THE release of the Government’s Letter of Intent to the International Monetary Fund (IMF) to secure a $4.3 billion for COVID-19 relief will both allay fears that the loan comes with onerous conditions but will also raise questions about how exactly the loan will be repaid and what happens if promises to the IMF are not kept.
It seems government has promised the IMF austerity measures, however painful, just to repay its debt.
The letter, signed by Finance minister Tito Mboweni and Reserve Bank Governor Lesetja Kganyago, states simply: “On behalf of the Government of South Africa, we hereby request approval of financial support from the IMF under the Rapid Financing Instrument (RFI)…[for]… 100 percent of quota to mitigate the adverse economic impact of Covid-19.”
The concerns about conditions are addressed by the fact that under the RFI, a country merely has to demonstrate that it is in a crisis and the funds have been used for intended purpose and offer the required proof of payments.
The government has undertaken to provide periodic reports on spending and audited statements within 12 months of disbursement and, in a line that strikes a chord in light of recent events, to publicly disseminate “all Covid-19-related procurement contracts and allocation (with details about awarded companies and their beneficial owners).”
The letter also gives IMF permission to publish all documents related to the request, so if there is a fine print in which the government has pledged a power station or a harbour in the event of a default, it will eventually come to light.
The loan falls due at just over three years after disbursements, or 40 moths, and is payable over 20 months.
The five year period within which it has to be repaid can be seen as the IMF protecting itself against the possibility of another crisis striking, and further emergency loans being required, before this one is repaid.
In the letter, government starts by admitting that the effects of the hard lockdown will be deep and sustained, and sticks to the Reserve Bank’s conservative estimate that GDP will shrink by 7% this year, a figure they will likely need to revise if not at the October Medium Term Budget Policy Statement, then retrospectively in next February’s main budget.
The government outlines its three step approach funded by its now contentious R500 billion stimulus package starting with the disaster relief allocation, a fiscal support package for individuals and businesses while the third will be implemented over the medium term on structural reforms.
Given that part of the money will be spent over the next three years and that includes a R200 billion loan guarantee scheme over two years that has not even been 50% utilised, how the narrative that R 500 billion has disappeared in three months arises is a mystery to rival COVID-19 itself.
“The direct impact of the fiscal package on the consolidated budget amounts to R185 billion while R101 billion of existing expenditure commitments will be reprioritized and shifted towards COVID-19-related interventions,” Mboweni and Kganyago said in the letter.
“The rest of the spending will be financed through the use of cash balances and borrowing from multilateral institutions (around US$7–7.5 billion).”
The bulk of these have now been secured.
Government also points to the Reserve Bank’s intervention of a 275 basis points rate cut so far this year, the purchase of government bonds and relaxation of capital requirements for banks as mitigating measures which it makes clear re temporary and will fall away as soon as the pandemic subsides.
The reserve Bank has now been committed to keep inflation at around 4.5 %, the mid-point of the inflation target range, over the next two years.
The irony of the fact that the Reserve Bank is sitting on reserves that are far more than the country is looking to borrow at $ 52 billion and that it can do more on rates and bond purchases is lost on the authors of the letter.
One of the questions that come to mind is if what government has promised the IMF, and presumably the World Bank, is the same as what it told rating agencies it would do, why is the IMF prepared to believe them yet the rating agencies did not?
As reflected by their successive downgrades?
The answer can only be that the IMF has leverage that rating agencies do not, which could be further loans with strict conditions and triggering default clauses.
Government’s ultimate reason for borrowing is to finance a budget deficit which is expected to balloon to almost 15% of GDP, or R750 billion, in 2020.
“In addition to financing this deficit, the government may face increasing contingent liabilities, mainly from deteriorating finances in state-owned enterprises (SOEs),” the government says in a point that would raise alarm.
Government then reminds the IMF of its good standing.
“South Africa does not have outstanding credit from the IMF and its capacity to repay the RFI purchase is adequate. We intend to meet our financial obligations to the IMF on a timely basis.”
To achieve this, Treasury aims to stabilise the dent to GDP ratio at 87.4% of GDP in 2023.
Government then promises to implement reforms according to its document entitled Economic Transformation, Inclusive Growth, and Competitiveness: Towards an Economic Strategy for South Africa.
That process is set to be driven by deputy finance minister David Masondo and is meat to lower the cost of doing business, introduce more competition and promote labour intensive sectors such as tourism and agriculture.
“Once the impact of the pandemic subsides, we will take action to reverse the upward trajectory of the public debt-to GDP ratio,” government says.
“To facilitate this effort, we are open to introducing a debt ceiling in addition to the nominal spending ceiling currently in place.”
What this means is that government may find itself unable to borrow to fund infrastructure, which it needs for growth, or to sustain healthcare spending that has started with COVID-19 or even to fix education but may be allowed to borrow some more, even above 90% of GDP by the IMF, in order finance the deficit to pay grants, the public sector wage bill and repaying this and the interest on all of its debt.
That will trap South Africa in a debt and consumption spiral that may last for a generation.
(COMPILED BY INSIDE POLITICS STAFF)