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The IMF loan to South Africa – a mistake


South Africa’s February budget was based on a GDP growth rate of 0.9%. Despite having such a vast national balance sheet, deep capital markets and a Reserve Bank that can finance a stimulus, President Ramaphosa indicated that South Africa has approached international financial institutions such as the IMF and the World Bank for funding. The IMF provides funding for countries that have problems with their balance of payments (BoP), a statement that records a country’s financial transactions with the rest of the world. It has a new Covid-19 funding window that has about $100 billion (R1.9 trillion) – almost the size of the South African budget – for all its 189 member countries. The World Bank has a funding window of $14 billion (R266 billion), equivalent to 13% of the South African budget, for all countries. Based on its quota, South Africa could borrow up to

$4.2 billion (R79.8 billion) from the IMF. It is unlikely that one country would get such a large allocation from the Covid-19 window, which has received 102 applications. To use its quota, South Africa would probably have to also borrow through the normal window, which would involve a dreaded structural adjustment programme. These programmes have punishing conditions that have impoverished many countries in the Global South and in Europe. It is not clear why South Africa should take an IMF loan that would also expose it to foreign exchange risks owing to currency depreciation.


IMF Funding and Low-Income Economies

This is not a concern unique to South Africa. In a baseline scenario, the impact of the crisis will force at least 45 Low Income Economies (LIEs) to request US$ 93.8 billion in emergency financing to face the epidemic. Without a suspension of external debt payments, US$ 21.8 billion in emergency financing would be diverted away from Covid-19 response efforts towards creditors. For countries receiving support, provision of loan financing would increase public debt as a share of Gross Domestic Product (GDP) on average by 14.2 percentage points. This would represent an average increase of 36.6 per cent over current debt level. The overlap between the risk of debt distress and health service-vulnerability points once more to the negative impact of debt on health care. For countries in debt distress, debt reached 11.5 per cent of GDP on average, while public health care expenditure represented only 2.2 per cent of GDP. Delayed and complex debt restructuring processes that last for 2 years or more (Congo, Gambia, Mozambique, Zimbabwe) have inflicted additional economic damage onto these countries. By extension, this has limited their capacity of response to the Covid-19 epidemic. There is a real risk of a rapid surge in the number of countries experiencing these same types of problem. The urgency of this situation highlights the need to reform the current debt resolution system and make progress towards the creation of a multilateral debt workout mechanism which allows for an orderly, fair, transparent and durable debt crisis resolution to reduce the economic and social costs of debt crises. The IMF’s ‘first line of defence’ to provide financial support to developing countries is comprised of two types of emergency loans that can be rapidly deployed without conventional conditionality attached, the $10 billion Rapid Credit Facility (RCF) and the now $90 billion Rapid Financing Instrument (RFI), for low-income countries and emerging economies, respectively.


Historically and correctly regarded as a villain that has obstructed the prosperity of developing nations, the International Monetary (IMF) is now saying that exchange controls (finally on outward flows, not just inflows) are precisely what “developing nations” need to exercise sovereignty. But it is not just its recommendation of controls that is slightly surprising. In response to the coronavirus, the IMF is now offering grants or loans with comparatively low interest rates (albeit dollar denominated), and with fewer conditions attached.


The World Bank

In April, the World Bank board approved its first operations for $1.9 billion in COVID-19 emergency health support. While details are lacking, the Bank also announced it expects to deploy up to $160 billion over the next 15 months. Notably, these did not include disbursements of the World Bank’s Pandemic Financing Facility (PEF), a much-criticised mechanism supposedly designed to quickly raise funds for pandemic responses in low- income countries .There is concern that funds being discussed consist of pre-existing resources that will be ‘merely’ reallocated and consequently become unavailable to support other essential programmes. CSOs, particularly from the Global South, have also raised significant fears about the erosion of already poor community engagement and protections as multilateral development banks rush through approval of what many consider ‘business as usual’ projects, including large infrastructure initiatives.

Reacting to the announcement of support to the International Finance Corporation (IFC) – a sister organisation of the World Bank- Global Unions stressed that IFC must ensure its resources preserve employment and are not used to bailout of private financial institutions, calling on the IFC to monitor the labour safeguard requirements on retrenchment, health and safety, and collective bargaining, social protection, paid sick leave and childcare for direct borrowers and sub-clients of intermediaries. Some commentators questioned why World Bank support was channelled through the IFC rather than the Bank’s Health, Nutrition, and Population Division and cautioned that IFC’s investments in for profit health facilities might detract from effective response efforts.

While resources allocated from the International Development Association (IDA), the World Bank’s low-income lending arm, allow for the provision of grant support, that is not the case for the International Bank for Development and Reconstruction (IBRD), the World Bank’s middle-income lending arm. Given that middle-income countries will also be heavily impacted by the crisis, CSOs have called on the World Bank to expand eligibility criteria for grant support. At a more fundamental level, civil society and communities struggling to respond to the pandemic and its consequences will be closely observing to see whether the Bank and Fund’s responses will reflect a change in the market-based fiscal consolidation policies that contributed to the current health, social and economic .


Assumptions and concerns

There are several concerns with IMF and World Bank Loans. They work on the incorrect assumption that South Africa(SA) has a foreign exchange reserve crisis and an urgent balance of payments (BoP) crisis and therefore accessing a loan from the IMF is desirable to raise the foreign currency to cover medical imports and SA’s short-term, foreign- denominated costs. Secondly, the argument fails to consider the medium- to long-term term implications of an IMF loan given the unfolding global economic recession and the types of reforms that will be needed to save lives. Finally, the argument mistakenly claims that the IMF has changed its spots and that it would be a tragic mistake for this not to be recognised. The SA Reserve Bank notes that an adequate level of reserves equals the value of three months of imports or the equivalent of short-term, foreign debt service costs. At last count SA had access to $43bn (R754.65bn) in foreign currency reserves — not counting $6.9bn in local gold reserves — a slightly healthier level than it was before the outbreak of the coronavirus.

SA’s imports for 2019 cost R1,490bn, which, in today’s significantly devalued currency, would cost just less than $85bn. This means, based on last year’s higher levels of trade and imports, we could cover the import costs for six months, double the level required by the Reserve Bank — more than sufficient to cover all urgent medical imports.

What about South Africa’s ability to service short-term, foreign-denominated debt costs? SA’s total state debt service cost in the 2020/2021 budget was R229.1bn. A small percentage (10%) of this is required to be paid back in forex. Of course, the problem remains that corporations, banks and parastatals have borrowed from international creditors to the sum of $185bn (just more than half of which is denominated in forex).

Several parastatals borrowed from the World Bank, the China Development Bank, the Brics New Development Bank, the African Development Bank. A debt audit should therefore be mandatory before there is any further servicing of the foreign debt. Nevertheless, according to Reserve Bank requirements, the country is far from having a forex reserve crisis. This does not mean countries should not be thinking how to strengthen forex reserves; it proves only that South Africa does not have to go to the IMF to do so.

Regulating capital outflows through the implementation of more stringent capital controls— now more easily implemented as illustrated by the IMF’s own position — as well as the introduction of import substitution measures and limiting the imports of luxury items, a public audit and scrapping of anything illegitimate, would all be key measures in this regard. Given all the above, a loan is not required. The question may then be asked, but why not take the loan anyway, given the concessionary interest rates and seemingly few strings. Besides the loan not being needed, it is also undesirable. Beyond not having a forex reserves crisis now, nor an urgent BoP situation, the first major problem is that this loan from the IMF, even though small (now) with “few strings”, must be paid back in dollars. Such a loan will therefore only exacerbate the problems of SA’s balance of payments (and the structural weaknesses in the current account), rather than ameliorate them.

Having to repay more dollar-denominated debt will create greater dependence on FDI and portfolio investment and exports to raise the forex to service that debt. These structural problems make it difficult to break from the country’s export-orientated growth path and dependence on financial inflows. However, being difficult is different from being impossible. Indeed a 2018 open letter signed by over 110 academics detailed MFD’s many structural flaws, stressing that its promotion of shadow banking to create investable opportunities in essential services such as water, health and infrastructure can have long- term effects.


Alternatives to the IMF and World Bank Funding

Several factors have contributed to the development of alternative and supplementary mechanisms to carry out IMF functions. Perhaps the most important has been the rapid growth of financial markets, and especially bond markets, which in turn has driven the expansion of institutions that monitor and carry out continuous market surveillance, notably rating agencies and other private and governmental institutions that track financial conditions. A second factor has been an equally impressive expansion in networking and local or regional cooperation and integration. Alternatives that South Africa could explore instead of Bretton Woods Institutions include:

  • Expanding social security coverage and contributory
  • increasing tax
  • eliminating illicit financial
  • improving efficiency and reallocating public expenditures (emphasising this requires going beyond a simple financial cost-benefit analysis).
  • tapping into fiscal and foreign exchange
  • managing debt (meaning borrowing or restructuring sovereign debt).
  • adopting a more accommodative macroeconomic
  • increasing aid and transfers.

Key Principles for Governments receiving Corvid Aid Funding

  • Ensure complementarity in expenditure across various sources: A high-level national or subnational decision-making body dealing with the COVID-19 crisis could ensure complementarity of funding between the budget and any emergency funds. Processes need to be in place to ensure that there is no double dipping of funding for the same transaction from multiple sources. For example, having a single budget allocation and release, financial report and audit for expenditure could both sources would help minimize the
  • When there is a need for exceptions, protocols also need to be enhanced: For transactions that do not follow regular government processes, appropriate protocols need to be in place for higher-level authorization to minimize risk of waste, fraud and corruption. The details of these protocols need to be communicated
  • Financial reporting arrangements should link to outputs and outcomes. The government must commit to publishing how the money from donations is spent. It will be appropriate to establish mechanisms for reporting the amounts co-financed through the emergency fund at each spending agency
  • The total expenditure on COVID-19 from both regular government budget and the emergency fund need to be reported along with output and outcomes. If COVID-19 emergency funds also follow the same public sector accounting standards (International Public Sector Accounting Standards or national standards), the reporting would be relatively more
  • It would be prudent for governments to communicate through various legislative committees on how COVID-19 emergency relief funds are used and the overall result of the spending. A government website for the emergency relief fund could also publish updates on utilisation of the funds on a timely basis to enhance transparency and accountability.
  • Supreme Audit Institutions (SAIs) and private sector auditors can establish credible oversight: There is concern over accountability when an SAI’s mandate does not explicitly require an audit of this category of funds. n such cases, even if the SAI is not responsible for the audit of the emergency relief fund, the SAI audit teams should review the expenditure from the blended sources when they conduct their regular performance audit of COVID19
  • Civil society organisations can help improve accountability and play a crucial role, both as supporting actors as well as monitoring and information sharing bodies. Governments should encourage engagement and dialogue with civil society organizations and citizens openly and transparently, especially when decisions related to the government’s response to the pandemic are

Recommendations for Alternatives to Covid-19 Funding

  • Placing a temporary moratorium on government and SOE foreign debt repayments and ensuring that any profit and dividend payments due to transnational corporations are made in local currency for local
  • Annulling loans and contracts of State enterprises, agencies and government departments associated with corruption (i.e. odious debts and contracts, including the World Bank’s 2010 US$3.75bn loan to Eskom).
  • Raising capital from government funds under the management of the Public Investment Corporation (Government Employees Pension Fund, Unemployment Insurance Fund, etc).
  • A moratorium on dividend pay-outs by corporations on the Johannesburg Stock Exchange (JSE), and a redirecting of dividends to the COVID-19 fund in response to crisis.
  • Implementing a financial transaction tax with a progressive base so that major transactions are penalised, and normal banking is considered a lifeline human right of all
  • The SA Reserve Bank substantially reducing interest rates and putting in place measures to prevent speculation on the Rand via exchange and other capital controls.
  • Easing pressure on the balance of payments and reducing opportunities for base erosion and profit shifting by restricting cross border payments of dividends and interest on inter-company loans, particularly to companies in tax
  • With respect to illicit financial flows and corporate profit shifting, prohibit all payments of “sales commissions”, “management fees” and other payments to related parties     in                            tax                       havens;        and Furthermore, the SA Reserve Bank could also directly issue bonds to

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