Monday, June 24, 2024

Demonising the IMF is a not a substitute for urgent reforms

The demonisation of the International Monetary Fund (IMF) and World Bank is a favourite past time of failed leaders. It is also popular with purveyors of oppression and the failed economic policy of socialism. The leaders, many of whom unfortunately are littered all over Sub Saharan Africa plunged their economies into stagnation, poverty and misery. After so doing, they turned around, acted like petulant children and blamed the IMF for asking them to undertake structural reforms to get their economics back on track.

In some of the local stories, the IMF is referred to as a Bretton Woods institution perhaps as a sign of the extent to which it is loathed. Although the Bretton Woods moniker is used in a derogatory manner, the detractors would be pleased to learn that the much maligned Bretton Woods conference was not exclusively about freewheeling capitalism but leaned towards government intervention including capital controls.

I see that after the IMF put out a statement recently following its assessments and discussions of Botswana’s financial development with the government and other relevant authorities – otherwise known as in IMF-speak as Article IV Mission consultations – the media has been awash with stories of some leaders berating the IMF for daring to proffer recommendations to reform the Botswana economy. The IMF simply echoed in a non-scathing tone, what many of us already know regarding the structural weaknesses of our economy. Some of these weaknesses, one might add, predate the coronavirus pandemic.

Moody’s also followed suit last week with their regular diagnosis report on the state of the Botswana economy which they issue for credit rating purposes. One again the report was couched in calm language and was not designed to trigger any frenzied reaction. While the agency downgraded Botswana’s credit rating by a notch, due to a massive deterioration in fiscal buffers and the ability to absorb future shocks, it maintained a stable outlook as a vote of confidence in the country’s macro-economic prudence.

However the two international bodies raise concerns about the structural weaknesses of the economy such as size of government and reliance of diamond revenues. Moody’s refers to our outsized government and overreliance on diamonds in euphemistic terms and calls it “the government’s significant footprint in the economy and reliance on a single revenue source”. On top of that we have deficits which have hitherto been financed by drawing down on fiscal reserves leading to their depletion.

We are now at a point where we can simply not afford to spend money we do not have. Of course we can choose to behave like many of our failed leaders in the continent and print more money which would then chase few goods, trigger inflation and end up valueless and therefore not worth the paper it is written on. So we can have our Zimbabwe moment if we choose to be reckless and our buffer situation leads us ever close to a fiscal cliff.

If we find ourselves in an inflationary environment , Moody’s and other rating agencies would be left with no option but to relegate us to junk status and with that , our ability to borrow or sell bonds would be severely undermined. And unmistakably Moody’s in their Botswana report adds that “over the long term, the absence of material diversification progress risks eroding Botswana’s credit strengths. “

At the end of their reports, both institutions reflect rather indirectly and politely on what Botswana needs to do improve her economic prospects. And predictably, all roads lead to embracing free market reforms. Well, they do not call it thus but it is exactly that. The IMF refers to the need for supply side reforms but it is all there. It means rationalisation of bloated civil service, privatisation of state owned enterprises, reforms of subsidy and welfare programmes, tax cuts and apprenticeships for young people.

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