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Sometimes you need a coach: The upside of an IMF loan

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Jan-Daan van Wyk is a senior analyst, investment management, with Stonehage Fleming.

While the jury is out on whether Treasury will opt for tapping the IMF, the main advantages of the IMF RFI funding are simply that at an interest rate of around 1%, it is almost definitely the cheapest form of funding available, and it can be acquired relatively quickly.

Minister of Finance Tito Mboweni has lately been at pains to distinguish between emergency relief funding available from the International Monetary Fund and traditional IMF funding. Speaking to the Finance Committee last week, he said that the IMF’s Rapid Financing Instrument specifically relates to extraordinary demands on a country’s budget as a result of the economic impact of Covid-19, and does not come with the normal requirements for structural reform.

South Africa has an IMF quota of $4.2-billion (SDR3.05-billion), or about R77.5-billion, depending on the rate of exchange at the time, and the government is considering applying for it as part of the R500-billion relief package announced by President Cyril Ramaphosa. The government will also be applying to the World Bank and to the New Development Bank, a BRICS initiative.

While the jury is out on whether Treasury will opt for tapping the IMF, the main advantages of the IMF RFI funding are simply that at an interest rate of around 1%, it is almost definitely the cheapest form of funding available, and it can be acquired relatively quickly.

The current crisis is not, however, the first time South Africa would have had dealings with the IMF. South Africa’s poor and deteriorating fiscal position is not new and our economy was already in a recession before the pandemic.

SA’s funding options to address this situation are quite limited, having already gone to the public and business in several instances to increase tax revenue. Consider the hikes in income tax rates, the increase in VAT and changes to dividend withholding tax, to name a few. The country’s tax burden already sits at just over 27% of GDP according to the World Bank, which is already higher than the average of our emerging market peers.

That being said, calls for a wealth tax have been heard again, notably by the authors of a new study by the Southern Centre for Inequality Studies at Wits University. The study was recently debated on radio by Judge Dennis Davis who, while he questioned one or two of its figures, supported imposing a wealth tax to assist with government’s R500-billion relief package.

But why are we here? Why are we in the position of considering IMF support? Of course, the answers lie in SA’s lack of structural reform, large budget deficit, high debt to GDP ratio and years of poor capital allocation which translated into low economic growth.

For the past 10 years, every time a new Budget has come out, Treasury has increased spending on the basis that this will help put us in a position over the next two or three years to start cutting back. But all that has happened is that fiscal consolidation keeps getting pushed further down the road.

This is where partnering with the IMF could prove useful. As a policy anchor, rather than purely as an emergency relief measure for Covid-19 — to assist with our overall balance of payments, by targeting improvements in key economic metrics. While there is much resistance to this idea, it is important to also consider the benefits. 

Currently, the government could seek financing from global markets at an interest rate of between 7.5%-8% on a 10-year US dollar-denominated loan. Compare this to an IMF loan, where, at 3%-4%, the interest burden would be half as onerous over the same period. Even with the risk of further rand depreciation pushing up the cost, this is still a good price. Depending on the loan instrument selected, repayment would take place anywhere from 12 months up to four years.

Such a loan would also come with what is known as “concessional” terms — certain requirements to restructure the South African economy. But these requirements are unlikely to be any different to what we already know needs to be done. They could include curbing our high public sector wage bill, significantly reducing state transfers to SOEs, targeting efficiency gains in revenue collection and imposing floors under both capital expenditure — to bolster growth — and social spending, to protect the socially vulnerable from austerity measures.

Further, these requirements would kick in immediately and the government would no longer be able to continue procrastinating. It would be rather like taking on a personal trainer or wellness coach, where you know you need to lose weight for health reasons, but you can’t seem to get started. Suddenly, there is accountability (and cost) and while it may result in short-term pain, you know it will be worth it in the longer term. DM/BM

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