Alert 124 – Is reliance on foreign loans a ticking time bomb for South Africa?

Fiscal spending is necessary to provide cushioning for businesses, avert a looming hunger crisis, and stimulate the economy, but using these loans is a controversial strategy with long-term implications and political impacts within the factionalised ruling African National Congress (ANC).

After early restrictions and the announcement of a state of disaster on 15 March, South Africa began a formal and strict national lockdown on 27 March 2020, restricting the movement of people except for essential services, and sending businesses into panic. The decision came with an announcement of a R500 billion (US$28 billion) stimulus package, dedicated to extraordinary health spending, the relief of hunger and social distress, support for companies and workers, and monetary and financial market measures to cushion the impact. However, South Africa has limited options to cover the spending, compounded by a dramatic decline in tax revenue as a result of the restrictions. South Africa’s gross domestic product (GDP) is expected to drop by over 6% in 2020, while the current unemployment rate of around 30% is expected to rise even further, with some predictions hitting 50%.

South Africa’s options for financing its Covid-19 response include increased and extraordinary taxation, de facto taxation and debt-financed policy. Others include raising debt through government bond auctions and selling government debt to the South African Reserve Bank (SARB) – otherwise known as quantitative easing. All present risky strategies and have prompted a flurry of discussions on the way forward. S&P Global Ratings, which already downgraded South Africa’s investment status to junk in April, has now warned that South Africa’s stimulus package could widen the country’s debt burden to unsustainable levels. 

The National Treasury has explained that it will look for R95 billion (US$5.4 billion) in credit from international financing institutions to cover its stimulus package and has already applied for a R17.4 billion (US$1 billion) loan from the NDB. The NDB has already disbursed this amount to both India and China for emergency assistance, and has offered to expand it to all member states. The bank focuses on sustainable infrastructure and prides itself on being “new” through its use of country systems. This means that loans will be disbursed in South African rands, and that procedures will be in accordance with South Africa’s own administrative systems. The use of country systems reduces the burden of aligning national procedures with international ones (thereby reducing time-consuming and bureaucratic processes), but donors are often hesitant to do so for fear of financial misuse and a lack of credit for their development impacts.

To date, the NDB has provided loans to South African parastatals implicated in corruption, including Eskom and Transnet. While its alleged focus is on sustainable and green infrastructure, its efforts have included financial support to Eskom for retrofitting systems to reduce sulphur emissions, rather than installing renewable energies. There has been little transparency in project selection or monitoring, with questions about the management of these loans. This comes in the context of an increased size and cost of public service, despite massive irregular expenditures reported, and not a single successful prosecution of one of the major players involved in state capture in the last ten years. This raises questions about how appropriately the Covid-19 loan would be utilised.

South Africa is also considering loans from the IMF. This could provide a far greater amount than the NDB, and offers loans in United States (US) dollars, which has implications on the amount by which the loan could depreciate. Like the NDB, it offers concessionary interest rates, although the value of both the IMF and NDB interest rates are unknown. Loans from the IMF are particularly controversial, given its history of structural adjustment programmes and conditionalities. Some see the traditionally conservative institution as opposed to public sector-driven growth and affordable social services. South Africa has previously dabbled with the IMF, with the last loan coming months before South Africa’s first democratic election in 1993, after the National Party had depleted state coffers. South African President Cyril Ramaphosa has, in the past, warned against conditionalities attached to IMF loans, noting that structural reform is required, but shouldn’t be imposed. He will also face resistance within his own party despite its public principled agreement to approach the IMF and this could have secondary political impacts for Ramaphosa’s own position in the longer term.

As South Africa decides how best to cover its emergency costs, the knowledge that loans are available should not detract from efforts to reduce the public sector wage bill and enhance accountability. Historically, countries that have been given loans by the IMF have become reliant on this aid for decades, creating an inter-generational debt trap. Thus, if South Africa is to take out loans to cover its expenses, it must come with a long-term commitment to rooting out corruption in the public sector. The outlook for South Africa does not look bright at the moment, but it has a number of options to get the economy started again. This will require decisive and strong-minded structural reform.