Debt implications of the World Bank loan to SA

By Professor Bonke Dumisa

THE SOUTH African government applied for and was granted a US $750 million (about R11.4 billion) low interest rate loan by the World Bank with very attractive terms, inclusive of the 13-year repayment period with a three-year grace period.

A special communication on this by the National Treasury, on Friday, January 21, said that this loan will support government efforts to accelerate its Covid-19 response aimed at protecting the vulnerable poor and unemployed groups from the adverse socio-economic negative multiplier effects of the Covid-19 pandemic, and supporting a resilient and sustainable economic recovery.

The rand immediately strengthened against all the major currencies we usually compare it with when the news of the R11.4bn World Bank loan to South Africa started trending globally on January 21.

– Having traded at R15.52/US$ and R15.31/US$ against the US dollar on Wednesday, January 19, and Thursday, January 20 respectively, the rand significantly strengthened to R15.10/US$ and even briefly stronger at about 15.08 in the morning of Friday, January 21.

– Having traded at R21.12/UK£ and R20.74/£ against the UK Pound Sterling on Wednesday, January 19 and Thursday, January 20 respectively, the rand significantly strengthened to R20.46/UK£ in the morning of Friday, January 21.

– Having traded at R17.59/€ and R17.37/€ against the European Union’s Euro on Wednesday, January 19 and Thursday, January 20 respectively, the rand significantly strengthened to R17.10/€ in the morning of Friday, January 21.

While most South Africans, who are well-informed and up-to-date with global market trends, were happy with the rand strengthening because of this loan, most of them started asking whether South Africa actually needed this loan.

Do We Need This World Bank loan?

South Africa has been repeatedly warned by the three international credit rating agencies against increasing government expenditures and government debt levels, because they fear that our country’s Debt-to-GDP levels are already deemed too high above the 70% levels or even estimated at 80.30%.

It was partly on these grounds that all three of these international credit rating agencies, namely Standard & Poor, Fitch, and Moody’s downgraded us to sub-investment grade (popularly referred to as Junk Status). Many people fear that this loan may unnecessarily increase our country’s interest payments and/or debt repayments which may divert other funds which could have been used for service delivery purposes.

Second, there is an “illusive” figure of R500m, or even R500bn, that those opposed to the ANC government, and worse still the self-styled “Radical Economic Transformation” faction of the ANC, like citing that the government borrowed from overseas last year, purportedly to be used in dealing with the negative multiplier effects of the Covid-19 pandemic.

They say this money was never clearly accounted for; with most of them even claiming that that money simply disappeared into the “sea of corruption”. They say this R11.4bn World Bank loan may equally be lost to that “sea of corruption”.

I have a problem with all the people who hold these views, first, because I believe that this whole “illusive” amount of R500m or even R500bn they repeatedly refer to, is unknown to most of us who are actively monitoring the economic trends.

Third, the economic growth rates in South Africa are worrying, this year we had a negative economic growth rate because of the serious national lockdown restrictions on businesses and the economy that year. That resulted in much lower taxes for the South African Revenue Service (Sars) and other State revenue generation structures.

It is predicted that there will be a very low positive economic growth rate for last year. The implications of this are that the government needed to access external sources of finances in order to augment the internal finances from Sars. The World Bank loan with its very low interest rates was thus ideal for our circumstances, and we can easily afford its repayments.

Unfortunately, South Africans with their culture of entitlement expect the government to immediately fix our unemployment, poverty, and inequality challenges without stating where the money to fix these issues will come from.

Already, there are demands for the government to use this World Bank loan to extend the R350 monthly social relief of distress grant indefinitely. Others are even saying this money must be used to introduce the totally unsustainable Basic Income Grant; I disagree with this.

The World Bank loan was necessary, and there are no structural adjustment programmes linked to it.

* Professor Dumisa is an Independent Economic Analyst.

** The views expressed here are not necessarily those of the DFA and Independent Media.