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IMF: if you didn’t like the starter, wait for the main dish
by Amandla
5 July 2020

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. The net outflow from South Africa between January and the middle of April was $6 billion according to UNCTAD, 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 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 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 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 (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 directly by paying from the national budget. One of the sectors that suffered from this in the 2020/21 national budget was health care. 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 – 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 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 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-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.