REPORT ON PORTFOLIO COMMITTEE ON FINANCE CHAIRPERSON'S ATTENDANCE TO THE IMF & WORLD BANK ANNUAL MEETINGS - 1998

1. INTRODUCTION
The IMF/WB Annual meetings are colossal events with a series of many seminars focusing on regions of the world or specific countries, and many open, selectively attended and closed meetings. In this regard it is impossible to cover all proceedings that take place during these annual meetings. In this brief report I shall only touch on these meetings that were related to our country and the SADC region.

Secondly, this report will draw the attention of members to the major theme that dominated the annual meetings and the documentation that captures the issues related to that theme.

Thirdly, the report will further draw members' attention to some dissenting and alternative views raised at the annual meetings.

Fourthly, the author will make some observations based on the experience of attending the meetings as a parliamentarian and, in particular, as Chairperson of Portfolio Committee on Finance.

2. SOUTH AFRICA AND THE SADC
2.1 SOUTH AFRICA
The South African delegation began it's participation in the annual meetings with a meeting of the full delegation in which the focus was on:
- familiarising members with the issues on the agenda of the annual meetings;
- identifying key activities of importance for the delegation and assignment of responsibilities for each member

In this meeting the Minister of Finance, the Honourable Trevor Manuel, MP, outlined the issues on the agenda of the Interim Committee of the Board of Governors of the IMF which is a key body in the preparations for the annual meetings. These issues are contained in a communiqué of the Interim Committee which is attached.

The Governor of the South African Reserve Bank, Dr. Chris Stals, reflected on the current international situation which he summed up as one of pessimism among bankers and fund managers. An issue which would be of special interest to the members of the Portfolio Committee was his account of the appearance of the Chairman of the Federal Reserve Bank of the USA, Mr. Allan Greenspan, before a Senate Committee to be questioned on the perceived rescue of a hedge fund, Long Term Capital Management, which collapsed around the time of the annual meeting.

The concerns raised by the Senate Committee revolved around the fact that the fund was not registered in terms of any Law in the USA and not regulated in any way.

In response the Chairman explained that the Federal Reserve Bank facilitated the coming together of Commercial banks to jointly take over the hedge fund on the grounds that a collapse of the fund would have affected other financial institutions.

In the discussions the following issues were also covered:
- Governance issues that arise out of the Article JV consultations of the IMF with countries, such as the point at which a government can or should indicate to the IMF that it's observations and recommendations had been noted

- How countries relate to the IMF/WB as co-shareholders;

- Some criticisms of IMF/WB policies

Many of these issues are reflected in the body of the selected documentation attached.

Two further meetings which were specific to South Africa followed, and these
were:
- A South Africa seminar, and
- A meeting of the S A delegation with the Africa Department of the IMF - specifically the Article IV team

In these meetings, South Africa, through the Director - General of the Department
of Finance, Ms. Maria Ramos, gave very detailed briefings on the economic
situation in the country. These briefings covered the following issues:
- Growth trends including the projections and revision made;
- Deficit trends;
- Debt management restructuring;
- Debt service cost minimisation and the effect of the international financial crisis on costs;
- Debt to GCP trends;
- Foreign currency borrowing;
- Reserves and the net forward open position;
- The current account deficit
- Exchange rate movements;
- Inflation and monetary policy;
- Budget analysis: - revenue
- expenditure
- the MTEF and medium term budget policy statement
- provincial fiscal consolidation
- the Treasury Control Bill
- The final outcome of negotiations on the improvement of conditions of service:
- The 99/2000 budget process in view of the pending national and provincial elections: to be passed ahead of elections
- Restructuring of state assets: update
- The Jobs summit
- Labour market reform regarding government's offer to make necessary changes to legislation subject to negotiations by government, business and labour;
- Trade reform in the area of tariffs:
- Demutualisations
- SADC regarding South Africa's position as Chair of Finance and investment sector

These were both important meetings in so far as they enabled South Africa to give an account of it's own financial economic situation in a manner that ensured that the world takes note of progress and problems.

Central to these briefings was the message that South Africa was not in a debt
trap and had withstood the international financial crisis. Importantly it was that the world had to sit up and take South Africa into account.

Although the briefings covered much the same ground and perhaps differed in the level of detail to the seminar and the IMF meeting, the discussions followed a different track. In the seminar the briefing was followed by general questions I comments and responses. In the IMF meetings however, the briefing was followed by a response and recommendations by the IMF team.

The response contained the following observations:
- the soundness of South Africa's financial policy
- an observation that fiscal policy was on track, tight and expected to continue
- an expectation of an economic down-swing in the following year
- the public sector wage agreement as commendable
- the recent recovery of the rand assignalling a return of some confidence.

The team also made certain recommendations:
- that a further appreciation of the rand had to be avoided, instead that we should take advantage of the appreciation that had taken place in two ways:
+ to reduce the forward book, i.e. The net forward open position
+ to gradually reduce interest rates, a key focus being to keep the rand at the levels it had attained them

Furthermore, the team recommended that in the IMF's view, structural reform was
even more urgent then, in view of the expected economic sluggishness in the
following year, and that such reform had to be in the following areas:
- Trade reform
- Land reform
- Labour worked reform
- Training of Labour force
- Privatisation.

On the basis of a request by the author (myself) to have these matters elaborated on, a further meeting took place between myself and the MEC for Finance in the Eastern Cape, Mr. Enoch Godongwana (the MEC for Finance in Kwa-ZuIu Natal, Mr. Peter Miller, could unfortunately, not attend that meeting ) where these issues were discussed in more detail.

Trade reform
South Africa, it was recommended, needed to reduce tariffs further as it's tariffs were currently higher than those of it's competitors. Such a process would according to this recommendation, force S.A industries to change faster because of competition from foreign companies.

Land reform
South Africa had to move away from the large, mechanised non-labour-intensive farms towards smaller ones which were labour intensive so as to absorb the excess labour the country was having.

To encourage this, government had to impose a tax on large farms to encourage people to break them up into smaller pieces.

As an incentive, government should extend it's current housing subsidy for low income earners (the R15 000 ) and make it part of the land reform programme

These measures were seen as having potential to reduce unemployment in the rural areas, and to prevent migration from rural to urban areas

Labour - market reform
Minimum wages for unskilled workers were too high relative to their productivity and that the threshold needed to be lowered.

The Gear proposals regarding the level of wages for trainees and the automatic extension of contracts needed to be implemented as the current situation was seen as perpetuating large corporations because even smaller firms paid the same rate, thus keeping those in employment happy while shutting out those who were not.

Training
The emphasis was on accelerating skills development and improving the quality of education, not spending more money.

Privatisation
The emphasis was on inefficient parastatals which needed to be exposed to competition and private sector methods, and to attract more money into the country.

We further discussed two aspects of financial policy:

1. Monetary and exchange rate policy
The point made by the IMF team was that historically this was used to stimulate growth but that such gains were of a short-term nature as the effect was not so much on economic activity but on inflation which created problems for the poor

2. Fiscal policy
Again, historically it was used to lead growth but that it is short sighted as it leads to debt problems which result in high interest rates

They noted that South Africa was currently reducing the deficit levels, and emphasised that growth could be achieved in a sustainable way through changing the composition of expenditure towards education, infrastructure, etc., i.e. supplementing what the private sector is doing.

Furthermore, the team expressed concern regarding rigidity in the public sector personnel levels and wage bill as this was seen as the only area where savings could be realised to boost other expenditure.

This is an objective report on the views of the IMF regarding the South African economic situation and it was the content of these proposals that made me to propose that when the IMF Article IV team next visit South Africa, an opportunity be crated for them to share these views with a broadly representative group, i.e. each political party. The meeting which we arranged for the 4 December 1998 could, unfortunately, not be attended by all political parties.

2.2 SADC
Two meetings of SADC in which the author participated were held:
- A meeting of SADC Finance Ministers and Governors of Reserve Banks which largely discussed organisational issues.
- A meeting of SADC Finance Ministers with USA Treasury Department led by
Secretary of State for the Treasury, Mr. Rubin. The meeting was essential aimed at highlighting the plight of some of the SADO member countries which:
+ As commodity price dependent economies were a constant debt equation regarding exchange rate and commodity price changes that were negative.

+ In spite of steadfast adherence to their adjustment programmes, were experiencing pressure on social services spending and thus needed a redesign of such adjustment programmes to take into account their social impact, for which the support of the US Treasury was sought.

+ Required a review of the H I P C initiative which was seen to be too slow to yield results for participating countries, and as having complicated rules for assessing countries to determine qualification to benefit from the programme (some detail about this programme will be found in the documentation).

This meeting was a very good example of a co-operative effort by the SADC countries on an issue that affected only some of the members countries of the community.

3. THE IMF I WB ANNUAL MEETINGS
The major themes that dominated the meeting were:
- the need for a new architecture for the international financial system which captured quite well the mood internationally in the wake of the financial crisis;

- a review of the design of particularly IMF structural adjustment and stabilisation programmes for developing countries;

- a review of the HIPC initiative for Heavenly Indebted Poor Countries (HIPC)
All of these issues are covered in the documentation provided and it is best for members to read for themselves.

It is, however, worth drawing attention to the proposals of the British Chancellor of the Exchequer, Mr. Gordon Brown MP, which are contained in a speech he delivered and which is also included.

4. SOME DISSENTING VIEWS
There were also some dissenting views that were expressed by:
- OXFAM on debt review and the HIPC initiative as well as the IMF's responses to the Asian crisis;

- EURODAD on the HIPC initiative;
- NGO's on relations with the IMF and new architects for the global economy.

Documents which reflect these views are included.

5. CONCLUSION
A major observation made by the author on the experience of attending the annual meetings is that these are very important meetings in which very substantive and far reaching decisions are made.

In this regard it appears that there is yet no thinking given internationally to the question of how parliaments can be informed on these processes.

It is, in my view, an issue that does require some discussions as to whether or not parliaments should participate formally in these processes.

In discussion with the Deputy Managing Director of the IMF, Mr Quatara (Ivory Coast) it became clear that the founding documents of the organisation direct that it shall deal with only the executive arms of governments.

M. Mpahlwa
Chairperson: Portfolio Committee on Finance

Documents:
A. Communiqué of the Interim Committee
B. Communiqué of the Development Committee
C. Statement of G7 Finance Ministers and Governors of Central Banks
D. Communiqué of the G- 10 Ministers and Governors
E. Opening address by the Chairman, the Honourable Wolfgang Ruttenstofer
F. Address by the Managing Director of the IMF Mr. Michael Camdessus
G. Address by the President of the World Bank Group, Mr. James Wolfensohn
H. Address by the British Chancellor of the Exchequer, Mr. Gordon Brown MP
I. OXFAM
J. EURODAD
k. NGO's