The increasingly warm relationship between South Africa and the Bretton Woods institutions (World Bank and IMF) is probably pushing Nelson Mandela to turn in his grave.
The World Bank’s $750 million Development Policy Loan (DPL) to Pretoria in late January signals that the red line Madiba took after becoming South Africa’s first democratically elected president in 1994, of not not report to the Group with a begging bowl for loans, was repeatedly crossed. Its implications are considerable.
President Cyril Ramaphosa first crossed that red line in July 2020 when he signed a $4.3 billion IMF Rapid Financing Instrument. The “state capture” had depleted the treasury coffers to the point that the country had little choice but to obtain the IMF loan.
Pragmatism tempered with desperation seems to have taken precedence over political principles!
“This DPL,” says the World Bank, “will help bridge the funding gap resulting from additional spending in South Africa in response to COVID-19. It reflects the priorities of modernizing the country’s social protection and health services and improving delivery systems, which will apply even beyond the pandemic.
The new norm in Pretoria’s debt management strategy is to seek more facilities between the IMF and the World Bank in the future. The reasons put forward by Finance Minister Enoch Godongwana are compelling. Loans are cheaper and long term.
But the country is indebted to them because its economy is underperforming and therefore unable to generate the GDP growth needed to support the budget. South Africa has a low debt-to-revenue ratio, which means costly debt service from the budget.
Godongwana signed on to the World Bank Group’s new Country Partnership Framework 2022-2026 in January “to help spur investment and job creation”. In last November’s medium-term fiscal policy statement, he prepared a nation struggling with rising living costs and 34.4% unemployment for greater austerity to come.
For Dondo Mogajane, Director General of the National Treasury, “the World Bank loan will help meet the immediate challenge of financing essential social protection and health programs while continuing to develop our economic reform program to build back better”.
Mogajane, in an interview with local radio BizNews, explained the harsh realities of the country’s debt problem.
“Money is never free. The $750 million DPL has a 13-year repayment period with a three-year grace period. It’s a cheap loan compared to what we would have gotten on the financial market. There are no conditions attached to the loan,” he said.
The reality is that it yields 1.92% less than the equivalent South African Eurobond issue in 2019.
The Treasury confirms that public debt service costs alone “are projected to rise from $17.77 billion in 2021/22 to $24.15 billion in 2024/25”. Public debt currently stands at $260 billion. Last year, the Treasury paid $32.41 million to service its debt to the World Bank, which amounts to $1.9 billion.
Poor spending record
However, the IMF’s February Article IV consultation with South Africa makes it difficult for Godongwana to read. Its baseline scenario for South Africa’s projected public debt as a percentage of GDP projects the debt burden to increase from 69.4% in 2020 to 69.9% in 2021 to 74.5% in 2022 at 77 .7% in 2023 to 84.3% in 2025.
Pretoria is not resorting to bottomless quantitative easing – central banks printing money. He turns to international agencies. The alternatives are tax revenue, fundraising in local and international bond and Sukuk markets, central bank issuing treasury bills, and FDI inflows.
Critics question the effectiveness of the Bretton Woods institutions’ oversight over the use of proceeds from its funding to South Africa. Mogajane admits that the government’s record on public spending is poor.
“I’m not just concerned about spending $750 million. I’m concerned about the $92 billion we receive every year. The Auditor General’s reports show erratic spending increases all the time,” he lamented.
The government’s desperation and dependence on the IMF and the World Bank are explicit. “We have a huge deficit of $23.76 billion in one year. We need money. We need the economy to work and the tax revenues to arrive. Until our economy is running at full capacity, we will have to borrow,” he conceded.
Mogajane’s call “to strengthen our public oversight bodies, including the boards of public entities and public enterprises”, is the most repeated call to arms of the public service in South Africa! It looks like Madiba will continue to mournfully spin in her grave for some time to come.