IMF leader engages Wits students
- Wits University
South Africa needs to match its goals with strong ambition, said IMF’s First Deputy during a talk on campus.
The Wits School of Economics and Finance hosted the International Monetary Fund for students to ask questions about SA’s path for economic recovery and stability.
“The world has a growth problem.” This was the opening comment from Gita Gopinath, the First Deputy Managing Director of the International Monetary Fund (IMF), a senior leader who took part in a Q&A engagement with Wits Economics students at the end of August.
Gopinath, an economist who holds the second highest position at the IMF, was on an official visit to the country. She outlined pressing global challenges, with the IMF medium-term forecast for growth in the world sitting at just 3% – the lowest projection since 1990. This comes on the back of several contributing factors, Gopinath said, including “being hammered by Covid, to the Russian war in Ukraine and the energy crisis that followed, as well as a slowdown in China.”
The pressures of ageing populations and lower productivity have also affected the global economy, she said, adding that these conditions mean the current cycles of higher interest rates are set to continue. More tough news, she added, is that public spending will be pulled towards the additional priorities of fighting the impacts of climate change and advancing the just energy transition agenda.
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Energy supply impacts growth targets
“For South Africa, the World Bank says the country will need 4% of its GDP every year from now to 2030 to meet its climate goals – it’s an enormous cost; it’s a big chunk,” she said.
Added to this, she warned that still more needs to be done to ensure that targets set out in the Paris Agreement to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels can be achieved.
“The problem is that there is not enough ambition in terms of those goals. And there’s even a disconnect between the stated ambition and what has been done in terms of actual policy actions,” she said.
Along with the need to close this gap, Gopinath said there needs to be “policy measures and a comprehensive package”, that should include green investment and green infrastructure and carbon pricing, to give the right signals to the private sector. In turn, this can add to revenues for the government, to focus on the just energy transition as a priority.
She reiterated throughout the hour-long engagement at Wits that South Africa must address its biggest challenge of stabilising and securing its energy supply. “It’s absolutely critical to fix the energy crisis. If there is one issue that has to be addressed head on it’s the energy issue because the situation directly feeds into GDP and growth.”
In addition to infrastructural challenges, Gopinath also homed in on South Africa’s need to “rationalise much more” the money ploughed into state-owned enterprises; the outsized public sector wage bill; and to factor in lower commodity prices on revenues.
“You have to ensure that your debt is on a sustainable path otherwise, you're going to get punished by markets in terms of the interest rates. For South Africa, we're projecting that the share of revenue going into interest payments will go up from around 17% this year to 27% in 2028 – that is a very big bill,” she said.
South Africa’s 2023 Budget Review also puts gross debt stock projected to increase from R4.73 trillion in 2022/23 to R5.84 trillion in 2025/26. Debt is projected to be 73.6% of GDP in 2025/26.
Students confront our changing world
Students’ questions for Gopinath focused on climate change and the just energy transition but other issues raised included youth unemployment and the skills mismatch; the rise of AI and new automation; unequal debt burdens; the sustainability of basic income grants; food security; the reshaping of world economies in light of debates resurfacing around the dominance of the US dollar at the BRICS summit hosted in Johannesburg in August; and also questions around the changing relevance and role of a body like the IMF.
In her responses Gopinath said that while there are 25 lending programmes for the African continent, the IMF’s role is not solely focused on financing and lending but also on giving advice and technical assistance to governments to improve fiscal planning.
She added: “It is very important to us that our recommendations are tailored to the specific conditions of a country. We have an advantage of doing that because the IMF is one of the only multilateral institutions that has a mandate, and all member countries sign up to get yearly report cards on their economic performance. So, for every single one of our 190 member countries we have an economic scene, we have built-up knowledge; we are not parachuting in.”
“We don't go in and help unless a country actually wants us to step in”
The IMF was set up in 1944 towards the end of World War II. It sets its objectives as “furthering international monetary cooperation, encouraging the expansion of trade and economic growth, and discouraging policies that would harm prosperity”. In recent years the IMF – as students’ questions highlighted – has come under criticism for its “harsh conditionality” of loans, which has often filtered down to more hardships for citizens in poorer nations.
Gopinath defended the role of the IMF, saying: “We don't go in and help unless a country actually wants us to step in. We work on political assurances, which means that we believe that a recommended programme can be implemented because there is political support for it.
I think that the IMF has evolved to a point of being much more surgical … including looking at different pieces of a country’s budget and protecting things like spending that goes to the most vulnerable, so I think we are much more careful and nuanced.”
On shifting global currency dominance from the US dollar, she warned that countries or blocs looking to trade in their own currencies still need to factor in currency risk – the impact this has on longer term contracts in doing business and other constraints associated with less predictable currencies that have low liquidity and low stability.
“The best thing governments can do for getting their currencies to be used more is to have strong institutions that give strength to the currency. That gives confidence in the currency that makes it highly convertible in the market,” she said.
Gopinath concluded with a word for the next generation of economists: “Your skills are going to be needed; so please invest in them. Economics is one of those wonderful subjects where you are building technical skills, and thinking scientifically, but at the same time you're trying to solve real world problems. I think that combination is going to be needed for the foreseeable future, it’s harder for a machine to replace that.”
External media coverage
Fiscal consolidation, structural reform key to bolstering South Africa’s economic growth – IMF