Why Zuma’s actions point to shambolic management of South Africa’s economy

epa04784387 Minister of Finance of South Africa Nhlanhla Nene during the World Economic Forum on Africa at the Cape Town International Convention Centre, South Africa, 05 June 2015. The World Economic Forum on Africa in 2015 marks 25 years of change on the continent. According to the World Economic Forum over the past fifteen years Africa has demonstrated an economic turnaround growing two to three percentage points faster than global GDP. Some of the highlight discussions at this years meeting focused on food security and agriculture and also the various options and areas of investment. EPA/NIC BOTHMA

A fine technocrat who did not wear his position on his sleeve, and known for tapping into his soft power of persuasion, Nhlanhla Nene has now been shunted out of South Africa’s National Treasury.

The man who was South Africa’s Finance Minister has been forced to make way for an obscure politician, David van Rooyen, who was on the backbenches of parliament.

There are very few things that are surprising about South African politics, in particular the president’s decisions. In 2012 a Constitutional Court judgment described a key appointment President Jacob Zuma had made in the justice ministry as “irrational”. Since then irrationality and Zuma have become synonymous.

One of the difficulties in analysing developments in South Africa is that political decision-making does not fit any neat theory in political science. The president is unpredictable. His policy thinking is woolly.

Zuma’s sense of South Africa’s political and economic vision is shrouded in destructive ambiguity. This helps him to consolidate his authority in the ruling party, but it weakens the country’s institutions.

Nene’s legacy

The decision to fire Nene as Finance Minister has shocked many. It immediately sent ripples through the financial markets.

In understanding the president’s frame of mind it is important to remember that Zuma is not an institutionalist leader whose primary concern is to defend the country’s institutions and safeguard its economic well-being. It is a leap of faith to believe that a leader who has several times shown his inability to pronounce a figure of less than R1 billion can preside over a R4 trillion economy and still appreciate its complexity.

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Nene’s appointment as finance minister in 2014 was quickly welcomed by international markets. His technocratic flare and understanding of the country’s complex economic challenges endeared him to political parties across the spectrum. Before his appointment he had been chairperson of the portfolio committee on finance and then deputy finance minister.

During his tenure he reinforced the importance of macro-economic stability and prudential fiscal management. He announced a cap on government spending and made a commitment to rein in the budget deficit which had grown to 4% of the GDP.

He spoke openly about the need to cap above-inflation wage increasesfor public sector workers, even though he later conceded to their higher demands. He continued along the path set by his predecessor Pravin Gordhan, eliminating wasteful government spending. This included spelling out limits to expenditure on flights, hotels and entertainment.

Why Nene was fired

The crux of Nene’s fall is not easy to decipher. But two factors seem to have driven the final nail into his professional coffin.

The first has to do with his hard stance on the country’s state-owned airline, South African Airways. Nene challenged the board of the state-owned airline, led by Dudu Myeni, to reconsider its intended restructuring of a fleet arrangement with Airbus. The restructuringwould have had fiscal implications with the government being forced to make good on its guarantees.

Second, it is apparent that Zuma found the National Treasury, and Nene in particular, a stumbling block to a nuclear deal the President is believed to have promised the Russians. It is estimated that the deal could cost as much as R1 trillion. Nene’s allocation of a mere R200m towards research for this programme must have been seen as an insult by Zuma’s cronies and insiders.

Zuma believes that this nuclear deal will be a magic bullet for South Africa’s urge to undertake industrialisation on a large scale, address energy deficits and create employment. He may turn out to be right on some of the outcomes, but the push to flout procurement rules and avoid accountability signifies a destruction of institutions.

The likely, and more menacing scenario, is deepening corruption. This is more so given Russia’s impoverished corporate governance culture. The nuclear deal, if implemented, could create a feeding trough on a gigantic scale for cadres and cronies while acting as a debt albatross for future generations.

At the heart of both the South African Airways saga and the nuclear deal is the failure by the country’s leadership to adhere to accountability and transparency mechanisms, especially the Public Finance Management Act, as well as to grasp the implications of irrational decision-making on the fiscus and the economy.

A bad omen for South Africa

The markets or economic actors are not familiar with Van Rooyen, Nene’s replacement at the helm of National Treasury. He clearly is someone Zuma considers malleable. The appointment itself was handled clumsily with no forewarning to the markets. This was a serious mistake given the strategic importance of National Treasury. The department stands at the nexus between the domestic economy and global markets.

What we can draw from these changes is that National Treasury has now lost its place of pride as a premier economic nerve centre for government. The cavalier manner in which Zuma has treated this crucial institution will have implications for the economy.

Investor confidence will be negatively affected, and trust in the ability of the ruling party to provide economic leadership severely eroded. Further, there will be a heightened sense of political risk, making it even harder to convince investors about South Africa’s profile as an investment destination.

The public debt, which is already hovering close to 50% of the GDP, will balloon, with implications for fiscal sustainability in the future. Delivery of quality public services, public sector wages, and ability to modernise infrastructure will suffer further.

To hope for faster economic growth and job creation under such a scenario is a pipe dream.

What will get South Africa out of the quagmire is a revolt within the ruling African National Congress to challenge Zuma to explain himself and to provide a credible plan to reform and manage the economy.

Second, the local government elections due to be held in early 2016 should be a platform to rebuke government for its shambolic management of the economy.

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