Is Ramaphosa’s plan another false dawn?

President Cyril Ramaphosa’s economic recovery plan has received a mostly lukewarm reception from economists and the markets, even though it contains many positive policy reforms that, if urgently implemented, would help boost SA’s growth rate.

The problem is that most of these reforms are promises that have been recycled endlessly over the past few years but never implemented. Many featured in Ramaphosa’s last two state of the nation addresses and in finance minister Tito Mboweni’s growth document, released a year ago. But their execution has been hamstrung by political contestation and state incapacity.

Policy inertia has been SA’s default mode for so long that it requires a great leap of faith for citizens to believe that the state, which bungled many aspects of the coronavirus lockdown, is suddenly going to spring into action in the way envisaged by Ramaphosa.

"Our recovery will be propelled by swift reforms to unleash the potential of the economy and supported by an efficient state that is committed to clean governance," Ramaphosa said in a speech outlining the economic reconstruction & recovery plan (ERRP) last week.

Given the state’s track record of nondelivery and brazen acts of corruption, the country’s scepticism is palpable.

And yet, some things have changed for the better, suggesting that the newly minted ERRP has a better shot at being implemented than previous growth plans.

First, it has firm presidential backing — something that was entirely absent when then president Jacob Zuma was tasked with implementing the National Development Plan (NDP) in 2012. Dedicated capacity is being created in the presidency to drive the plan, including through a joint initiative with the National Treasury called Operation Vulindlela. Time will tell whether this will be enough to counter the drag of less able departments.

There is substantial consensus across business and labour that the plan contains the essential steps to get growth going, coupled with heightened impatience at previous government foot-dragging. In an anxiety-ridden statement, Business Unity SA (Busa) says SA has "run out of time" and it will be pushing hard to ensure the plan is carried out.

Some of the preparatory work has already been done, especially in the area of infrastructure, where Infrastructure SA, headed by Kgosientsho Ramokgopa, together with the Infrastructure Fund (IF) run by the Development Bank of Southern Africa, are some way down the road in identifying bankable projects and securing the private sector skills and buy-in to deliver a big, joint infrastructure push.

Two months ago, the FM canvassed 10 economists on SA’s prospects for reform. By far the majority said the country would be lucky to implement 20% of the structural economic reforms required to raise the growth rate and that the debt:GDP ratio will most likely burst through the 100% barrier in the next few years.

Those who were deeply sceptical remain so. Among them is Intellidex’s Peter Attard Montalto, who believes that while the ERRP is "broadly OK" on general policy reform, and indeed contains many positive elements, it still fails to clear the bar because it lacks convincing detail on how implementation will be achieved now, when it didn’t happen previously.

SA understands the issues, is shifting in the right direction, and putting clear building blocks in place for a turnaround
— Arthur Kamp

This is perhaps the weakest part of the plan. At least half of the NDP was dedicated to institutional reform to improve accountability and service delivery because its authors, including Ramaphosa, were worried that the state was incapable of implementing it.

Among other things, the NDP called for an end to the ANC’s disastrous cadre deployment policy and for performance agreements with cabinet ministers to be made public. There are no such commitments in the ERRP.

It also excludes a key recommendation from the underlying National Economic Development & Labour Council (Nedlac) economic recovery plan — that the ban on public servants doing business with the state be extended to politically exposed persons.

Other tough political trade-offs in the Nedlac document didn’t make it into Ramaphosa’s speech, including the commitment to review SA’s labour market arrangements. This is particularly galling, given the ERRP’s assertion that there will be "a big focus" on SMMEs.

At a minimum, the ERRP should halt the automatic extension to small firms of collective wage agreements struck between big business and big unions, as these impede SMMEs and price low-skilled, entry-level workers out of the market.

This means that even if the ERRP succeeds, the economy will not become more labour-intensive and growth will not be the result of a boom in small firms.

Sanlam Investments economist Arthur Kamp is more sanguine. He believes the ERRP is "broadly realistic" in that many of the proposed reforms on energy, telecommunications and regulatory red tape are doable.

"If we just got telecoms and energy reform right it would be a big step in the right direction and would improve sentiment and the ability of business to get things done," he says.

He believes the R500bn Covid-19 relief package plus central bank action (which prevented a humanitarian disaster and a credit crunch), coupled with the ERRP and, hopefully, a credible medium-term budget, suggest "SA understands the issues, is shifting in the right direction, and putting clear building blocks in place for a turnaround".

But to climb out of the hole caused by previous policy bungling and the pandemic, and set SA on a faster path towards fiscal sustainability, the government must do what it says it will do in the ERRP.

The core elements of the plan include:

A R100bn infrastructure rollout over 10 years (over and above the R815bn for infrastructure already budgeted over the medium term), with commitments to specific projects and regulatory reforms over the next six months. The intention is to use the R100bn to leverage R1-trillion in private infrastructure investment over the coming decade.
A R100bn employment stimulus over the next three years, including the creation of 800,000 employment opportunities in public schemes in the next few months. However, only a third of the extra 25,000 public works jobs promised during the lockdown were created, and payment lagged by some months.
Rapidly expanding energy generation following the integrated resource plan. However, the ERRP commitments are merely in line with previously announced plans and fall short of expectations of an accelerated shift towards renewable energy. Attard Montalto is scathing about Ramaphosa’s promise that SA will achieve energy security within two years, dismissing it as "completely unachievable".
Reindustrialising SA’s manufacturing base by stimulating local production, especially through state procurement connected to the infrastructure programme. It will be driven by sectoral master plans and relies on the R64bn in new investment that was pledged at the two investment summits coming to fruition. Free-market economists are wary of import substitution, however, given that it can end up protecting large, inefficient producers at the expense of smaller, downstream enterprises — as is currently the case in the steel industry.
Regulatory reform that reduces the cost of doing business, including halving times for mining licences; expediting skilled immigration; auctioning spectrum in March 2021; creating an independent transport regulator; and granting private rail concessions.
Extension of the R350 a month Covid-19 special relief grant for three more months. With 6-million people now receiving this grant, this will add about R6bn to the R61bn temporary grants stimulus announced at the start of the pandemic.
While the plan makes no mention of SAA, it commits to reducing the state’s reliance on state-owned enterprises and accelerating plans to stabilise and rationalise the sector.

Many economists have welcomed the plan’s commitment to fiscal consolidation in that it acknowledges that SA cannot sustain its current debt levels. At the same time, it talks of striking a balance between the need to restore fiscal sustainability and support a growth recovery.

However, as Busa points out, SA is in the throes of a fiscal crisis and there is no indication as to how some of the plan’s commitments will be funded.

A big question mark hangs over how the government can hope to free up R100bn for public employment over the next three years, when economists are warning that SA is headed for a sovereign default.

Likewise, though the Treasury has committed to providing R100bn to the IF over the next 10 years, of which R10bn will flow by the end of 2023, ramping up funding in the later years will only be possible if there is a resurgence in growth.

According to the Treasury’s modelling, if the ERRP is fully implemented, the growth rate should average 3% over the coming decade — double the pace of the past decade. It would be a stretch for a well-run country; for SA’s conflicted, limping bureaucracy it will require levels of cohesion and efficiency that have long fallen by the wayside.

As Ramaphosa said, "implementation is going to be key" in giving effect to the plan. Let’s hope that by paying so little attention to fixing state capacity, the ERRP has not doomed itself from the start. If Ramaphosa were considering a cabinet reshuffle, now would be the time.

LISTEN | All you need to know about Ramaphosa's Economic Recovery Plan

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