreign loan defaults is inevitable, and will occur in coming months, just as happened during four prior waves in history – the 1830s, 1870s, 1930s and 1980s-90s – when at least a third of indebted countries defaulted.

Germany ranked among these scofflaws on four occasions, and Turkey eight times, Austria and Greece seven times, and Spain six times, along with even more default episodes by Latin American countries. South Africa also defaulted three times: 1985, 1989 and 1993.

The first step to a carefully managed default would be to defer repayment of unrepayable interest coming due. That’s exactly what Africa’s finance ministers will have to consider, because a month ago they called for “the waiver of all interest payments, estimated at US$44 billion for 2020, and the possible extension of the waiver to the medium term.”

But the two main sets of creditors on the continent – the Bretton Woods Institutions and Beijing – are supplying terribly inadequate debt relief. Compared to the 2000-13 era of massive IMF lending and Special Drawing Rights (SDR) issuance, very little is being done to ramp up global financial governance. Blame for this goes to the narrow geopolitical interests of Trump and Narendra Modi, whose finance ministers vetoed new SDRs at the IMF’s semi-annual convention last week.

Regardless, all the evidence suggests that it would be wise to avoid further Bretton Woods Institution encumbrances, since so many IMF and Bank interventions in South Africa dating to 1951 have done far more harm than good.

One reason for extreme caution is the high cost of any foreign loan – even at 1% in US$ – once currency depreciation is considered. The January-April decline of the Rand from R14/$ to the R18.6/$ level today would have shot the effective real Annual Percentage Rate on any foreign loan taken out then to a level higher than 80%.

Sure, the currency probably won’t fall as fast in coming months and years, but recent negatively-priced oil futures make it risky to bet on any currency backed by commodity prices. (South Africa’s exports of minerals are around half the economy’s traditional exports, and will be more in the period ahead, and in dollar terms have crashed significantly since their January peaks, with the exception of gold.)

As BRICS NDB president KV Kamath quite correctly told Russia Today in 2015, “The effective costs of borrowing in hard currencies, for any of us developing countries, appears low. It appears to be 2 to 2.5 percent. But when you add the exchange loss, the weakening of the currency over time, you end up paying 12, 13, 14 percent. So that’s your true cost.”

There are both good and bad reasons for the anti-IMF dissent that continues rising from the SA Federation of Trade Unions (albeit not the larger Congress of SA Trade Unions), Economic Freedom Fighters (EFF), Communist Party and even the Tripartite Alliance secretariat. The latter was recently “very concerned by the suggestions, conveyed through the minister of finance, that South Africa should approach the IMF or the World Bank for ‘assistance’.”

Such grumbling became so loud that last Friday, finance minister Tito Mboweni openly denied that IMF staff were “horrible people in Washington who carry stones to break people’s bones.”

Yet IMFers have carried those very stones to South Africa repeatedly, generously financing apartheid during its hours of greatest need: four massive loans before apartheid ended in 1994, to fund balance of payments crises. The first followed the 1960 Sharpeville Massacre of 69 non-violent protesters who after burning their Dompasses received police bullets in their back; the second followed suppression of the Soweto Uprising of 1976 when more than 1000 children were murdered by the police; the third followed the 1982 crash of the gold price (by 70%); and the fourth was in late 1993, and was designed to straight-jacket Mandela’s government into accepting destructive neoliberal policies.

Likewise the World Bank’s loans here from 1951-67 supported apartheid’s worst features: discriminatory power supply via its largest borrower, Eskom, that started as coal and ended up as electricity in white but never black African households; and the migrant labour system, via borrower Transnet’s rail lines stretching into bantustans, that gave multinational corporations the highest profit rates on earth during apartheid’s heydays.

Speaking of politics, consider another reason for shunning the Bretton Woods twins, as argued last year by former Business Day editor Peter Bruce: “No one should want the IMF in here [because] the political effect is frightening. The current government is immediately replaced by its own party and then, as austerity bites and the years of survival pass, the ANC shrivels and the EFF grows. An IMF bailout 100% fuels populism.”

(Right then, I’m rather populist, albeit not a Fighter; so this line doesn’t move me.)

In sum, the corrupt lending by the Bretton Woods Institutions, as confessed by the current World Bank president, is just one of the signals that their South African portfolio needs voetsek closure. Freeing up billions of dollars by repudiating incontrovertibly corrupt debt is surely a more sensible way forward than adding more to our childrens’ and future generations’ terrible, terrible burden, which is to carve out a decent life after cleaning up our incalculable economic, ecological and now epidemiological messes.

* The Balance of Payments records the “current account” of net trade in goods and services, earnings on cross-border investments, transfer payments, and the “capital account” of capital and foreign aid flows.

Patrick Bond teaches at the University of the Western Cape School of Government; his most recent co-edited book is BRICS and Resistance in Africa, from Zed Books, 2019.