“There is no reason why South Africa would not be able to repay its obligations,” says the International Monetary Fund’s (IMF) senior representative to South Africa, Montfort Mlachila.
The country’s $4.3-billion (R70-billion) loan from the IMF is payable over a period of five years at an interest rate of 1.1%. The money was approved this week and forms part of the government’s plans to raise R95-billion from various multilateral and development finance institutions to partly fund the country’s response to Covid-19.
“South Africa, like many other IMF member states, has a good track record of meeting its obligations and there is no reason why it should fail to pay,” Mlachila said.
But, should the rand depreciate against foreign currencies, paying back the loan will become more costly.
The pandemic hit as South Africa entered a recession and the government feared it could not afford to offset the effects of the coronavirus. Weak economic growth and a widening budget deficit have worsened the country’s debt trajectory and worn down the public purse.
Gross national government debt is projected to increase to more than 81% of gross domestic product (GDP) in the current year, while gross tax revenue is expected to miss the target by R304-billion.
The IMF projects the government deficit to rise to about 16% of GDP in 2020-2021, pushing up debt by 18 percentage points of GDP. Public debt is expected to peak at 87% of GDP in 2023-2024 before starting to decline as economic activity recovers.
The country asked the IMF for assistance in late April but formal negotiations began in June because the IMF found it “would be optimal for us to see what the budget [for the country] is and more or less what the government wanted to do in terms of the budget”, Mlachila said.
In its report to South Africa, the IMF pointed to the supplementary budget presented in June and the government’s commitment to implementing economic structural reforms, cutting the public wage bill and reversing the upward trajectory of public debt to GDP ratio by introducing a debt ceiling.
In a letter of intent co-signed by Finance Minister Tito Mboweni and the governor of the South African Reserve Bank, Lesetja Kganyago, the government has said the IMF’s loan would not change external and public debt sustainability indicators, adding that the country will “take any necessary measures to maintain debt sustainability”.
Mlachila says the government has said that it is not yet in a position to specify all policy measures that would lift the economy out of the doldrums. These would be discussed in the coming months and are expected to be presented in the medium term budget policy statement in October.
In its report to the country, the IMF has warned that the government should urgently implement the reforms as set out in the supplementary budget. If reforms are not implemented, the IMF says it poses “threats to debt sustainability, and generating destabilising effects such as inflation or financial repression”.
The IMF’s loan is part of the government’s R500-billion social and economic response to Covid-19. The New Development Bank and the African Development Bank have approved $1-billion (R16.5-billion at current exchange rates) and $288-million (R5-billion) loans respectively. South Africa has also approached the World Bank for additional funding. The treasury said discussions with the World Bank have not been concluded.
The country’s approach to the Washington-based lenders has not been without its critics, in the main the South African Federation of Trade Unions and the Economic Freedom Fighters. Other parties — the Congress of the People, the Democratic Alliance and the South African Communist Party — have voiced concerns about theft and called for the transparent use of the funds.
The IMF’s loan forms part of its rapid finance instrument (RFI) that is designed to provide assistance to countries’ financial crisis caused by the Covid-19 pandemic. The RFI does not come with stringent conditions that have been notoriously associated with the IMF.
Izak Odendaal, the chief investment officer at Old Mutual Wealth, says the country should not be concerned about the IMF “barging in and start pushing us around” because the RFI is not a structural adjustment programme. But he says any form of borrowing usually comes with some loss of sovereignty.
“Your creditors do have at least say in how you manage your affairs, whether you are a household applying for a home loan or a government issuing new bonds,” he said.
Mboweni told Parliament this week that the “misunderstanding” that the IMF loan is “the biggest devil in town” is untrue. “[We] have to understand it [the loan] in the context of Covid-19 and the borrowing requirements that we would have had to enter into anyway either by issuing a global bond or some other domestic bonds,” he said.
Thando Maeko is an Adamela Trust business reporter at the M&G