Why foreign loans are a self-imposed straitjacket for SA’s economy

The increased presence of international financial institutions in South Africa since 2020 should not be seen simply as a turn to cheaper lending. Rather, they are playing a key role in legitimising policy reforms that are aimed at dismantling state power over key economic resources, benefiting domestic and international capital.

At first glance, it may seem like South Africa has caught a break. International financial institutions, most recently the World Bank and the African Development Bank (AfDB), have funnelled billions of dollars and euros in loans into the public purse. 

These loans have been provided at below market interest rates and with generous grace periods, at a time when the debt markets are charging the government a premium to borrow money.

These loans are often celebrated in headlines as victories: “South Africa secures World Bank funding” or “AfDB backs green growth reforms”. But we need to ask what these loans are actually financing – and to whose benefit.

Curiously, these loans are not for the construction of bridges, roads, rail or tied to mega infrastructure projects such as Medupi. 

Moreover, according to the media statements and project documents published by the institutions, these loans are not intended to help South Africa refinance foreign currency-denominated debts. In other words, they cannot be regarded as an alternative to the high cost of market borrowing.

Instead, these loans are meant to finance the legal and regulatory infrastructure deemed necessary to dismantle the state’s control over key economic resources and often include policy conditions in their terms.

National Treasury is therefore voluntarily approaching international financial institutions for money it could otherwise acquire elsewhere without the conditionality and political baggage associated with such borrowing.

Reading the clues

The first clue lies in how these loans are structured. They are neither earmarked nor set aside for a particular infrastructure project, as is often suggested by media reports.

Instead, National Treasury classifies these loans as “general budget support”. This means they are lumped together with all the taxes, market debt and government income generated in a fiscal year.

While it is good for the government to have discretion on spending, as is allowed by general budget support loans, this is problematic where there is a hidden or contentious agenda behind the lending.

Fortunately, reports provided by international financial institutions provide some more clues: in assessing South Africa’s readiness for new loans, institutions evaluate the extent and speed at which the government has been undertaking policy reforms.

Let’s take the 2025 World Bank loan as an example. The loan agreement document explicitly states that the release of the $1.5-billion is conditional on the World Bank’s satisfaction with the “programme being carried out by the Borrower [Republic of South Africa]”. This “programme” comprises several pillars largely related to legislative and regulatory changes that are designed to increase the role of the private sector.

In the energy sector (pillar one), the World Bank cites the government’s mandate for the National Transmission Company of South Africa (NTCSA) to enter into electricity transmission services agreements with independent transmission providers. This, it says, is to promote “private sector participation” and acts as proof of South Africa’s adherence to “the programme”.

Similarly, in the transport sector (pillar two), the government is commended for expediting the unbundling of Transnet through the Transport Economic Regulator Act of 2024.

Self-imposed straitjacket

That World Bank loan is not an isolated case. The recently approved $476.6-million loan from the AfDB follows the same pattern. The AfDB board was thrilled with the success of the previous $300-million 2023 loan, which they say “delivered key reforms that bolstered financial stability and increased renewable energy capacity”.

The project appraisal for the 2023 AfDB loan outlined the bank’s specific contribution. It included its support for the Electricity Regulation Act, which, in their view, would “provide the legislative framework to restructure and unbundle the electricity industry to create a modern and competitive sector, crowd in large investment into renewable energy, and establish a transmission system operator”.

Unlike the classic “structural adjustment” loans prevalent in the Global South following the 1980s, these loans are a self-imposed straitjacket on economic policymaking as well as an undoing of the developmental principles underpinning the establishment of the South African democratic movement.

Government commitments to international financial institutions, as argued by the IMF, are viewed by global capital as a stamp of approval for a country’s “readiness” for investment. It assures the private sector that the government will not reverse its policy stance.

No surprises

Greater policy certainty is viewed as a precondition for crowding in private sector commitments. The push by the National Treasury and the Presidency to pass these reforms, all of which fall under the banner of Operation Vulindlela, should come as no surprise.

Civil society and organised labour have consistently raised the alarm about the nature of these reforms and about whose interests they serve.

The South African Federation of Trade Unions views Operation Vulindlela as “a neoliberal structural reform agenda that is accelerating the privatisation of South Africa’s public infrastructure”.

The Congress of South African Trade Unions has also expressed concern about the ongoing unbundling of Eskom.

Meanwhile, the Alternative Information and Development Centre has noted the link between the acquisition of these loans from international bodies and the acceleration of reforms proposed in Operation Vulindlela. It argues that it serves “to satisfy the narrow interests of private investors and business elites at the expense of the public good”.

In sum, for the National Treasury, the proliferation of foreign loans not only provides certainty to the market that reforms will be carried through and maintained, but also makes it difficult for dissenting voices to trigger policy changes.

Ultimately, protecting South Africa’s economic sovereignty means ensuring that the vision for our economy is shaped by the people the economy is meant to serve – that is the general public.

This would necessitate opening up the space for Parliament and the public to scrutinise and debate the uptake of loans granted by international financial institutions, including their terms, conditions and long-term consequences.

It is about ensuring that economic decisions reflect the needs and voices of the people above the preferences of markets or the priorities of lenders.

The call by Parliament’s Standing Committee on Finance for greater transparency – despite resistance from the National Treasury – must now be taken up more widely.

Decisions about who controls our electricity grid, our ports, our budgets, and our future cannot be made behind closed doors. The time for making lending decisions that foreground the interests of South Africans is now. DM

Liso Mdutyana is a debt and budget policy junior researcher at the Institute for Economic Justice, and Matshidiso Lencoasa is chair of the Budget Justice Coalition.