EDITORIAL: World Bank loan is a no-brainer but there are risks

It took the Covid-19 crisis to break a taboo that had been in place since the birth of democracy in SA. In the depths of the pandemic, with the economy all but shut down, tax revenue tanking and huge demands for the government to spend on health care and relief for the most vulnerable, SA at last said yes when the IMF was dishing out emergency funding across the globe.

SA’s democratic government had always resisted borrowing from the Washington-based IMF and World Bank, and had gone out of its way to manage public finances so that it would never have to. The only exception to the rule, ironically, was a $4.75bn World Bank loan to Eskom to build Medupi and Kusile, along with one or two renewables projects.

For the rest, SA’s fear was of a loss of sovereignty over economic policy and, worse, the kind of social unrest that had often followed when the IMF imposed “structural adjustment” programmes on countries that approached it for bailouts.

But the Washington-based lenders long ago changed their top-down unilateral approach. And when Covid hit they offered huge amounts of support to countries hit by the pandemic. SA took advantage. It borrowed $4.3bn of low-interest emergency money from the IMF and followed up with loans from the New Development (Brics) Bank, the African Development Bank and more recently the World Bank.

Since 2020 the government has borrowed more than $8bn from these so-called international financial institutions (IFIs). The government has borrowed more than $1.7bn from the World Bank alone since the start of 2022, including a $750m development policy operation (DPO), as well as a $480m loan to help pay, retroactively, for Covid vaccines.

Over and above that the World Bank approved an almost $500m package in November to fund the decommissioning and repurposing of Eskom’s Komati power station, which is to become a solar and wind facility with battery storage — and jobs for workers and communities affected by the shutdown of the 60-year-old Komati.

Added to that SA has recently tied up loans from German development finance institution KfW and its French equivalent, AFD, for a total of €600m as part of the $8.5bn Just Energy Transition Investment Plan agreed with SA’s international partners at the COP climate summit. And now the Treasury has revealed it is in talks with the World Bank on a second, $1bn DPO which it has requested.

All of these loans are in hard currency and come at interest rates that are way below what the government could borrow on the international bond market. Not that it hasn’t done that too — it had a successful $3bn international bond issue in April 2022.

The KfW and AFD 20-year loans, for example, came at interest rates of 3% and 3.6%, respectively, at a time when the government would have paid about 8.9% to raise equivalent loans in the market, according to a statement from the Treasury in November. And the Treasury made it clear this week that it wants ideally to shift its funding strategy towards more of this concessional IFI lending over the next three years, rather than borrowing more on international bond markets.

It won’t win too many friends on international bond markets for doing so, with many keen to see SA come back on a regular basis. But it is a no-brainer in so many ways. First is that the money is so much cheaper than market funding. In a high interest rate environment globally, that matters more than ever. And paying less interest means more cash available for more worthwhile spending that the government needs to do, whether on health and education and security or on infrastructure.

Second is that the money no longer comes with the kind of conditions that used to spook governments and communities. Instead, the terms are the subject of negotiation between country and lender. In particular, DPOs reward actions already taken by the government — in areas such as Covid-19 relief or economic reform or climate — rather than making disbursements subject to actions that need to be taken in future. As the Treasury’s Duncan Pieterse puts it “we are making the reforms anyway; we might as well monetise it”.

Even so, there are risks to this kind of borrowing. It is foreign borrowing, with interest and capital that have to be paid in foreign currency. So it comes with exchange rate risk, even though SA’s foreign currency borrowing remains at low levels.

More troubling is that much of the recent lending is linked to progress SA has made on decarbonising its economy. That means it can’t afford to be seen not to be delivering. It will have to show continued and committed progress on its green energy transition. And at a time of uncertainty, with Eskom’s André de Ruyter departing, renewables projects mired in red tape and tensions over which ministry should take control of Eskom, progress is by no means assured.