SA’s IMF loan carries echoes of Britain in 1976

SA’s IMF loan carries echoes of Britain in 1976

On September 28 1976 British prime minister James Callaghan made a momentous speech to the Labour party annual conference in the Lancashire seaside town of Blackpool. It was later described as the “first monetarist speech” by a British prime minister, albeit a socialist.

Callaghan advised his party delegates: “Britain faces its most dangerous crisis since the war … We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists.”

Callaghan rose to prominence due to his close association with the trade unions, first as an official and later in cabinet as the staunchest advocate of union rights and interests. In 1969, when then prime minister Harold Wilson and secretary of state for employment Barbara Castle produced “In Place of Strife”, a white paper on curbing the excessive powers of the trade unions, it was Callaghan who led the successful opposition to its enactment.

His proximity to the unions — the most important power bloc in Labour — helped elect him party leader and prime minister in 1976. Yet in the same year he now led a country in desperate economic turmoil — in part caused by runaway inflation spurred by out-of-control wage agreements won by aggressive unions.
The other main Labour figure of that year was its bruiser chancellor of the exchequer, Denis Healey. His arrival at the conference was delayed because the collapse in confidence in sterling caused him and treasury officials to apply for a $3.9bn IMF loan, or “standby arrangement” (SBA). At the time it was the largest to have been considered by the body.

Callaghan and Healey both knew that the Left wing of their party — and most of its delegates — would find this anathema. Not just “the loss of sovereignty” argument, of which much is heard today, but the stringent conditions attached to the loan. These would emerge a month after the conference and would require the hitherto free-splurging government to cut $2.5bn in government spending to obtain the loan.

But Callaghan and Healey knew this would be the requirement, so the prime minister used his conference speech to achieve what two analysts, Colin Thain and Maurice Wright, later termed “multiple targets” — to appease the financial markets, frighten the Labour party into accepting the need for tough measures, and make the right impression on the US treasury secretary, whose support would be vital for the UK to obtain IMF support.

Callaghan hit two of his three targets. But the one-time political darling of the unions was repudiated by his own party, where trade unions controlled most of the votes. Resolutions were passed by huge majorities mandating the government to “nationalise four major banks and most of the insurance industry”. Healey called the resolution an “albatross” and Callaghan simply announced that “the government would disregard the vote”. It duly did.

Of course, the unions’ revenge came two years later with the 1978-1979 “winter of discontent”, where untrammeled union power allowed mass strikes to cripple the country and torpedo Callaghan’s re-election. Novice Conservative prime minister Margaret Thatcher then intensified the monetarist approach started under her Labour predecessor, but stripped the unions of most of their power. The rest is history.

A far more recent page in our own turbulent financial history was written here on the evening of July 27 this year, when the ANC government received IMF approval for an unprecedented $4.3bn emergency loan in the form of a “rapid financing instrument” (RFI). Between the two acronyms — SBA (Britain in 1976) and RFI (SA in 2020) — lie important differences.

Britain was obliged to don the hair shirt of extreme stringency. In his emergency mini-budget of December 15 1976, Healey rammed through extreme cuts in public spending, which led to the then Labour-supporting Sun newspaper headlining this loss of sovereignty “Britain’s Shame”. But while Healey had pushed against some of the IMF demands and lost, he later termed it a “Pyrrhic defeat”. It forced him into adopting the proto-Thatcherite stringency “he wanted to adopt anyway”, according to the Financial Times.

SA’s RFI from the IMF does not have too many quos for the quids received. The letter of intent provided by the Treasury to the IMF uses such permissive, rather than peremptory, language that the proverbial coach and horses could charge through it. The Treasury advised the IMF, for example, “we are open to introducing a debt ceiling” on the runaway deficit. Then there is the regurgitation that “our support to SOEs will be strictly conditional on meeting main performance indicators to improve their operational and financial health …”. If you feel you have read this all before, you have indeed. It is about as specific as the pledge to “mobilise funding for SAA”.

In a recent paper by the Brenthurst Foundation gloomily but aptly entitled “Brink of a Breakdown”, authors Greg Mills and Ray Hartley remind weary South Africans of the government’s “pathological unwillingness to make tough choices”. And if there is the remotest chance of the Treasury’s letter of intent being realised, some tough choices will have to be made, all of which will require a reckoning with the unions. The evidence to date, especially with the bended-knee approach by President Cyril Ramaphosa to Cosatu during the coronavirus pandemic, is not exactly reassuring.

Still, according to Intellidex economist Peter Attard Montalto, the IMF loan “is an important Rubicon moment for SA, and that deserves reflection”. Having thoroughly reflected on it, Attard Montalto advises that the current RFI will simply be insufficient impetus, containing too many carrots and not enough sticks, for substantive reforms to happen. That requires, in his view, the whole nine yards of the 1976 British IMF SBA loan — that is, strict conditionality. He predicts this will happen anyway “within the next two to three years”.

The one thread between the two distressed sovereigns — Britain in 1976 and SA in 2020 — and their need for an IMF bailout is this: hidden behind the esoterica of both debt instruments is one plain political fact. The appeal to an outside body and receipt of its funds provides an alibi for making deeply unpopular decisions and being able to blame external conditions for them. That is the real fear of the ANC economic Talibans with their shouts about “loss of sovereignty”.

When Caesar crossed the real river Rubicon from Gaul to Rome, he famously uttered “the die is cast”. Maybe ours has been too.

Leon, a former leader of the opposition, now chairs Resolve Communications.
@TonyLeonSA.

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By |2020-07-31T06:09:53+00:00July 31st, 2020|Opinion|0 Comments

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