Opinionista Dick Forslund 24 June 2020

Borrowing from the IMF will only deepen South Africa’s crisis

 If you take the devil in the boat, you have to row him to the shore, and the International Monetary Fund makes it clear that no one gets a loan from it without pursuing an economic policy that the IMF supports. 

Finance Minister Tito Mboweni is creating panic before his tabling of the Supplementary Budget. He is speaking of an imminent “sovereign debt crisis”.  

By doing so he is pretending that the R1.8-R2-trillion state pension and unemployment insurance mega funds don’t exist – half of them currently placed on the shaky stock market. He believes nothing can be done to halt the $10-25-billion in illicit capital outflows from South Africa every year. 

Mboweni doesn’t think a graduated wealth tax on the richest 1% of the population is possible or that the South African Reserve Bank (SARB) could “monetise” a part of the government debt to mitigate the exploding unemployment and widespread hunger – to cite just one of the measures suggested by 34 economists, scholars and others in an open letter to the SARB published earlier this month. The economists demanded a change in the whole macroeconomic framework to grapple with the Covid-19 crisis, warning that failure to do so risks “degenerating into a failed economy, society and state”

But the Treasury has another plan. 

In the 2020 Budget Review a 0.4% real cut in non-interest spending every year for three years was announced. Public Health was to be cut by 1.2% in real terms this year. The crusade against “the public sector wage bill” was concretised into a plan for large reductions in public employment; cutting R160-billion in wage costs over three years. There is no way this can be done by wage freezes or even wage cuts.

The government is being taken to court for abandoning the third year of the 2018 wage agreement long before any lockdown crisis, but have the unions asked the Treasury about its plan for public sector employment? 

The Presidential Health Summit in October 2018 estimated that there were 35,000 vacancies in the public health sector alone. Two years later we are faced with a draconian plan to cut the size of the public sector as a share of the whole economy. The finance minister must now take the opportunity to clarify how his R160-billion cut translates into public sector job losses.

Moody’s downgraded South Africa to “junk” in March and nobody talks for long about an axe that fell. 

The $3.75-billion loan facility from the World Bank to Eskom was mainly for the building of the Medupi coal-fired power station. Its value in rands in April 2010 was R27.5-billion. Eskom has used R3.111-billion of it, which at midday 23 June comprises a debt of R54-billion, because of the much weaker rand.

In his Budget speech today (Wednesday 24 June), we instead expect the finance minister to speak more about the International Monetary Fund (IMF) and the smallanyana $4.2-billion loan he has applied for, arm in arm with President Cyril Ramaphosa and the governor of the SARB, Lesetja “Independent” Kganyago, who became chair of the International Monetary and Financial Committee (IMFC) in 2018; “the primary policy advisory committee of the IMF Board of Governors”. We can also predict that the IMF will approve the application for this loan, which the finance minister has assured everyone comes without conditions. 

The website of IMF provides information about the Rapid Finance Instrument or any other loan. It makes it clear, however, that no one gets a loan from the IMF without pursuing an economic policy that the IMF supports.

 If you take the devil in the boat, you have to row him to the shore. 

If we argue that the smallanyana IMF loan and the $1-billion loan from the New Development Bank are promoted for political purposes, the opposition will be called “ideological”. This is said to be in contrast to “scientific thinking” that allegedly is guiding the loan applications. 

But as a cautionary tale that may throw light on Mboweni’s plans, let us look at how another “small” dollar loan has developed over time and served South Africa. 

The $3.75-billion loan facility from the World Bank to Eskom was mainly for the building of the Medupi coal-fired power station. Its value in rands in April 2010 was R27.5-billion. Eskom has used R3.111-billion of it, which at midday 23 June comprises a debt of R54-billion, because of the much weaker rand.

Over the years, many have demanded it should be cancelled completely as so-called “odious debt”, recognising that the giant coal power project was against the interests of the country, and approved despite the threat it posed to climate change and its being riddled with corruption from the start. These were things the World Bank was aware of, but it still did not stop the credit from growing. 

To cancel such a debt may sound radical but it would get much international support today. 

In March, Mboweni co-chaired a meeting of African finance ministers that sent a letter to the World Bank, the IMF and the European Central Bank. Given the Covid-19 crisis the ministers asked for $100-billion in emergency loans to African countries. 

But on that point, the United Nations Conference for Trade and Industry (UNCTAD) has a different view. UNCTAD is against new loans from global institutions to governments in trouble. It does not support the mere postponement of payments until the end of the year, as the IMF decided in April for a range of countries, and which was agreed by the G20 meeting in March, on condition that creditors lose nothing at all in the long run.

The UNCTAD dispute with the IMF is public. 

In April, UNCTAD came out to advocate cancellation of more than $1-trillion in debt (of estimated $2.7-$3.4-trillion) owed by developing countries. UNCTAD argues that a debt crisis can trigger a financial meltdown; a chain of government defaults.

The loan is a kind of credit card. Right now Eskom has used about $3.111-billion of the allowed $3.75-billion credit. Eskom increased its debt to the World Bank by $20-million in the 2019 financial year. Another $54.8-million has been used since then; $34.8-million was drawn in June. 

The African ministers were much more modest. Nonetheless, they proposed “that the ministers recommend the immediate waiver of all interest payments on all debt estimated at $44-billion for 2020”.

The Treasury cannot have done much with this support from Africa and from the much more radical UNCTAD. Eskom scandalously forked out $79-million to the World Bank in interest and charges for this loan in the middle of the lockdown crisis, as if nothing special was going on.

In the lack of any other explanation, we interpret this as an example of the typical approach of our government. There is no opposition to or questioning of the role of global finance, of its insatiable demand for profits or the politics of its leading institutions. There is only, it seems, political congruence and unity to the bitter end; only this country’s collegial participation in a global compact of the political and corporate elite.

The reason for this is that, to the government, private international capital is the only basis there is for reconstituting the South African economy. 

But let us now look at the World Bank loan to Eskom

The loan is a kind of credit card. Right now Eskom has used about $3.111-billion of the allowed $3.75-billion credit. Eskom increased its debt to the World Bank by $20-million in the 2019 financial year. Another $54.8-million has been used since then; $34.8-million was drawn in June. 

There is $639.03-million left to draw from this credit, should Eskom choose to do so. This can continue until 30 June 2021; the closing date. 

Now, should Eskom do that, or can it turn to domestic financing? 

The Alternative Information Development Centre (AIDC) has long argued that the vastly overfunded Government Employee Pension Fund (GEPF) is the obvious alternative to dollar loans from the World Bank or, for that matter, from the China Development Bank (CDB), from which Eskom in March 2019 had borrowed $2.05-billion, using a $4.5-billion CDB facility.  

To summarise: a loan in dollars is not “cheap” only because of a 1.1% interest rate. The rand has dropped 20% in value to the dollar since January. The rand might stand at R20, R21 or R22 to the dollar next year. Nobody knows. 

The cost for a dollar loan increases when the rand falls in value. When Eskom opened the credit line in April 2010, the rand stood at R7.33 to the dollar. On 31 March 2019, $3.056-billion of the credit had been used. The exchange rate was R14.48. The value of the rand to the dollar had almost halved, and the debt in rands corresponded to R44.3-billion, or 10% of Eskom’s total official debt declared in the 2019 annual report. 

Now in June 2020, the rand has been hovering around R17.20 to the dollar, but is extremely volatile. In May, the rand stood at R18.29 to the dollar on average. That same month, Eskom made $45.4-million in loan repayments to the World Bank and $78.7-million in payments of interest and charges. The sum of $124.1-million cost Eskom about R2.27-billion. In April 2010, they would have cost R0.9-billion. The amount payable in rands has more than doubled, or by an extra R1.4-billion. 

Since 2010, Eskom has paid the World Bank $1.548-billion at a steadily worsening exchange rate. Only 25% of that amount, $392.85-million, counted as repayments of the loan, while $1.156-billion were paid in interest, fees and charges. 

At the current pace, the Medupi loan will be repaid by the turn of the century, and given the letter from all African finance ministers, what is the Treasury saying to the World Bank about it? What is the government’s position in the international debt relief debate? Mboweni should explain this in the Supplementary Budget speech. 

To summarise: a loan in dollars is not “cheap” only because of a 1.1% interest rate. The rand has dropped 20% in value to the dollar since January. The rand might stand at R20, R21 or R22 to the dollar next year. Nobody knows. 

Indeed, the Treasury has always commended itself for borrowing domestically in the Budget Reviews. This year, the plan was to go below 10% in foreign borrowing. In contrast, state-owned enterprises like Eskom have 40-45% of their loans from abroad. This has always been seen as a problem. 

There are no rational reasons for the government to change its borrowing policy during this unprecedented crisis. 

The two dollar loans in the pipeline are political. The government has several alternatives to them. For these reasons we hope that when it comes to a vote Parliament will reject the foreign borrowing plans. DM/MC

Dick Forslund is senior economist at Alternative Information and Development Centre.

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