R70 billion IMF loan: SA’s noose or lifeline?

The $4.3 billion loan South Africa has received from the International Monetary Fund is unnecessary, with economist, Patrick Bond, charging that the loan conditions could lead to crippling budgetary cuts, which would be detrimental to the poor.

A colleague, however, disagrees, saying the loan, which translates to about R70 billion, is much needed but also a test of whether government could be trusted with this kind of money again in future.

Bond has blasted the justification that the emergency financing will help fill the urgent country’s Balance-of-Payments (BOP) as a result of the pandemic as “totally nonsensical,” saying: “There’s actually not an emergency need for hard currency due to an alleged (BOP) crisis. To the contrary, South Africa had its first current account surplus in 17 years last month, as imports collapsed due to the economic crisis (and also the oil price crash), as did payments of dividends to foreign firms for their SA operations.”

He said exports stayed high as the gold price rose dramatically in Rand terms, and SA still has $52 billion in hard currency and gold reserves, as of late March, according the last available data. With imports crashing, that means the reserves cover nearly seven months’ worth of imports, up from 4.5 months two years ago.

READ MORE: ‘Mboweni is misleading SA on IMF loan being low-interest,’ says EFF

Bond said in a special briefing to finance minister Tito Mboweni in April, Treasury’s Chief Director for International Finance, Roy Havemann, had said in the run up to rating agency Moody’s junk rating: “We were quite concerned about funding conditions, particularly during the 2020-21 financial year. And so we decided to raise the cash buffers quite significantly. That’s a very long way of saying that finding additional funding is not urgent. It’s certainly something we will need to do in this coming financial year but there’s no urgent need right now that we can see, for financing right now.”

The economist says this means speaking privately to their mates, the Treasury leadership admitted that the idea of a BOP funding crisis – justifying the $4.3 billion from the IMF, the $300 million from the African Development Bank, and the $1 billion from the BRICS New Development Bank all in recent days, was nonsense.

Bond says though the conditions for the loan were unclear, they could potentially impact on budget cuts on municipal services, which could lead to power disconnections because municipalities cannot pay Eskom.

“Conditions are not clear, but we do know that in February Mboweni was already following the conditions suggested by IMF in January, and then Mboweni cut the health budget in late February, even when Covid-19 was coming down like a train. He cut R3.9-billion from the health budge … We do not need additional international funding because the need for that is not urgent,” Bond added.

But political economist, Daniel Silke, disagrees, saying SA needed this loan, its conditions were not stringent as those of a regular IMF loan, and that it came with a low interest rate as it is specifically for Covid-19 relief efforts.

“We do need this loan. There is a huge shortfall which is made up of the R500-billion in the Covid-19 rescue package plus, another R300-billion at least in the under recovery of SARS taxes … There is at least R800-billion that has to be found in the short term to cover the Covid-19 relief efforts and to assist the economy in recovery,” he said.

Silke says the country did not have that kind of money and that budgetary cuts would be severe if the country was to use its own money, even if it had.

He says, however, government would have to ensure that the money is not squandered, as it could be the first and the last loan from the IMF.

“We have been very good at looting our own money. We now have a loan which has to be repaid … It is possible in the future we could go to the IMF for additional monies if things do not go well in SA. It puts additional responsibility on government to ensure that the rot of corruption is minimised as far as possible when it comes to these additional monies,” Silke says.

He says if the economy does not recover and the political side of the equation does not come to the party in the next two years or so, the warning from Mboweni that SA could hit a fiscal cliff or debt repayment default would come true, and we would need to go back to IMF for further funds.

“… if we are seen to have squandered these monies, it would be difficult in future to get cash out of IMF, and cash at favourable terms both in interest rates and conditionality.”

What treasury says:

According to Treasury, the International Monetary Fund (IMF) loan will contribute to the spending requirements for the Covid-19 fiscal relief package component of the spending plans, including spending on healthcare and the implementation of job-protection measures.

Responding to questions on conditions, Treasury said these will include that the loan must be spent on COVID-19 related initiatives, funding part of the COVID-19 R500 billion fiscal response package announced by President Cyril Ramaphosa.

The department explained that a combination of low economic growth, the outbreak of the Covid-19 and a significant decline in tax revenues necessitated the loan.

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