The International Monetary Fund (IMF) has granted a R70 billion (US$4.3 billion) loan for South Africa to help the country manage the immediate consequences of the fallout from COVID-19. “This is the Biggest Virus Loan granted by the IMF after doubling its emergency lending capacity to $100 billion in April to help mobilize more than $1800 to respond to requests from more than 40 African countries” – “Managing Director Kristalina Georgieva”

The funds “support the authorities’ efforts in addressing the challenging health situation and severe economic impact of the Covid-19 shock,” the Washington-based lender said in a statement Monday. “Once the pandemic is behind, there is a pressing need to ensure debt sustainability and implement structural reforms to support the recovery and achieve sustainable and inclusive growth.”

Let Azola’s editors shed some light on what South Africans should expect.

With economies around the world on the verge of collapsing due to the Corona virus pandemic. Some governments are pointing to the IMF as a potential savior of the world economy at this critical stage. They argue that the IMF can play a key role in avoiding financial crisis and restoring confidence to a pummeling international economy. Yet, at the same time many view the IMF with disparagement, arguing that their intervention causes more problems than it solves.

South Africa’s finance minister Tito Mboweni says the IMF loan will limit the country’s economic vulnerabilities which have been exacerbated by COVID-19. 

How true this statement as the country is in a state of crisis and companies are responding to the pandemic by retrenching in order to maintain a bottom-line.  We all know this is taking a toll on most African families due to their large sizes. Many have lost hope as it’s difficult to separate the cost due to a lot of people not working and food parcels are not reaching people due to over-regulation and red tape. The President Cyril Ramaphosa had promised South Africans & companies TERS relief funds so that they can assist them and certainly this won’t be enough to keep the companies afloat hence the re-opening of the economy on the 18^th August 18, 2020

The saddest part is that this situation is going to get worse before it can be right. How will the SA government get the loan from the IMF to help the ordinary South African? 

Expectations:

What conditions has the IMF attached to the disbursement?

The IMF has provided funding through its Rapid Financing Instrument. This is designed to support countries facing an urgent need for financing due to a crisis such as the COVID-19 pandemic. The goal is to help the country face the immediate financial consequences of the crisis. As a result, the IMF provides financing quickly and without strict conditions. The country merely needs to show the IMF that it is facing a crisis, that it will use the funds to deal with the crisis. That it will cooperate with the IMF to solve the balance of payment problems caused by the crisis and to describe the economic policies that it proposes to follow.

In some cases, the IMF may require the country to undertake certain policy actions before it can access the funds.

In South Africa’s case, the country’s payment problem relates to the fact that the economy is expected to contract by about 7% this year and the budget deficit to increase to about 15% of GDP. This means that the government will need to increase the amount it has to borrow. Given that it has been downgraded by credit rating agencies, and that the economy is in bad shape. There is a substantial risk that both local and foreign investors will have a limited appetite for South African debt. This will complicate the government’s efforts to finance the deficit. The IMF loan helps resolve this problem.

South Africa provided the requisite information to the IMF in the form of a letter of intent signed by the minister of finance and the governor of the Reserve Bank. The letter has not yet been made public. But, according to the IMF press release, South Africa seems to have informed the IMF that it intends to take certain steps to stabilize the country’s finances. This means that the government will cut government spending to reduce its need to borrow. The current disputes over public sector wages and funding for state-owned enterprises are examples of steps it could take. The government has also said it will improve the governance of state-owned enterprises and introduce reforms to stimulate a growing and inclusive economy. These reforms could include measures to improve competition in different sectors of the economy.

This will all be good if South Africa didn’t have the biggest downfall of all, the corruption that is hindering for ordinary South Africans to get the benefits of what the money is intended for, when the government applied for the funds, they said it was for the improving health care; making sure all the health workers have PPE and enough personnel is hired and remunerated accordingly. In light of videos circulating on SA’s social platforms where PPEs were dumped in a river in Gauteng province just so that tenders could be awarded family members and friends of government officials, it’s quite clear the funds will never be used for what they were gotten for due to the high corruption in the country. 

South Africa made these undertakings in last year’s medium-term budget statement and the supplementary budget statement in June this year.

This suggests that the IMF is merely expecting the country to implement the policies already announced by the government.

How will the money be disbursed?

This kind of financing is provided in one payment. The IMF press statement doesn’t say when the funds will be disbursed but the goal is to make the funds available “rapidly”. That could be as early as August.

Once the funds are disbursed, the government will be free to spend. According to the national treasury’s statement, it plans to use the money to support health and frontline services, to protect the vulnerable, drive job creation, support economic reform, and stabilize the public debt.

These are all consistent with the purpose of the Rapid Financing Instrument and the government’s stated intentions. But these purposes are very general and we will need to see more details about what exactly the government will spend the funds on.

What restrictions are there on the government’s ability to use the money?

The IMF loan does not impose any conditions over and above what is in South African law on how the funds can be used. Consequently, the funds will be subject to the same procurement and accounting requirements as all other budgetary expenditures.

Also, the government will have to account in its future budget statements and report to parliament on how the funds have been used. South Africans will also be able to demand that the government demonstrate that the funds have been spent consistently with the requirements of the constitution and bill of rights. This means the government should show that it is using the maximum available resources, from whatever source to help realize all the rights that the constitution and South Africa’s international commitment grant to South Africans.

“The IMF requires that South Africa repay the funds to the IMF over 20 months beginning 40 months after the loan is disbursed. This means that South Africans will need to ensure that the funds to repay the IMF are properly budgeted for.”

What are the upsides of the loan?

The most important benefit is that South Africa is getting $4.2 billion at about 1.1% interest. This is a very cheap source of funds. If the government tried to raise the same amount either on domestic markets or from other international sources it would pay a considerably higher interest rate – the current rate for government bonds of comparable maturity is about 7%.

The second potential benefit is that the IMF loan will catalyze other funds for the country. In other words, investors in South Africa and abroad will interpret the IMF’s action as an expression of support for South Africa and this will give them the confidence to invest in South African debt. Given that foreign investors hold about 30% of the South African government’s rand-denominated debt 

This boost to confidence could be important. It will both reduce the incentive of these investors to sell their government bonds, potentially pushing up interest rates, and enable the government to issue new debt if needed.

The third benefit is that by helping to stabilize South Africa’s situation, it will limit the damage that may be inflicted on the neighboring countries. This in turn, could help South African exports and thus help preserve jobs and income in South Africa.

What are the downsides?

The most significant downside is that the loan is denominated in foreign exchange. Thus South Africa has to bear the risk that if the rand depreciates, the loan and the interest on it will become more expensive. Given the state of the South African economy, this is not an insignificant risk.

But it’s important to keep in mind that the IMF denominates the loan and the repayment obligations in Special Drawing Rights. These are the IMF’s special form of money and its value is made up of a composite of a basket of currencies. These includes the US dollar, the Euro, the Japanese Yen, the Chinese Renminbi, and the Pound sterling. The values of these currencies tend to fluctuate against each other so that some appreciate while others depreciate. This helps mitigate the foreign exchange risk that South Africa must bear.

The second risk is that if South Africa does not use the funds from the IMF wisely, the country’s economic situation will deteriorate and it will struggle to pay back the debt.

If this happens or the pandemic lasts longer than anticipated, the country could be forced to seek additional support. In either case, South Africa’s negotiating position would be significantly weaker. For more information on how to scale your companies accounting, auditing and financial services. Struggling with TERS application, SARS submission and having your company in good standing, let Azola Consulting Services help you navigate these uncertain times with your new & existing business today with a plethora of topnotch consultants. At Azola Consulting we will make sure your company has the right BEE accreditation and good Financial Statements for Loans.