IMF: if you didn’t like the starter, wait for the main dish

5 July 2020 by Amandla

The Treasury has made clear that it is seeking a smallanyana three to five year loan from the International Monetary Fund (IMF) of $4.2 billion, at a smallanyana interest rate of 1 or 1.1%. It will also be looking for a loan of $55-60 million from the World Bank. And another good diplomatic loan of $1billion has been offered by the BRICS New Development Bank. This brings the total in new foreign institution lending to some $5.2 billion.

That’s “Rand(R) 95 billion” of the R500 billion that was called a “relief package” and not a stimulus by the Financial and Fiscal Commission (FFC) in its 26 May independent review.

 The loans and the currency

But are the foreign loans in fact worth R95 billion? At the Finance Minister’s 27 April press conference, you could have exchanged $5.2 billion for R97.6 billion. One month later, the two loans would be worth only R89.5 billion. On 27 April, you got R18.78 for a dollar. On 27 May, you got about R17.40. The slight strengthening of the rand was bad for these foreign loans: it cost South Africa R7 billion.

If the rand loses value again after the loans are disbursed and repayments have started, the effect will be bad for a second time. The loans are in dollars. Repayments, because we buy dollars with rands, will increase. Loans in dollars are paid back in dollars, but the cost of dollars in rands changes with the currency markets.

The world economy is in its worst crisis since before the Great Depression in the 1930s. The currencies of developing countries are shunned by the finance industry and pension funds Pension Fund
Pension Funds
Pension funds: investment funds that manage capitalized retirement schemes, they are funded by the employees of one or several companies paying-into the scheme which, often, is also partially funded by the employers. The objective is to pay the pensions of the employees that take part in the scheme. They manage very big amounts of money that are usually invested on the stock markets or financial markets.
. The net outflow from South Africa between January and the middle of April was $6 billion according to UNCTAD UNCTAD
United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.

, the main UN body dealing with trade and investment. That is why, even taking into account the slight upturn in May, the rand has dropped 25% in value in relation to the dollar since the beginning of January.

Nobody knows where it will be at the end of this year or next. It might be at R20, or R21 or even R22 to the dollar. If that happens, the instalments on the “small” dollar loans “with no conditions” will cost between 16 and 28 percent more to pay.

The idea that a loan to the government, from IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
or any foreign institution, “will be cheap” is therefore nonsense. In the coming turbulent years, it will matter little to the state or any
indebted South African entity, including private corporations, if the formal interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate on a dollar loan is low and “concessionary”.

Indeed, the Treasury has for years underlined in the Budget Reviews that the government is borrowing as much as possible in loans counted in rands. The foreign share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of the national debt has gradually been brought down. It was moving towards 9% in the February budget. Why should the Treasury change loan policy now, if there are alternatives?

 Eskom and the World Bank loan

45-50% of the state owned enterprises’ (SOEs) borrowing has been in foreign currency. This has been seen as a big problem. Let us look at one example.

A $3.75 billion “loan facility” was given to Eskom by the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

(WB) in April 2010. It was a kind of credit card, as is the usual WB loan format. It was aimed at financing about one third of the “Eskom Power Investment Support Project”, mainly for building the giant Medupi coal power station.

$3.076 billion of the facility has been used by Eskom over the years. Only $393 million of the amount has been repaid. So in May 2020, Eskom still owed the WB $2.683 billion for the Medupi loan. That’s 87% of what it had used of this credit card, called a “loan facility”.

In addition to the $393 million in loan repayments, Eskom also paid the WB close to $1.16 billion in “interest, charges and fees” during the ten-year period. So out of some $1.55 billion in total cross border payments to the WB between 2010 and 2020, only 25% were counted as repayments of the loan itself. At this pace, Eskom will still be paying the World Bank 30 years from now.

The Treasury has for two years been supporting Eskom’s debt service Debt service The sum of the interests and the amortization of the capital borrowed. directly by paying from the national budget. One of the sectors that suffered from this in the 2020/21 national budget was health care Care Le concept de « care work » (travail de soin) fait référence à un ensemble de pratiques matérielles et psychologiques destinées à apporter une réponse concrète aux besoins des autres et d’une communauté (dont des écosystèmes). On préfère le concept de care à celui de travail « domestique » ou de « reproduction » car il intègre les dimensions émotionnelles et psychologiques (charge mentale, affection, soutien), et il ne se limite pas aux aspects « privés » et gratuit en englobant également les activités rémunérées nécessaires à la reproduction de la vie humaine. . As Neva Makgetla pointed out before the lockdown, it was cut by 1.2% in real terms.

In May, the battered public utility Eskom paid $78.7 million in interest and charges to the World Bank. At the average exchange rate of R18.33 to the dollar, the interest and charges paid to the WB in May must have cost Eskom over R1.44 billion.

If the value of the rand had been stable since April 2010, the remaining debt in dollars would have been R19.7 billion. But today, with the rand hovering between R17 and R18 to the dollar, that debt is over R47 billion.

Eskom must not continue to use this expensive credit card and borrow the remaining $674 million before 30 June next year, when the WB “loan facility” is closing.

 Consequences of taking IMF / World Bank loans

Civil society organisations and environmentalists demanded from the outset that the loan to Eskom’s coal power build-out shouldn’t be granted. But it was. Eskom has been drawing funds from the WB facility for ten years, during which time it has been known to the world and to the World Bank that spending on the Medupi coal power plant build has been
marred by corruption.

That makes it odious debt Odious Debt According to the doctrine, for a debt to be odious it must meet two conditions:
1) It must have been contracted against the interests of the Nation, or against the interests of the People, or against the interests of the State.
2) Creditors cannot prove they they were unaware of how the borrowed money would be used.

We must underline that according to the doctrine of odious debt, the nature of the borrowing regime or government does not signify, since what matters is what the debt is used for. If a democratic government gets into debt against the interests of its population, the contracted debt can be called odious if it also meets the second condition. Consequently, contrary to a misleading version of the doctrine, odious debt is not only about dictatorial regimes.

(See Éric Toussaint, The Doctrine of Odious Debt : from Alexander Sack to the CADTM).

The father of the odious debt doctrine, Alexander Nahum Sack, clearly says that odious debts can be contracted by any regular government. Sack considers that a debt that is regularly incurred by a regular government can be branded as odious if the two above-mentioned conditions are met.
He adds, “once these two points are established, the burden of proof that the funds were used for the general or special needs of the State and were not of an odious character, would be upon the creditors.”

Sack defines a regular government as follows: “By a regular government is to be understood the supreme power that effectively exists within the limits of a given territory. Whether that government be monarchical (absolute or limited) or republican; whether it functions by “the grace of God” or “the will of the people”; whether it express “the will of the people” or not, of all the people or only of some; whether it be legally established or not, etc., none of that is relevant to the problem we are concerned with.”

So clearly for Sack, all regular governments, whether despotic or democratic, in one guise or another, can incur odious debts.
– debt given and taken against the interests of the people. So the debt could be cancelled with the support of international law. A less radical alternative would be to suspend all payments on this loan until most effects of the Corona crisis have
passed. We could argue that, during the lockdown, the May payment of interest and charges of more than R1.4 billion to the WB is a scandal and must stop.

The problem is that to speak of debt cancellation is politically incompatible with taking new loans from the same or similar institutions. The Finance Minister is proposing to borrow the $4.2 billion from the Rapid Financial Instrument (RFI). The terms of the RFI include that:
The level of access in individual cases depends on the country’s balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. need, capacity to repay, the member’s outstanding Fund credit and its record of using Fund resources in the past .” (our emphasis added)

SA cannot cancel or delay payments of old loans from one global financial institution and get a new loan from another one in the same family.

Then there are other commitments required:
A member country requesting RFI assistance is required to cooperate with the IMF to make efforts to solve its balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. of payments difficulties and to describe the general economic policies that it proposes to follow. Prior actions may be required where warranted.”

They add:
Financial assistance provided under the RFI is subject to the same financing terms as the Flexible Credit Line (FCL), the Precautionary and Liquidity Line (PLL) and Stand-By

These loan programmes are from the financial crash in 2007-2008. They required that a successful applicant ”has sound economic fundamentals and institutional policy frameworks; is currently implementing—and has a track record of implementing—sound policies; remains committed to maintaining sound policies in the future.”

In short, the South African government cannot have an economic policy that the IMF opposes and at the same time get any loan from IMF.

 But Treasury supports IMF anyway

But of course this is no problem as far as the Treasury is concerned. Its leading staff already support the recommendations of the IMF. They are just like the “structural reforms” of Tito Mboweni, which he promotes as economic science, with massive corporate and traditional business support. They are based on export- and profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. -led maldevelopment and “growth”. They ignore redistribution and the disintegration of society that was taking place even before the Corona Crisis.

The priorities are relaxation of protective labour laws, lower corporate taxes, a smaller public sector, and less interference on all fronts in what employers and corporations are doing with the people they employ and retrench, with the climate and the earth and with
the profits they are shifting abroad.

It is as if the global shock from the pandemic hasn’t hit the established thinking of the South Africa political class, or the economic elite and its think tanks.

Yet it is the IMF, together with the World Bank, that is fighting for global legitimacy. Their loan programmes have been pointed out as one root cause of the poor state of the public health sector in developing countries. That will lead to tens of thousands of unnecessary deaths from the Covid-19 pandemic.



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