South Africa announced on Wednesday a R2.4bn ($355m) loan to neighbouring Swaziland on condition that King Mswati III opens talks on reforms in Africa's last absolute monarchy.
The People's United Democratic Movement (Pudemo) said it was disappointed South Africa had not heeded calls from Swazi activists to withhold the loan until Mswati agreed to allow political parties, banned in 1973.
Activists including Pudemo have also called for a transitional government to pave the way for elections within four years.
The loan sent a bad signal to the authorities, Pudemo president Mario Masuku told AFP.
"People who are pro-democracy in this country will get a backlash from the regime because the regime will be saying, 'We have won the battle'. It is a wrong decision," he said.
South African Finance Minister Pravin Gordhan said on Wednesday the loan deal "contains a set of objectives that promote economic and social development, multilateral co-operation, democracy, human rights and good governance".
But Masuku said he believed South Africa was "throwing money into a porous bucket with no management" because the Swazi government was "fraught with corruption".