The IMF’s $4bn loan for South Africa: The pros, cons and potential pitfalls

In some cases, the IMF may require the country to undertake certain policy actions before it can access the funds.
South Africa’s finance minister Tito Mboweni says the IMF loan will limit the country’s economic vulnerabilities which have been exacerbated by Covid-19. Image: Moneyweb

The International Monetary Fund (IMF) has approved a R70 billion (US$4.3 billion) loan for South Africa to help the country manage the immediate consequences of the fallout from Covid-19. The Conversation Africa’s editor, Caroline Southey, asked Danny Bradlow to shed some light on what South Africans should expect.

What conditions has the IMF attached to the disbursement?

The IMF has provided the funding through its Rapid Financing Instrument. This is designed to support countries facing an urgent need for financing due to a crisis such as the Covid-19 pandemic. The goal is to help the country face the immediate financial consequences of the crisis. As a result the IMF provides the financing quickly and without strict conditions. The country merely needs to show the IMF that it is facing a crisis, that it will use the funds to deal with the crisis, that it will cooperate with the IMF to solve the balance of payments problems caused by the crisis and to describe the economic policies that it proposes to follow.

In some cases, the IMF may require the country to undertake certain policy actions before it can access the funds.

In South Africa’s case, the country’s payments problem relates to the fact that the economy is expected to contract by about 7% this year and the budget deficit to increase to about 15% of GDP. This means that the government will need to increase the amount it has to borrow. Given that it has been downgraded by credit rating agencies, and that the economy is in bad shape, there is a substantial risk that both local and foreign investors will have a limited appetite for South African debt. This will complicate the government’s efforts to finance the deficit.

The IMF loan helps resolve this problem.

South Africa provided the requisite information to the IMF in the form of a letter of intent signed by the minister of finance and the governor of the Reserve Bank. The letter has not yet been made public. But, according to the IMF press release, South Africa seems to have informed the IMF that it intends to take certain steps to stabilise the country’s finances. This means that the government will cut government spending to reduce its need to borrow. The current disputes over public sector wages and funding for state owned enterprises are examples of steps it could take. The government has also said it will improve the governance of state owned enterprises, and introduce reforms to stimulate a growing and inclusive economy. These reforms could include measures to improve competition in different sectors of the economy.

South Africa made these undertakings in last October’s medium term budget statement and in the supplementary budget statement in June this year.

This suggests that the IMF is merely expecting the country to implement the policies already announced by the government.

How will the money be disbursed?

This kind of financing is provided in one payment. The IMF press statement doesn’t say when the funds will be disbursed but the goal is to make the funds available “rapidly”. That could be as early as August.

Once the funds are disbursed, the government will be free to spend them. According to the national treasury’s statement, it plans to use the money to support health and frontline services, to protect the vulnerable, drive job creation, support economic reform and stabilise public debt.

These are all consistent with the purpose of the Rapid Financing Instrument and the government’s stated intentions.

But these purposes are very general and we will need to see more detail about what exactly the government will spend the funds on.

What restrictions are there on the government’s ability to use the money?

The IMF loan does not impose any conditions over and above what is in South African law on how the funds can be used. Consequently, the funds will be subject to the same procurement and accounting requirements as all other budgetary expenditure.

In addition, the government will have to account in its future budget statements and reports to parliament on how the funds have been used. South Africans will also be able to demand that the government demonstrate that the funds have been spent consistently with the requirements of the constitution and bill of rights. This means the government should show that it is using the maximum available resources, from whatever source, to help realise all the rights that the constitution and South Africa’s international commitments grant to South Africans.

The IMF requires that South Africa repay the funds to the IMF over 20 months beginning 40 months after the loan is disbursed. This means that South Africans will need to ensure that the funds to repay the IMF are properly budgeted for.

What are the upsides of the loan?

The most important benefit is that South Africa is getting $4.2 billion at about 1.1% interest. This is a very cheap source of funds. If the government tried to raise the same amount either on domestic markets or from other international sources it would pay a considerably higher interest rate – the current rate for government bonds of comparable maturity is about 7%.

The second potential benefit is that the IMF loan will catalyse other funds for the country. In other words investors in South Africa and abroad will interpret the IMF’s action as an expression of support for South Africa and this will give them the confidence to invest in South African debt. Given that foreign investors hold about 30% of South African government’s rand denominated debt this boost to confidence could be important. It will both reduce the incentive of these investors to sell their government bonds, potentially pushing up interest rates, and enable the government to issue new debt if needed.

The third benefit is that by helping to stabilise South Africa’s situation, it will limit the damage that may be inflicted on the neighbouring countries. This, in turn, could help South African exports and thus help preserve jobs and income in South Africa.

What are the downsides?

The most significant downside is that the loan is denominated in foreign exchange. Thus South Africa has to bear the risk that if the rand depreciates, the loan and the interest on it will become more expensive. Given the state of the South African economy, this is not an insignificant risk.

But it’s important to keep in mind that the IMF denominates the loan and the repayment obligations in Special Drawing Rights. These are the IMF’s special form of money and its value is made up of a composite of a basket of currencies. These include the US dollar, the euro, the Japanese yen, the Chinese renminbi and the pound sterling. The values of these currencies tend to fluctuate against each other so that some appreciate while others depreciate. This helps mitigate the foreign exchange risk that South Africa must bear.

The second risk is that if South Africa does not use the funds from the IMF wisely, the country’s economic situation will deteriorate and it will struggle to pay back the debt.

If this happens or the pandemic lasts longer than anticipated, the country could be forced to seek additional support. In either case South Africa’s negotiating position would be significantly weaker.The Conversation

Danny Bradlow, SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria

This article is republished from The Conversation under a Creative Commons licence. Read the original article.

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Take out the word “potential” in the headline

This corrupt communist racist led ruling party have been lying to their voters and stealing from the people for 25 years

Just imagine the story they spun to the IMF who are totally oblivious to the workings of our cunning comrades !

When you have a man like Ace as your SG, it speaks volumes as to how ludicrous this loan is..he and his comrades are going to have a field day! Christmas has arrived early for them..ho ho

One of my conditions would hage been to get this Government to clean the cities and fix the roads

Having said that, if you cannot even repair a pothole, collect garbage and instill discipline in the municipalities, not to mention Govern, how on earth are you able to repay a loan?

Incidentally, anyone know whether the Gupta’s have been locked up, and whether or not the guilty at the Zondo commission too?

I rest my case

Government could have had R60 billion plus if they didn’t waiste it on Saa and could have had billions more from cigarettes and alchohol sales.stupid evil fools!

Ah, but they are getting money. Individuals within government are bypassing the tax system and directly getting income from cigarette and booze sales. Think of geriatric, obese female ministers.

SAA must repay all its creditors . Mainly CITY BANK. So the government is using the taxpayers money to repay the bankers! That’s all. In exchange, americans can dump their meat, their chickens, their products in South Africa and the rest of Africa without impunity.
AFRICA HAS ALWAYS BEEN CORRUPTED BY THE WORLD POWERS like US, China, Europe. The Germans are good at corrupting African countries… giving them «  loans ».
Now the IMF is giving a new loan to South Africa. So more debt to repay. Bigger to repay. Far too big. So the IMF(=US!) keep a good grip and maintain control of South Africa . Basically Africa remains permanently COLONIZED. It’s a disguised way. The big shots are obviously rewarded. The common taxpayers will keep suffocating more and more…Africa will never be able to build any meaningfull industry on their own. Africa will never have its own unique currency.

The money will be looted and make a few select very rich. It will not reach the intended recipients. When it comes to paying it back the government will call for the debt to be written off as is par for the course in Africa. This loan will achieve nothing.

The USD 4,3billion IMF Covid-19 loan is fairly close to the project build cost of a single US Navy “Nimitz” class AIRCRAFT CARRIER!

That’s a 330-meter ship weighing 100,000tonnes, kitted out with 2 types of Air Search radars, one Target Acquisition radar, 2 Air Traffic Control radars, a landing aid radar, 4 guidance systems,a anti-missile countermeasures suite & a torpedo decoy system, a last-ditch 24-missile air-defence suite….and to top it off, powered by 2 nuclear reactors, plus 4 gas-turbines!

(…unlike the impressive hardware described above, I ponder what SA will have left over to show after our ZAR 70bn Covid-19 loan is depleted?)

This is size of loan from the IMF.

Let that sink in (pardon the pun) for one moment….

…am not done yet. Hold my beer…
What…?! “govt must borrow more as their revenue is reduced from economic contraction”. What misguided nonsense!

Reality is, Govt does NOT have a revenue problem. They have a serious SPENDING problem!!
It needs to be a THIRD of its current size. And the powers that be does not want to admit that.

I gather, there will be another IMF loan in the distant future, covering the debt from this $4bn loan. (That’s how a debt trap works)

The ANC are pros, proffesional cons.

I’m not convinced that a party that gave us Zuma, created unlimited racial hatred in Malema and a hopelessly weak CR would know what to do with a $4bn loan other than loot it.

It’s vaguely amusing reading about how ‘cheap’ the 1.1% interest rate is, versus government bond yields. Adding the forward USD/ZAR rate, the effective rate seems to be just over 5%, or just marginally lower than a home loan.

The loan proceeds will be used to plug fiscal holes created by government’s own lockdown policies.

The bottom line is: borrowing in USD, while spending on consumables in ZAR, is not smart.

And one thing for sure.. the currency will devaluate!!! When the IMF « gives » you a cheap loan , they WILL devaluate the currency. They have done it everywhere. Just like a bank that will sell you a house at 7% and two, three years later the rates start to go up and up and up. But you have signed for 20 years!

The banks have no say in the matter, they merely adjust rates after SARB adjusts rates. Also you can get a fixed rate mortgage for up to 5 years.

Max you clearly don’t understand what determines currency value. But IMF has zero effect. The main drivers are GDP (growth or decline), current account (magnitude of deficit or surplus), interest rate level/inflation rate, magnitude of budget deficit/surplus, the strength of other economies such as USA when you considering ZAR/USD, international Sentiment, technical factors especially in short to medium term.

Correct. Just the right word: TROJAN…

“The most important benefit is that South Africa is getting $4.2 billion at about 1.1% interest.”

Very misleading.. The rand weakens roughly 6% a year on avg. In recessions and bear markets up to 20% a year.

Interest rates on IMF debt are going to be roughly 10% p.a. and the principal owed ~40-50% higher in 5 years in rands.

The loan is a dead norwegian blue parrot plummeting over a fiscal cliff and no turning back.

It’s a Trojan horse. Finance minister and reserve bank Governor are totally the wrong people to sign the paperwork.

Ace and NDZ need to sign, but then the IMF is yet to learn that our undertakings of how to run the country aren’t worth the paper they’re written on.

Those taxpayers that disagree with the state, can they secede or is that civil war? I suppose moving is easier once the planes are allowed..

Don’t go to France! Taxes are about 63%. Add the VAT and you reach 80%.
Plus France is rule by Macron: biggest lyer in the french history. He must be related to Tony Blair (who was advising Macron during the Brexit!)

South Africa has MORE taxes relative to GDP (size of economy) than France. SA’s total taxes/GDP is 29% and France’s is 24%, so SA is substantially higher. What’s more worrisome is that SA’s income taxes are paid by a tiny fraction of their population, whereas in France most people pay income tax. In SA out of a population of almost 60 million only 4 million people paid income tax last year. The ANC loves its taxes … income taxes, corporate taxes, excise taxes, sin taxes, customs taxes, carbon taxes, sugar tax, dividend withholding tax, fuel tax, property transfer tax, VAT etc

I still get something for my French taxes don’t I? I did the calc on a few EU entities, and assuming I still trust the government there to provide healthcare and pension on those tax contributions I would actually lower my tax rate in France/EU.

I worked out that my 45% here would be around 28% over there. Add in Medical, Pension at 25% of gross etc it’s 60% in France versus 65% here like-for-like. Plus I still need to pay out of pocket medical expenses here versus decent state hospital in EU.

Cons : We have stupid people running the country!

Everywhere the IMF has lend money to a country, the value of the currency WILl devaluate. Look in Zimbabwe, look in Ghana. The outcome is clear. The local currency is devaluated, the debt rockets up and the country cannot repay the debt and that is how this form of COLONIALISM is perpetuated. The chinese are using the same technique in Zambia , in Namibia, in Angola, in Kenya etc… So basically they prevent any african country to develop themselves. That is why Kadafi was killed. Because he wanted a united Africa with their own currency. Africa could have rule the world as it possesses all the minerals the world needs. So, Africa MUST REMAIN SUPPRESS AND DEPENDANT AT ALL COST from Europe, the US and China.
After 40 or 60 years of independence, not one single African nation has find its real independence! And they never will. The richer nations in Europe also enslaved the poorer ones with the same tric. Germany give billions to Greece but Greece will never be able to repay the debt. So the people pay the price, brain drain, permanent misery for millions of a greek people….

Wrong. Zim was stuffed long before they begged for money from IMF. In your dreamland you think Zim’s descent into the gutter had nothing to do with Bob Mugarbage’s policies, corruption and incompetence.

All government’s borrow but the ones that are the most stuffed try and borrow the most because they need the money and where else are they going to get it? You think Zim govt was going to get more income taxes from a population that is almost all unemployed? Lol. Or get more corporate taxes from a private sector that has disappeared, either bankrupted or packed up and left for greener pastures?

Africa does have a lot of minerals, especially SA. The world doesn’t need to suppress Africa to get minerals tho .. LOL. They can just buy however much they want from Africa. Or they can come and start a mining business in Africa. The African government will decide whether to grant mining company a mining license. Mining companies commit vast amounts of money to exploration … which might also be money down the drain since they may ultimately not find a commercially viable area to mine. But after they’ve committed vast sums to exploration, they then have to commit much vaster sums to development of a mine (if it passes feasibility). Then after years of massive sunk costs and no revenues they eventually start extracting minerals …. but then they pay TAXES on its profits AND ROYALTIES to government. In SA they pay 29% of their profits in taxes and royalties on top of that. Government collects all this money and has to do NOTHING. The ANC thought maybe they could make more money doing the mining themselves and started a mine … which made LOSSES for years. Again, it was such a miserable adventure that the ANC govt has decided they’re too useless to mine themselves and waste taxpayer money which is why there’s no more new goverment mines … thankfully!! Besides mining in SA is barely an enticing idea, with long term low ROE’s and ROC’s … which is why the biggest mining company on earth, BHP, pulled out of SA a few years ago.

End of comments.

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