The International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, U.S. Photo by: REUTERS/Yuri Gripas/File Photo
The International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, U.S. Photo by: REUTERS/Yuri Gripas/File Photo

IMF emergency loan of $4.3bn with 1% interest has no strings attached

By Siphelele Dludla Time of article published Jul 29, 2020

Share this article:

JOHANNESBURG - South Africa’s massive $4.3 billion (R70.9bn) loan from the International Monetary Fund (IMF) has been welcomed, although there are concerns over the country’s ability to meet its debt obligations.

The lender of the last resort on Monday approved South Africa’s request for emergency financial assistance under the Rapid Financing Instrument.

President Cyril Ramaphosa in April announced that the government would approach international financial institutions, including the IMF, for loans to make up the R500bn economic recovery package.

The IMF loan is meant to meet urgent balance of payment needs stemming from the economic impact of the Covid-19 pandemic.

Old Mutual Wealth’s Izak Odendaal said yesterday the IMF could not lend to countries when it deemed debt to be unsustainable, and therefore it was positive for South Africa that the IMF had approved the loan.

Odendaal said the IMF loan should be seen as positive, particularly given that the interest rate on the loan was likely to be in the region of 1 percent compared with the extremely high by global standards of about 7.5 percent.

“One main negative is that the rand has already appreciated quite a bit, so we’ll get fewer rands at today’s exchange rate than we would have in March/April. For me, the concern is that we have had very little dollar borrowing. We are kind of immune to global currency swings - that is our strength. So borrowing in dollars from the IMF weakens that strength. But I don’t think it’s the start of a long-term borrowing that is going to saddle us with a huge dollar debt.”

Odendaal said it was also a positive that the IMF was not imposing conditions, but seemed intent on holding the government to the commitments it had already made.

The IMF made specific mention of the government’s commitment to pursue medium-term fiscal consolidation and broader economic reform and make related announcements in October in the Medium-Term Budget Policy Statement.

IMF’s acting chairperson, Geoffrey Okamoto, said there was a pressing need to strengthen economic fundamentals and ensure debt sustainability by carrying out fiscal consolidation.

Okamoto said South Africa needed to improve the governance and operations of state-owned enterprises and implement other growth-enhancing structural reforms.

“Specific reform commitments at the time of the October Medium-Term Budget Policy Statement will be a critical step to buttress the credibility of the reform efforts and should be followed by steadfast implementation,” Okamoto said.

North West Business School Professor Raymond Parsons said yesterday the IMF’s special loan facility was a cheap source of finance and formally excluded the IMF’s usual stringent structural adjustment conditions.

Parsons, however, said these reforms policy commitments had, therefore, in effect become a self-imposed “structural adjustment agenda” for South Africa, against which the country’s future economic performance would be tested.

“In securing the special IMF loan, South Africa has apparently willingly made commitments which will enable it to repay the debt. To do so there must therefore now be demonstrable urgency and resolve in stabilising the policy outlook for the economy and investors,” Parsons said.

“This means that the policy pledges made in the supplementary budget must steadily be met and that South Africa actively seeks to remedy chronic problems, such as the excessive public sector wage bill, widespread corruption, poor delivery, weak infrastructural development and dysfunctional state-owned enterprises.”

BUSINESS REPORT

Share this article: