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Special Report Podcast: Pravin Gordhan – Minister of Finance

“Somebody needs … to at least have somewhere between $1trillion and $2trillion in the back pocket”

ALEC HOGG: In this Boardroom Talk special podcast Finance Minister Pravin Gordhan joins us on a day when I suppose there’s quite a lot of controversy around South Africa making a contribution to the International Monetary Fund’s part bailout of what’s going on in Europe. Minister perhaps you could just talk us through the numbers – the IMF has agreed to give €250billion as part of this package, and now South Africa’s share of that presumably, is what our voting share of 0.8%…

PRAVIN GORDHAN: Yes – we need to firstly explain how the IMF works and what its role is in the context of the European crisis. Now the European crisis is a very serious one – it’s a crisis of sovereign risk meaning governments are in serious trouble in terms of paying their debt and borrowing more money. Secondly the banking system in Europe is in trouble and in some countries, banks are in serious need of additional capital being given to them, and thirdly, there’s the fiscal crisis in the sense that each country makes its own decision whereas the Eurozone acts as a monetary area. And all of these factors have now reached a crescendo and that means that the discussions in Washington in the context of IMF and World Bank meetings demonstrated that the Europeans need to move and move with a sense of urgency to contain their problems, otherwise we in South Africa, and indeed the globe as a whole, will be impacted. Now let’s look at the numbers – the numbers are that Greece alone is one very small part of the problem. If this contagion spreads to Italy and Spain, then somebody needs the fire power to the tune of about $2.1trillion. The European Fund, which today the German parliament voted on, stands at about $400billion. IMF’s current fire power also stands at about $400billion. So somebody needs to develop a capacity, either jointly or individually, to at least have somewhere between $1trillion and $2trillion in the back pocket in the event that that is going to be required. What the Americans are teaching the rest of the world and pointing to, is that when their post Lehman moment came, they were able to throw large amounts of money at the problem, establish the right kind of funds to save their banks, capitalise their banks or nationalise them where that was appropriate, and try to contain the problem which of course didn’t help us out in that way because they still lost one million jobs in South Africa and R60billion in revenue. Partly our comments have not been understood properly because people don’t quite understand how the IMF works. If the IMF is to increase its capital, that capital – then all of the numbers of the IMF – need to be in the contribution and it’s in that context that that capital is not necessarily for Europe only – today it’s for Europe, tomorrow it could be for some other area or some other country and as a member of the IMF we have a very small contribution in relative terms to make to that. That’s the background and what we should understand is that as South Africans, we are going to be very seriously impacted if we allow – and the world allows, more importantly, this crisis to spread beyond Greece to Italy and Spain and beyond Europe and the US to China and then indeed we have a very serious challenge in terms of global demand and global growth and that will then impact even more so on the South African economy.

ALEC HOGG: Perhaps if I understand you correctly, then we have to pay an insurance policy almost to try and help bail out the problems that are going on in Europe, otherwise it could get much worse and we’ll be harder hit then?

PRAVIN GORDHAN: You might want to call it that, but that’s part of the responsibility that for example Germany has been asked to play in the European context, where of the kind of guarantees and contributions that have to be made to the European Financial Stability Fund which their parliament approved today, a significant amount of that $400billion comes from Germany. Similarly in the process of discussions in the BRICS meeting of finance ministers and governors of central banks, there was also a view that BRICS which includes South Africa today, would be negatively affected if a) Europe doesn’t make the vital steps towards solving sovereign issues that I spoke about earlier and b) if institutionally that the IMF doesn’t develop the capacity to intervene, but also the will to intervene as well. And some very frank discussions have taken place over the past week to point to the challenges that we face, and indeed the dangers that we face.

ALEC HOGG: The numbers I suppose are the issue that would be worrying South African citizens if you – just for every €250billion that the IMF has to put in, given our share is 0.8% – that’s the equivalent of R20billion that we might have to cough up – now these are enormous numbers in South African context…

PRAVIN GORDHAN: No those numbers are not correct. We are not in a position to contribute R20billion – the amount is few hundred million, and it’s about US$100million at most. But I don’t want to commit to that number because that depends on where we go – but we’re nowhere near the kind of figure that you’re talking about.

ALEC HOGG: That’s a huge relief. So we don’t actually have to participate to the extent of South Africa’s voting rights.

PRAVIN GORDHAN: No not in the sense that you’ve calculated it. There’s another way of calculating these things and they have their own complexities. But we can give the absolute assurance to South African citizens that we are not contributing in those numbers firstly, or to any process which neglects our responsibilities in South Africa, but thirdly we are part of a globalised economy and part of global institutions and with our very small shareholding in those institutions, we continue to make a contribution towards building up the capacity to assist developing countries as well that find themselves in difficulty.

ALEC HOGG: Minister even if it is only a small amount or relatively speaking that we’re putting in, many African countries went through hell in the 1970s and the 1980s because of conditionality according to these loans. Are you going to try and insist that there’s similar conditionality now that the boot is on the other foot, as it were?

PRAVIN GORDHAN: Absolutely – the refrain coming and if you like the demand from any country is that the IMF must demonstrate that it’s even-handed, the IMF must demonstrate that in its surveillance of all countries developed and developing, it must be even-handed and that the IMF must be as proactive in developed countries as it is in developing countries. The days when there was unequal treatment, and the nasty treatment if you like is reserved for developing countries and politeness for developed countries in its past, and in that sense we should all be very aware that world around us is changing and changing very fast. One academic pointed out in Washington that there are tectonic changes taking place, meaning that previous countries that used to be creditors or lenders of money are now debtors or borrowers of money. So those are fundamental shifts in the global economy and in the spending of countries that is taking place as well. The IMF has to play both an active role and indeed some would say a proactive role. There should be appropriate conditionality’s on any country, on an even-handed basis and the same should apply to any European country as well.

ALEC HOGG: At the time that the new managing director of the IMF was being considered, you were quite outspoken about the fact that it should come to someone from a developing country. Do you think that if Christine Lagarde had been say from China, that her approach as the managing director would have been different?

PRAVIN GORDHAN: She has been in office for a few months and to date she has tried hard to be even-handed – she has been very courageous in telling the Europeans that their banks need to be capitalised. She has also been courageous in saying that watch it, we need to have a balance between fiscal consolidation and austerity measures on the one hand and growth promoting measures on the other hand, and that if we neglect growth, we will have an even more disastrous situation on our hands. And those are difficult issues in which so far, she has played an admirable role, and we hope will continue to do so.

ALEC HOGG: So – so far she has done better than perhaps anticipated, but I get back to the whole question of conditionality. The Greeks for instance lied to the European union in giving forward their figures – that’s one of the reasons why they’re in so much trouble now. How will one know that they’re going to play ball this time around?

PRAVIN GORDHAN: That’s where the international institutions come in on the one hand, and the European institutions on the other hand. I think Europe will understand that a) they are in a deep crisis and b) that deep crisis is already having consequences at least in confidence terms and indeed in uncertainty terms around the globe and endangering global growth prospects. And they’re very aware that they’ve got to get their institutional machinery right and amongst the things is apart from the establishment of the fund, and upgrading that $400billion through one mechanism or another to over a trillion, they’ve also got to start working on how they manage fiscal policy in Europe – and part of that process I imagine is going to be absolute certainty about numbers – absolute tightness from each of the member countries, their ability to have sufficient surveillance over whether there is compliance with the officials that have been tracked and set – and that’s going to be part of the challenge that they take on now.

ALEC HOGG: So in a way this crisis is not going to be wasted.

PRAVIN GORDHAN: It’s not going to be wasted, nor is it going to go away tomorrow and each day will bring its own dynamics and its own surprise and as South Africans on that one level we’re very fortunate that our banking system and our fiscal position is good, our growth levels are still in the positive territory. We need to focus our minds on how do we restructure our economy, how we restructure our trade, how do we do things that will create more jobs, particularly for young people in South Africa, how do our enterprises become more dynamic and more innovative so that they can compete in the rest of the world and how do we see opportunities in our neighbourhood on the African continent.

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