Uncommon Sense from the IMF?

An article written by Ian Kilbride

The International Monetary Fund has a mixed record of global and macro-economic forecasting. It is notoriously poor at anticipating recessions. For example, after the 2008 collapse of Lehman Brothers the IMF still forecast global growth of 3,0% for 2009, with just seven countries entering recession. The unforgettable reality was that 91 countries went into recession and, rather than expanding, global growth in fact contracted by 0,1%. Far more recently the IMF forecast that the current wave of global inflation would be temporary, but was forced to publish an explanatory apology in March 2023 for getting it so wrong. In its defence, global economic forecasting is akin to predicting an oncoming speed limit by looking in the rear-view mirror. So, like all economic forecasts, the IMF’s should be viewed with circumspection perhaps rather than scepticism.

The IMF publishes two such reports annually and overarching theme of ‘Spring 2023’ report makes for sobering reading, at least in the short term. At the global level the IMF forecasts overall economic growth to bottom out at 2,8% this year, while rising modestly to 3,0% in 2024. This aggregate figure disguises the fact that developing and emerging economies are showing more rapid rates of economic recovery (particularly India for example), compared to developed economies with the post-Brexit UK now becoming once again the ‘sick man of Europe’, with an economic contraction of 0,4% forecast for the year, before recovering to 2.0% in 2024.

Somewhat better news is that global inflation, the nemesis of central bankers across the word, not just Pretoria, is expected to recede from the current 8,7% to 7,0% by year end and decline further to 4,9% in 2024. Notably, and as we are seeing in South Africa, the rate of decline is slower than previously forecast.

Yet, the just-released International Monetary Fund’s (IMF) World Economic Outlook report, ‘A Rocky Recovery’ seems to have taken some local economists and commentators by surprise. It shouldn’t have. The IMF concluded a mission visit to South Africa in March this year during which it met with leaders of government, treasury, the Reserve Bank and senior representatives of the private sector. Not only does the IMF have access to all relevant government and private sector data, it conducts a thorough review of the budgeting process, the budget book, monetary and fiscal policy and conducts longitudinal analysis, including variance between successive budget forecasts and medium-term budget policy statements. While not perfect, IMF country reviews are independent and with the support of the local IMF office, are conducted by a highly-experienced team that, given the overarching mission and purpose of the Bretton Woods institution, seeks to provide constructive policy advice.

Among others, two interesting issues emerge from the IMF mission to South Africa and find expression in the bigger World Economic Outlook. The first is the degree of variance between the macro-economic forecasts published by the South African government and those of the IMF and the second is the common-sense analysis and recommendations emerging from the Fund’s March 2023 mission report.

An examination of the variance between government macro-economic forecasts and those of the IMF ranges from perplexing to alarming and they can’t both be right. While the IMF and Reserve Bank are aligned on their growth forecasts for 2023 being 0,1% and 0,2% respectively, Minister of Finance Godongwana forecast that government debt would stabilise at 73,6% of GDP by 2025/26, the IMF sees this reaching 80% by 2026, which would be a record level in the post-apartheid period. On another key metric, the Minister of Finance projected the fiscal deficit to decline from the current 4,2% of GDP to 3,2% in 2025/26. The IMF forecasts the trend to point to the opposite direction, seeing a rise from 5,9% in 2023 to 6,3% in 2026. From a local perspective and as a businessman committed to the future of this country, one can only hope that the IMF has it wrong.

But there are areas in which I know the IMF has go it right and that is its recommendations for economic policy reform. While praising government for its sound fiscal and monetary policy, along with a number of the key reforms implemented by the Ramaphosa administration, the IMF lists a series of common-sense reforms that hold the potential to unlock the economy and place it on a more sustainable path of growth. A number of them are worth repeating here. (1) Take all necessary steps to lift the country out of its FATF grey listed status as soon as possible. The longer the country remains grey listed, the more difficult it will be to restore its compliant status. (2) Restore energy security and prevent the further accumulation of municipal arrears. Relatedly, the IMF urges South Africa to implement its just energy transition. Notably, this remains a key arm wrestle between government departments and interested stakeholders.  (3) Alleviate transport and logistics blockages and bottlenecks. (4) Rationalise state-owned enterprises. (5) Tackle high structural employment. (6) Promote good governance.

Six blinding glimpses of the obvious (BGOs) and all far easier said than done, and of course, some of the IMF to do list simply cannot be tackled in a generation. But if we are to successfully bring down high structural unemployment, for example, over the next generation, we have to start getting the very basics right and now. Whether or not the IMF has got it sums right is an open question, that it has its prescriptions right is less in dispute.