Independent Online

Saturday, June 25, 2022

Like us on FacebookFollow us on TwitterView weather by locationView market indicators

R11.4 billion loan from the World Bank sparks fears of South African debt trap

The World Bank on Friday approved R11.4 billion low-interest development policy loan to South Africa to help the government widen its social protection net. Photo: File

The World Bank on Friday approved R11.4 billion low-interest development policy loan to South Africa to help the government widen its social protection net. Photo: File

Published Jan 24, 2022

Share

FEARS of a debt trap loomed large last week as it became apparent the government was set to extend the R350 a month Covid-19 Social Relief of Distress (SRD) grant for another year.

The World Bank on Friday approved R11.4 billion low-interest development policy loan to South Africa to help the government widen its social protection net.

Story continues below Advertisement

National Treasury director-general Dondo Mogajane said the loan would contribute towards addressing the financing gap stemming from additional spending.

“It will assist in addressing the immediate challenge of financing critical health and social safety-net programmes, while also continuing to develop our economic reform agenda to build back better,” Mogajane said.

President Cyril Ramaphosa last week led a government delegation in a meeting with a civil society organisation to discuss a proposal for the extension and improvement of the SRD beyond March 2022 and possible policy pathways to the introduction of a Basic Income Grant. The SRD grant coverage has grown significantly since its introduction from 6 million to 10.3 million recipients a month.

BNP Paribas South Africa senior economist Jeff Schultz said it was their base case view that the SRD grant would be extended for at least the 2022/23 fiscal year, which would cost the fiscus at least R35bn.

“Deteriorating socio-economic conditions, rising joblessness and more acute inequality in the economy suggests that a SRD extension for another year is a likely minimum requirement for the political economy right now, we believe,” Schultz said.

The World Bank loan comes on the back of multi-billion rand loans taken in the past two years to mount a serious response to the socio-economic crisis created by the pandemic. In July 2020, South Africa secured a R70bn loan from the International Monetary Fund; R5bn from the African Development Bank the same month; and R14.5bn from the New Development Bank in April 2021.

Story continues below Advertisement

Opposition political parties have raised concerns over this latest World Bank loan, at a time when South Africa is looking to exit its state of national disaster as the fourth Covid-19 wave has passed.

The DA’s spokesperson on finance Dion George said the National Treasury needed to provide clarity on the conditions that were attached to the loan.

“At the very least, the minister of finance will need to clarify how this World Bank loan is to be spent and repaid,” George said.

Story continues below Advertisement

“The prospect of getting ensnared in a debt trap is a looming reality for South Africa. More debt will not solve South Africa’s economic challenges.”

IFP spokesperson on finance Inkosi Mzamo Buthelezi said the Treasury cannot afford to take on a loan when the R500bn in funds allocated to Covid-19 relief in 2020 was allegedly plundered.

“We run the risk of losing our sovereignty as a nation since we cannot service our current debt, while our national debt-to-GDP percentage stands at around 70 percent,” Buthelezi said. “We are essentially widening the gap and digging ourselves further into a debt trap.”

Story continues below Advertisement

However, Schultz said the Treasury’s strategy to obtain lowest-cost funding from multilateral organisations made sense, due to little conditionality attached to these multilateral loans.

He said this loan was already earmarked by the National Treasury and is part of its FY21/22 hard-currency funding plan.

“Therefore the loan was already incorporated in the budgetary framework outlined in November’s Medium-Term Budget,” Schultz said.

“Given that 21 cents of every rand of tax revenue generated in the country goes to servicing government debt, taking advantage of low-funding costs in the current environment makes a lot of economic sense and was always part of the Treasury’s strategy, we believe,” he said.

[email protected]

BUSINESS REPORT ONLINE

Share