SA’s pledge to the IMF
Approval expected on Monday for historic Covid-crisis loan
SA is set to receive its first ever loan from the International Monetary Fund within days, with the IMF’s 24-member executive board due to meet in Washington DC on Monday to approve SA's application for $4.2bn (about R70bn) in Covid-related emergency financing.
An announcement from the IMF is expected on Monday evening SA time, with details due later this week on the commitments SA has made to support the loan.
Those commitments, on stabilising the public debt and implementing growth-boosting economic reforms, are understood to have been made in the letter of intent that finance minister Tito Mboweni and Reserve Bank governor Lesetja Kganyago have already signed.
The letter will be included in the IMF staff report that the fund is expected to publish in the course of the week.
The rapid financing instrument (RFI) SA has applied for comes with less overt conditionality than the standby arrangements the IMF traditionally offers countries that run into severe balance of payments crises, and the ANC endorsed SA’s application on the grounds that it would not compromise national sovereignty.
However, it’s expected that SA has still had to commit to stabilising its public debt — along the lines of the demanding “active scenario” that Mboweni outlined in his supplementary budget last month, which relied on an additional R250bn in state spending cuts to narrow the deficit and stabilise the debt within three years.
It’s also expected that the government and the IMF will have agreed on a macro-economic outlook, with the government committing to implement reforms outlined in the Treasury's economic growth document, which was endorsed by the cabinet.
Letters of intent signed by other countries that have obtained IMF emergency funding contain similar commitments to fiscal prudence and economic recovery strategies.
No free lunches
University of Pretoria international development law professor Danny Bradlow said no financial institution provided large amounts of financing without attaching conditions “designed to ensure that the recipient uses the funds responsibly and pays them back as agreed”.
In an article on The Conversation this week he noted, however, that the IMF conditions its financing on policy measures, rather than on collateral or promises about the use of the funds, as other institutions might. The terms of the agreement would depend on how effective SA was in its negotiations, he said.
“South Africans should not view the IMF either as the protagonist in its nightmares or as its saviour,” Bradlow said. “Instead, the country should treat it as it would any other financial institution.”
Kganyago told a media briefing after Thursday’s monetary policy committee meeting that the application was in the pipeline. “We did sign the letter of intent and you will know what's in it once the IMF makes its decision and posts it on its website,” he said.
Mboweni, who first spoke in March of the government's intention to approach the IMF, told parliament on Friday that the RFI loan would be used to provide direct budget financing.
He said the government expected to raise a total of about $7bn this year from international agencies including the IMF and World Bank, as announced in his supplementary budget last month.
The finalising of talks with the IMF comes after the board of the African Development Bank (AfDB) this week approved a R5bn loan to SA. The AfDB said the loan, which falls under the bank’s $10bn Covid-19 response facility and is the first budget support the AfDB has provided SA, would help to finance SA’s Covid response programme.
Last month the New Development Bank set up by the Brics group (Brazil, Russia, India, China and SA) granted SA a $1bn Covid-related loan and might extend a further $1.5bn in financing to the public and private sectors.
The R100bn-plus in loans from these finance institutions will go some way to plugging the huge hole in the government’s finances. Last month’s supplementary budget showed the government would in the current year have to borrow R777bn to finance its ballooning deficit, about R300bn more than Mboweni projected in February.
As SA’s public finances have deteriorated its cost of borrowing has risen. Economists warn the borrowing requirement is consuming much of the domestic savings pool and crowding out private investment.
The RFI loan SA has applied for is repayable within five years and comes at an interest rate of 1.1% — substantially cheaper than the 4.5% at which SA’s five-year dollar debt is trading on the market currently, Ninety One co-head of fixed income, Peter Kent noted. Kent said the conclusion of a loan agreement with the IMF would be well received in the market.
“Engaging with the IMF is seen as a bit of an ideological leap, in a constructive direction,” he said.
In addition, though the conditionality was “tiny” and the hurdle to clear was low, the reason negotiations had taken time was that SA probably had to commit to the active scenario in the supplementary budget — without bailing out SAA.
Since the start of the pandemic the IMF has provided Covid-related emergency financing or debt relief of $83bn to 77 countries, including 30 in Africa, and questions have been raised about why SA took so long to land the loan. Mboweni said at the time of the supplementary budget that there were “tough negotiations”.
The cash for the IMF loan is expected to flow within a few days of the board’s decision. Kganyago said on Thursday that the dollars would be converted into rands and the Treasury would draw on them as required.
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