On 21 January 2022, the World Bank approved a $750 million (~R11.4 billion) loan to assist the South African fiscus. As part of the Bank’s “development policy loan” (DPL) programme, this loan is expected to have an interest rate of around 1-2%. It is a 10-year, dollar-denominated loan with a three-year grace period, meaning that it must be repaid within thirteen years. Concerns have been raised about the state taking on more debt in foreign currencies, as further depreciation of the Rand would make this debt increasingly expensive to repay, even if the formal interest rate is low.
Myth 1: The state needs more dollars, this loan will provide adequate dollars
The state, with the support of financial media, have justified this dollar-denominated loan by asserting that South Africa needs to improve its foreign exchange holdings situation to pay for short-term imports and debt servicing on existing foreign-denominated loans. However, the state’s existing foreign debt servicing costs amount to only R20.687 million in 2021/22, compared with the state’s total closing cash balance in foreign currencies of R186.742 million. Furthermore, the SA Reserve Bank states that the minimum level of foreign exchange reserves should cover three months of import costs. The country’s foreign exchange reserves in December 2021 equalled ~R897 billion, compared with a monthly 2021 import value average of just under R115 billion, meaning that import cover was equal to 7.8 months in December. With more than adequate foreign exchange holdings to cover both imports and debt servicing costs, the state’s acceptance of a dollar-denominated loan appears unnecessary and risks further increasing the state’s debt burden in the (likely) event of the rand’s depreciation.
Myth 2: This loan has “no strings attached”
The World Bank has suggested that this funding is meant to support its Country Partnership Framework (CPF) 2022-2026, signed with the South African government in July 2021. The CPF’s aim is to increase job creation by fostering a macroeconomic environment that is more conducive for private investment, continuing the investor-led growth strategy that has failed to bring about an end to the employment crisis for decades. The CPF states that South Africa may be eligible for up to $3.4 billion in World Bank financing in the period FY2022-2026, “depending on the level and pace of reforms.” The $750 million loan may be formally “without conditions,” but as a part of the CPF its broader purpose is to support reforms that will continue to structure the South African economy along with a highly liberalised, extractives-oriented, FDI-dependent growth strategy. Furthermore, access to further World Bank funding through the CPF is contingent upon these reforms, necessitating that these funds be used for specific reform efforts if the state foresees a need for future World Bank financing. By accepting the loan, the state has signalled its commitment to further liberalisation of the economy, including the continuation of its devastating austerity budget.
Myth 3: The state needs to borrow externally
The government argues that even its heavily constrained austerity budget will require extensive foreign borrowing. This argument ignores sources of internal finance, especially the Public Investment Corporation (PIC). The PIC mainly manages the assets of the Government Employee’s Pension Fund (GEPF), raising concerns in some quarters that using the PICs excess funds could imperil the pensions of public sector workers. However, the PIC remains heavily over-funded, meaning that much of its capital could be invested in Eskom’s green transition. The GEPF’s assets cover far more than 100% of its liabilities to members, yet a pension fund is never required to pay 100% liabilities at any one time. There exists no such scenario in which the fund will need to pay all of its members, given that they will not retire simultaneously. Furthermore, the GEPF is a defined benefits system, meaning that the level of the fund’s surplus will have no effect on the pensions received by members.
Estimates suggest that the GEPF is overfunded by up to R800 billion. This financing could be used for a wide variety of purposes, including the initial capitalisation of a sovereign wealth fund, paying off Eskom’s debt, a Basic Income Grant (BIG), or publicly owned renewable energy generation. Instead of turning to unsustainable, foreign-denominated loans, the state must utilise this untapped source of internal financing to drive a just recovery from the Covid-19 pandemic, leading into a Just Transition towards a low-carbon, high-wage development path. See a wide range of potential financing options here.
Myth 4: Increased austerity will promote job creation and growth
The continuation of fiscal austerity relies on the notion that the state is spending too much, and larger budgets would be unsustainable. Therefore, the state asserts that an austerity budget will reduce the public sector’s supposed bloat and create an environment in which the private sector will invest to facilitate job creation and economic growth. The World Bank loan, as a funding source for the implementation of the CPF, is meant to increase South Africa’s ongoing austerity budget.
The reality is that this gutting of the public sector has disastrous effects on employment, development, service delivery, and public health. For example, the state’s spending on employment creation is scheduled to decrease by 27% from 2022 to 2024. This decrease will almost certainly worsen the unemployment crisis, yet it is not made up for through social grants, which are also scheduled for increasing cuts in the coming years. As the country continues to suffer from one of the highest unemployment rates on earth (currently 46.6% by expanded definition!), it is unthinkable for the government to continue to cut its job creation spending, wages, social services, and the grants that more than 30% of South Africans rely on to survive. Instead, the state must publicly invest in development through value chain formation, localisation, and low-carbon, high-wage industrialisation.
Myth 5: Continued liberalisation and export-driven growth is the way out of crisis
The Country Partnership Framework (CPF), of which the $750 million loan is part, lays out a broad, overarching framework of macroeconomic liberalisation. The government and the World Bank agree that this continued liberalisation is crucial for economic growth, which in turn will spur job creation. The CPF plan promotes an export-led growth strategy based on extractive industries, a deepening of the current economic model. By accepting this loan, the state is therefore further locked into a growth path that is unsustainable in terms of environmental degradation, unemployment, and climate change mitigation. The world must rapidly transition to a low-carbon economy, a goal that is incompatible with the CPF’s plans for intensifying South Africa’s extractives-led model. Further, liberalisation will undoubtedly worsen the current unemployment crisis. Continuing to base the economy on resource extraction will deepen the country’s deindustrialisation and loss of manufacturing capacity. Rather than liberalise, the state must publicly invest in economic diversification, particularly facilitating low-carbon industrialisation through manufacturing.