The looming contest over South Africa’s political direction will kick off with a dispute over IMF financial support to plug a massive gap in government revenues. Opponents of IMF conditionalities favour tapping into state pension funds or stepping up central bank bond buying to make up the shortfall. With ‘battle’ lines drawn across the ruling alliance’s ideological divisions, the outcome of the contest will determine the country’s political leadership and economic policy outlook for years to come.

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The International Monetary Fund (IMF) is due to approve a USD 4.2 billion loan under the Fund’s Rapid Finance Instrument which the South African government was granted to help it fight the economic fallout of the coronavirus pandemic. The IMF will provide the bulk of funding through South Africa’s entitlement to draw down its Special Drawing Rights quota – essentially a claim to currency held by the international financial institution for its constituent members.

The loan comes with few conditions and is unlikely to be challenged by South Africa’s vocal opponents of the IMF’s structural adjustment requisites, which the country has long opposed. The Fund has sufficient rand holdings for the RFI loan to be rand-denominated (just over ZAR 70 billion), which negates the currency risk that some have cited as a reason against an IMF loan. South Africa, a founding member of the IMF in 1944, has long eschewed IMF intervention fearing loss of sovereignty. The country’s only multilateral debt is a USD 3.75 billion World Bank loan for the ongoing construction of a coal-fired power plant.

However, the funding of USD 4.2 billion from the IMF, as well as smaller concessional loans expected to be approved by the World Bank, African Development Bank, and New Development Bank, are unlikely to make up for the massive USD 17 billion tax revenue gap as a result of a nine-week economic lockdown. Before the pandemic, the government projected that debt would reach 65.6 percent of GDP this financial year with a budget deficit of 6.8 percent of GDP. The government now believes that the fiscal deficit will exceed 13 percent this year and the public debt to GDP ratio could reach 80 percent by 2021. Ratings agency Fitch projects the fiscal deficit could surge to as high as 14.4 percent of GDP, while the economy will shrink 5.5 percent this year. Other forecasts are even more dire – the South African National Treasury itself has forecast an economic contraction of as much as 16.1 percent this year.

Africa’s most industrialised economy was in bad shape even before the pandemic. The need for further IMF funding and other support from international financial institutions will become urgent as the post-lockdown economy fails to recover and the country’s structural economic weaknesses, such as failing state-owned enterprises, remain entrenched. However, a powerful faction in the governing alliance that controls many of South Africa’s key institutions is opposed to any further IMF interventions that would be conditional on broad economic reforms and thus would undermine their influential patronage base. Instead, this faction in the government and allied labour unions is seeking a drastic increase in state intervention in the economy funded by the country’s pension funds. The two opposed ideologies are set to clash in coming weeks as the government considers its funding options.

The case for IMF assistance


The South African government has announced a USD 30 billion economic and social support package, while it simultaneously faces USD 17 billion in lost tax revenue this year. Proponents of seeking IMF support argue that such funding pressures cannot be sustained without extensive international financial support, which would also anchor policy reform that attracts private creditors. The soon to be approved initial RFI facility is available to every IMF member at a 1.1 percent interest rate to be repaid over three to five years. Despite delays in the negotiations, the RFI is likely to be approved in the coming month and the loan will probably be the biggest extended so far from the facility. The interest-free Rapid Credit Facility is not available to middle-income countries like South Africa. Finance Minister Tito Mboweni wants to approach the IMF for long-term assistance in the form of an extended credit facility (ECF) or standby arrangement (SBA), which could give the country access to up to USD 18 billion.

However, the ECF and SBA programmes are typically conditional on the implementation of extensive structural reforms aimed at addressing economic challenges and raising the country’s long-term growth trajectory. A similar IMF credit facility of USD 12 billion to Egypt has been widely praised as spurring that country’s economic recovery (See EGYPT: ANOTHER STREET REVOLUTION BECOMES LESS LIKELY AS ECONOMIC INDICATORS IMPROVE). Egypt’s economy grew by almost 5.6 percent in 2019 and is forecast to still grow by nearly 2 percent this year before a projected fast recovery in 2021. In contrast, South Africa’s economy barely grew last year and was due to shrink in 2020 even before the onset of the pandemic. Mboweni is eager to pursue an IMF-monitored reform programme that would include budget cuts. On 24 June, the finance minister is due to unveil a supplementary budget that is expected to mark a major shake-up in spending and revenue forecasts.

Supporters of Mboweni in the business community argue that South Africa needs an Egypt-style economic turnaround that should increase per capita income, boost economic growth through an improving business environment, and reduce unemployment and poverty. The IMF’s last Article IV report on South Africa in January 2020 also suggests that reform of state-owned enterprises and labour markets should cause public debt to start declining in 2022. Supporters of IMF intervention predict that the country would benefit from IMF-mandated business-friendly reforms that would trigger the foreign direct investment that South Africa desperately needs to make up its funding shortfall. The IMF would, for example, guide the process of reforming the Protection of Investment Act that has been in force since 2018 and has weakened investor protections. The Fund would also mandate structural reform of state-owned enterprises, including at least a partial privatisation of electrical power generation at distressed state power utility Eskom (See SOUTH AFRICA: TWO OPPOSING VISIONS FOR STATE ENTERPRISE REFORM AS ECONOMY TEETERS).

Radical economic transformation


However, unlike Egypt, South Africa’s governing alliance is deeply fractured, and the anti-IMF faction is exceptionally influential. Mboweni is close to President Cyril Ramaphosa, but he lacks the political constituency of his policy adversaries. Trade and Industry Minister Ebrahim Patel is spearheading a concerted effort to outvote Mboweni and his allies in the cabinet. Meanwhile, Patel is promoting a massive escalation in state intervention in the economy to replace the battered private sector. Patel is calling for a revival of the country’s distressed state-owned enterprises through more bailouts and expanded financing. This would include USD 300 million to rescue struggling state carrier South African Airways, and USD 1.3 billion for defaulted state agricultural lender Land Bank, and a massive USD 15 billion in a debt-to-equity bailout of Eskom. This strategy has the hallmarks of the Zuma-era’s much-touted ‘radical economic transformation’ that was meant to replace much of the private sector with bloated parastatals.

The state interventionist faction is opposed to the conditions that come with financial assistance from international financial institutions and instead seeks to fund state-owned enterprise bailouts through aggressive money printing and tapping into state pension funds. There are growing calls for the Reserve Bank to purchase government bonds to inject the required liquidity directly into the economy. South Africa is already borrowing at more than 10 percent on 10-year bonds, making the argument for some form of ‘quantitative easing’ even stronger. However, Reserve Bank governor Lesetja Kganyago is opposed to bond purchases on the primary market, and the government cannot compel him to do so.


Therefore, Patel and his allies in the governing African National Congress (ANC) party’s Economic Transformation Committee led by Enoch Godongwana, as well as the labour unions and South African Communist Party (SACP), are looking to tap into the funds of the Public Investment Corporation (PIC), which manages more than USD 117 billion on behalf of the Government Employees Pension Fund (GEPF) and the Unemployment Insurance Fund (UIF). They are calling on the PIC to buy up more than half of Eskom’s USD 26 billion debt by converting the PIC and GEPF’s bonds in Eskom into equity (See SOUTH AFRICA: PRESIDENT CLAIMS LABOUR SUPPORTS PLAN TO BAIL OUT ELECTRICITY SECTOR).

The ANC is considering amending regulation 28 of South Africa’s Pension Funds Act so that the government can compel portions of pension investments to be invested in infrastructure. The party is also exploring ways to force the Reserve Bank to inject USD 30 billion into state-owned development finance institutions, such as the Land Bank, the Industrial Development Corporation (IDC), and the Development Bank of Southern Africa (DBSA). The ruling party also sees the coronavirus pandemic as a motivation to launch a state bank and a state pharmaceuticals company, as well as to nationalise healthcare provision through the establishment of a National Health Insurance. The cost of these schemes was considered to be unaffordable even before the onset of the outbreak and initiatives are opposed by allies of President Ramaphosa in the ANC and business community (See SOUTH AFRICA: ECONOMIC SHOCK MAY DERAIL PUBLIC SECTOR CUTS AND ESKOM REFORM).

Challenging Ramaphosa


State President Cyril Ramaphosa may be the ANC party president, but he exerts little influence over the sprawling organisation that is still heavily controlled by followers of former president Jacob Zuma, such as ANC Secretary-General Ace Magashule and Deputy President David Mabuza. The pro-Zuma faction had hoped to challenge Ramaphosa at the now-postponed ANC party National Policy Conference in a similar way that triggered the recalling by the Zuma-aligned party of president Thabo Mbeki in 2008. However, the graft tainted Magashule faces an array of investigations, while Mabuza has been marginalised in cabinet by Ramaphosa. The once-supreme deputy leader has been overshadowed by party leaders such as Health Minister Zweli Mkhize, who remains the competent face of the government’s coronavirus response, and Minister of Co-operative Government and Traditional Affairs Nkosazana Dlamini-Zuma (Zuma’s ex-wife), who holds broad executive powers within the National Coronavirus Command Council (NCCC). She has on various occasions overruled the president on matters such as the extension of a controversial tobacco ban, which Dlamini-Zuma has long championed.


Other potential challengers to Ramaphosa in the party are also emerging, including Lindiwe Sisulu who heads the department of Human Settlements, Water, and Sanitation. Sisulu has been accused of siphoning off funds to fight the pandemic to finance her political campaign to win the deputy presidency of the party (to replace Mabuza) at the ANC elective conference in 2022 as a launching pad to run for the presidency. Both Dlamini-Zuma and Mkhize challenged Ramaphosa when he became party leader in 2018, while Sisulu holds widespread name recognition as the daughter of popular ANC heroes Walter and Albertina Sisulu.

Mkhize and Dlamini-Zuma (both former medical professionals) oppose the gradual reopening of South Africa’s economy espoused by Tito Mboweni and President Ramaphosa (See SPECIAL REPORT: HOW TO REOPEN AFRICA’S ECONOMIES?). They are supported by so-labelled ‘securocrats’ such as Minister of Police Bheki Cele and Minister of Defence Nosiviwe Mapisa-Nqakula, who have often heavy-handedly enforced the lockdown imposed by the NCCC. According to human rights groups, 12 people have died as a result of the lockdown. Ramaphosa’s opponents are trying shift the blame for such abuses on the president to tarnish his reputation ahead of an eventual challenge from within his own party. Initial broad-based support for the lockdown has been replaced with widespread resentment against Ramaphosa’s government.

Allies of former president Zuma, such as the ANC Women’s League and ANC Youth League, are mobilising their support in favour of Dlamini-Zuma in anticipation of a bruising battle for control of South Africa’s ruling party and political direction. The president is seemingly powerless as the NCCC has assumed many of the governing functions that are constitutionally held by the cabinet. Meanwhile, Magashule will have the right to vet any loan from an international financial institution, which puts him in a powerful position to oppose Ramaphosa’s borrowing ambitions.


The looming battle over South Africa’s political direction will kick off with a contest over any IMF financial support, beyond the extent of the soon to be approved USD 4.2 billion RFI facility. Any subsequent ECF or RBA loan programmes would be tied to conditionalities such as already contested public payroll cuts, austerity budgets, and partial privatisations, as well as enhanced transparency and investor protections. Such conditions are anathema to much of the leadership of the ruling ANC party which fears loss of sovereignty and a dilution of its patronage networks that were expanded under former president Jacob Zuma. Opponents of current President Cyril Ramaphosa are playing out the ideological divisions in the governing alliance in order to mobilise support for a challenge against the embattled president. Ramaphosa has pushed back the timeline for a potential leadership contest this year, yet he faces an array of political opponents within the ANC, labour unions, activists, and even the usually favourable business community.

The government’s handling of the coronavirus outbreak in the country will be a critical indicator for its stability. The current toll of the pandemic is nearly 1,500 deaths and over 70,000 infections. The infection rates are doubling every 12 days. Although testing capacity is one of the best in Africa, at almost 18,000 tests per one million of the population, there is an estimated testing backlog of several hundred thousand. In infection ‘hotspots’, such as the Western Cape (mostly Cape Town), and soon also Gauteng (Johannesburg and Pretoria) and the Eastern Cape, there is a growing possibility of further lockdown measures that would curtail economic activity and individual freedoms, spurring fresh unrest and antagonism towards the government. A peak in infections is only expected between July and September, while medical experts warn the coronavirus will remain a threat to the country until at least the end of 2021. This scenario indicates that further economic disruption should be expected well into next year.

Finance Minister Mboweni now faces a stark choice ahead of his emergency budget on 24 June. In order to plug its revenue gap and fund economic stimulus, the government is fast running out of options. At 10 percent interest, local bond buying is no longer sustainable, while the central bank is unwilling to initiate quantitative easing as is common in more developed economies. There remains an option of tapping into state pension funds or seeking multilateral assistance. The prospect of either option comes with political and socio-economic implications that will determine South Africa’s future for years to come, perhaps well beyond the pandemic.