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South Africa: Big task lies ahead to reform the economy – presidential adviser Makhaya

By Xolisa Phillip, in Johannesburg
Posted on Thursday, 15 July 2021 16:25

South African President Cyril Ramaphosa gestures as he delivers the opening address during the 3rd South Africa Investment Conference in Sandton
South African President Cyril Ramaphosa at the 3rd South Africa Investment Conference at the Sandton Convention Centre, in Sandton, South Africa, November 18, 2020. REUTERS/Siphiwe Sibeko

A mammoth task lies ahead for President Cyril Ramaphosa’s administration to reform South Africa’s economy. Progress has been made, but “one shouldn’t overestimate where we are. We’ve been taking steps in the right direction. We still need to do a lot more,” says economist and businesswoman Trudi Makhaya.

Makhaya has been serving as President Ramaphosa’s economic adviser since April 2018. Between then and now, the country hosted a jobs summit as well as the South Africa Investment Conference (SAIC).

The summit was intended to rope in the private sector to help with the country’s high unemployment rate, while the SAIC was held to unlock private-sector investment, which has been on a downward trend for more than a decade.

Both events were on a give-and-take premise between the state and the private sector.  The government promised to address policy shortcomings to create optimal conditions for investment and job creation.

Out of an estimated 40 million South African adults, only 16 million are in employment, according to the World Bank’s latest South Africa Economic Update. South Africa’s emerging-market peers – including Thailand, Vietnam, Romania and Turkey – fare better.

We have a lot to offer our neighbours in terms of products. So the … [AfCFTA] is a big part of ensuring that we revitalise some of our manufacturing in machinery, industrial inputs and also even in services – professional services that can be offered to the rest of the continent.

In previous reports, the World Bank described South Africa as one of the most unequal societies on earth. Previously, the institution had cautioned about the threat posed by pervasive inequities, which are most apparent in a skewed labour market. The elevated rate of youth unemployment has been characterised not only as unsustainable but also as a powder keg for instability.

The coronavirus pandemic exacerbated pre-existing structural weaknesses. In the South Africa Economic Update, Wolfgang Fengler (World Bank lead economist), Benedicte Baduel (senior economist) and other experts assess the country’s response to the pandemic and project its 2021 economic growth prospects, as well as its medium-term growth trajectory.

The overriding sentiment is that the South African government mounted a credible response to the pandemic, and the country is forecast to post 4% growth for 2021. However, the medium term looks more uncertain. For 2022 and 2023, the World Bank predicts economic growth of 2.1% and 1.5%, respectively.

The oft-prescribed remedies for South Africa’s low growth and high unemployment rate include increasing private-sector investment and elevating economic growth. This is where economic reform is vital.

The good, bad and ugly

In the absence of any government intervention during the Covid-19 crisis, “hunger would have been much worse,” Makhaya says adding that, “we [South Africans] still have high levels of hunger than we typically would.”

“Those interventions were probably useful to ensure that we do have the green shoots in economic recovery [that] we are seeing. We’ve had a trade surplus, a current-account surplus [and we’ve] regained some of the jobs that we’ve lost, [although] not all,” says Makhaya.

The biggest issue for South Africa is what happens next year and the year thereafter. Will South Africa fall back?

Also, “we’ve seen our financial markets holding up. Our banks have not had significant incidents that would cause any worry,” she says.

In recent days, however, the balancing act of working on economic reforms – which is a long-term project – and managing a public health crisis amid a constrained global procurement environment for vaccines, brought about an added complication with the arrest of former president Jacob Zuma on contempt of court charges.

This resulted in a frenzy of looting in KwaZulu-Natal and Gauteng: shopping centres, businesses, warehouses, production facilities, factories and business premises were ransacked and some set alight. Dozens of trucks transporting goods between the two provinces were also set ablaze.

The N3 between KwaZulu-Natal and Gauteng – a key trade route in the Southern African Development Community – has been closed; activity at the Durban Port, one of the biggest and busiest on the continent, has been severely hampered. The communications regulator has also issued notice about network towers being vandalised in the two affected provinces.

Strain on the system

On that front, “we are doing all we can to ensure that the disruptions are minimised,” Makhaya says. The caveat, “of course, [is] that [this] begins with arresting criminals [and] intervening in those hotspots where we are seeing challenges.”

But “some of this has been on government’s radar for a while,” she says, citing the situation at Rio Tinto.

Two weeks ago, the mining company declared force majeure on customer contracts at Richards Bay Minerals, in northern KwaZulu-Natal, and stopped its operations because of an escalation in security breaches. “We’ve had the national and the provincial commissioners, and the security cluster more broadly, putting together a strategy to deal with that,” adds Makhaya.

“We have a model of how you can go into a community both from a stakeholder management and from a strong law enforcement, and crime detection and prevention, perspective.” But the recent flare-ups are occurring across the country, specifically in KwaZulu-Natal and Gauteng, and there is strain on the system.

“We are convening all the parties and stakeholders to [agree on] one plan and ensure that we don’t have the disruptions we are seeing at the moment,” she said. President Ramaphosa has authorised deployment of the South African National Defence Force to assist the police service in quelling the looting, violence and acts of arson.

Reform, a long-term project

As the situation in KwaZulu-Natal and Gauteng unfolds, work continues on long-term economic reforms and short-term interventions. Makhaya says the approach has been to target policies that have “been stuck or where there’s been impasses. We’ve tried to resolve these, some … have been on the books for the past 10-15 years.”

These include reforming South Africa’s ports and the release of high-demand spectrum and digital migration. Although most stakeholders agreed, for example, on the need to reform these two areas, these policies became mired in vested interests about implementation. In addition to that, there is insufficient state capacity – where government has not always been well organised and decisions have been dragged. “We are working on that,” says Makhaya.

“The point made about institutions being important for economic growth stands. It is something the President has taken to heart – that the state has to be efficient. [It must] make good decisions, [and] not be mired in vested interests,” she says.

The government says its focus is making the South African economy work better for the long term. Key areas of reforms include infrastructure, solving the country’s electricity supply problems and arresting the rapid decline of its industrial base. For the latter, the African Continental Free Trade Area (AfCFTA) agreement could be pivotal.

Makhaya says: “A lot [of work] has been put to infrastructure development. There’s a […] fund. The point of the fund is not just that government is putting money in it, but also that it will draw money from the private sector to drive certain catalytic projects.” The projects range from rural bridges, roads and maintenance on the broader road network, to bigger projects such as port revitalisation.

There is also a private-sector component to the programme. Makhaya points to automotive sector projects – that include the Ford hub in Pretoria and Mercedes-Benz in East London – and various industrial sites in KwaZulu-Natal.

Lessons from Medupi and Kusile

Infrastructure and learning from past mistakes are going to be big themes, she says. “Medupi and Kusile were also infrastructure, but that wasn’t done right,” says Makhaya. Medupi and Kusile are two coal-fired power projects that were intended to address South Africa’s electricity problems. However, both power stations have incurred billions of rands in cost overruns, have been delayed because of shoddy workmanship and been plagued by corrupt tender practices.

Ironically, in 2010, Eskom received a $3.75bn loan from the World Bank – which formed part of the overall project financing of $10.7bn – to build Medupi. Some of the funds from the World Bank loan were intended to support renewable projects in the country. Construction on Medupi began in 2007.

But considering what has happened at Kusile and Medupi, the government’s current infrastructure programme is “doing it right. Coming in at the right cost. And also going out of [our] way linking it to local communities in ensuring that they get procurement, [and] are part of the decisions that have been taken,” she says.

Equally important will be “getting our energy story right. […] It’s been one of the biggest drags on the economy,” concedes Makhaya.

There’s been reform at Eskom to make it more efficient. But the power producer will always enjoy a place of prominence in South Africa’s electricity generation. “There is no notion of trying to diminish Eskom,” Makhaya says.

AfCFTA can help the industrial base

Looking at South Africa’s industrial base, the proportion of manufacturing in the economy has fallen over the past two decades. “We need to arrest that,” says Makhaya.

The best way to do that is “to integrate ourselves better into the continent. We have a lot to offer our neighbours in terms of products. So the … [AfCFTA] is a big part of ensuring that we revitalise some of our manufacturing in machinery, industrial inputs and also even in services – professional services that can be offered to the rest of the continent,” says the economist. “Getting that productive base going is important.”

The final word from the World Bank’s Fengler is: “The biggest issue for South Africa is what happens next year and the year thereafter. Will South Africa fall back?”

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