SA's historic step in IMF direction
Emergency funds for Covid-19 would have a few strings attached
Announcing the government's R500bn economic support package this week, President Cyril Ramaphosa confirmed that SA has approached the International Monetary Fund (IMF) for funding, along with the World Bank, New Development Bank and African Development Bank.
This is, in a way, a historic moment for an ANC government that has fought shy of the IMF because of the stringent conditions the fund generally imposes on borrower countries and the way these might undermine SA's ability to decide its own economic fate.
The IMF is a lot more
nuanced, and more sensitive to the
needs of developing
countries, than it
used to be
It's particularly historic because even Cosatu this week conceded it would be OK with IMF funding, Bloomberg reported, after intense discussions in which Ramaphosa provided reassurance that the funding would not be conditional.
So what is this funding, how much of it might there be, and does it indeed come with no strings attached?
The short answer is that SA could in theory borrow $4.2bn (about R80bn) with few strings attached, using new emergency financing lines the IMF has made available in the Covid-19 crisis. But SA could borrow a great deal more - as much as $18.7bn over three years - if it gets into real trouble and needs a full-on, traditional IMF programme.
That would likely come with stringent conditions, requiring SA to fix its ailing public finances and cut its public debt. And it is not impossible that it might need to do exactly that.
For now, though, it's the emergency lines the government seems to be contemplating - though the IMF office in SA confirms SA has yet to make a formal approach.
The IMF has swung into rapid action in response to the Covid-19 crisis, and has recognised that Africa is particularly hard hit by the economic fallout. In just the past month, 35 of Sub-Saharan Africa's 45 countries have received support under the fund's new emergency facilities, and $15bn has already been disbursed or soon will be - compared to the $1.2bn-$2bn a year the IMF normally lends to the Sub-Saharan Africa region.
Historically, the IMF bailed out countries whose economic woes pushed them into balance-of-payment crises, causing shortages of the foreign currency they need to pay their import and interest bills. But emergency lines of credit require only that a country be severely affected by the Covid-19 crisis.
One emergency facility - the rapid credit facility - comes at a zero interest rate. It is subsidised by the IMF's rich-country members, and is available only to the poorest, so not SA. But SA would qualify for the other facility - the rapid financing instrument (RFI) - which has a 1.1% interest rate.
Each IMF member country has a quota, which is like a share in a stokvel, denominated in special drawing rights (SDRs). SA's quota is 3.051 SDRs, or $4.2bn, and it could draw up to 100% as an RFI. The money would have to be repaid over three to five years and would go into the general budget rather than being tied to health or any specific project.
The facility is not completely unconditional - countries have to commit to sustainable public finances and good governance. But this is not what the IMF calls a "post-facto" or enforceable condition.
The big advantage for SA would be that this is a substantial chunk of cash at a much cheaper interest rate than it could get on the market, at a time when market turmoil and capital flight have driven its cost of borrowing - and need to borrow - right up.
SA's public finances were already in crisis before the Covid-19 disaster. Now, with tax revenues expected to fall R140bn short of budget targets, and the deficit expected to jump to as much as 15% of GDP, even R80bn of IMF emergency finance will go only so far. SA might end up needing a lot more.
Disbursements from the IMF to
countries in Sub-Saharan Africa to
date to alleviate the economic fallout of the global pandemic
That would mean the full IMF standby facility, normally up to 435% of a country's quota over three years - about $18.7bn in SA's case. But this is the traditional IMF lender-of-last-resort funding to countries in crisis, and comes with many strings. Typically, countries must tighten their belts, cut public spending and reform their economies to ensure they get out of crisis mode and can ultimately repay their loans (hardly any countries have ever defaulted on IMF loans).
It's those "structural adjustment" conditions that have in the past caused hardship and triggered political protests in borrower countries. But the conditions are always the subject of negotiation. And the IMF now is a lot more nuanced in its approach, and more sensitive to the needs of developing countries, than it used to be. An IMF loan doesn't carry the stigma it used to - but neither can it necessarily force harsh structural reforms in the way some in SA hope it would.
That's especially so now. As Citi economist David Lubin wrote in the Financial Times this week, the IMF doesn't take security or collateral on its loans - the belt-tightening conditions are a kind of collateral, to ensure it gets repaid, which in turn is important for the fund's role in the international monetary system. The problem, he argues ". is that belt-tightening is a completely inappropriate approach to managing the current crisis".
That may be so now, but ultimately those loans will have to be serviced and repaid. SA was already headed into a debt trap and will be even more dangerously indebted post-crisis, unless it can act urgently to reform its economy and get it growing. Any conditions the IMF might impose would surely be conditions SA should want to impose on itself.