Dondo Mogajane on IMF loan: 'We shouldn’t be happy about taking on more debt'

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National Treasury director general Dondo Mogajane.
National Treasury director general Dondo Mogajane.
Ziyaad Douglas, Gallo Images
  • South Africa has secured a $4.3 billion loan from the IMF to support the fight against Covid-19.
  • Treasury Director General Dondo Mogajane says that taking on more debt is not ideal, but the country had no other option.
  • According to its letter of intent to the IMF, South Africa has committed to achieving fiscal consolidation, debt stabilisation, rolling out economic reforms and addressing challenges at Eskom.



"Taking on more debt can never make anybody happy."

These are the opening words of National Treasury Director General Dondo Mogajane, at the beginning of an interview about South Africa's new $4.3 billion loan from the International Monetary Fund.

The IMF agreed to extend the loan earlier in the week following months of engagements, as the Covid-19 pandemic exacerbates SA's already struggling economy.  

Mogajane says that South Africa should ideally be scaling down its ever-increasing debt burden, given that the country's debt-to-GDP ratio set to reach 81.8% of GDP by the end of the current fiscal year, according to Treasury's supplementary budget. Finance Minister Tito Mboweni, meanwhile, warned at the tabling of the budget in June that the country is at risk of a sovereign debt crisis if public debt is not stabilised.  

But the state also needs funds for the economic stimulus meant to keep the economy from falling into a deeper hole. The economic shock of the pandemic and the consequent lockdown will see SA miss its tax revenue target by a staggering R300 billion. This has forced government to borrow from international finance institutions to fund the pandemic response.

The IMF loan, which, according to Treasury, comes at a low interest rate, is cheaper than other options of raising funding, Mogajane tells Fin24. 

Looking for loans 

South Africa's economy is set to shrink anywhere between 6% and 13% this year, the largest economic performance drop in 90 years.

Government has created a R500 billion stimulus package to provide social protections and buoy the economy, among other things. Nearly a fifth of the package is to be funded with loans from multilateral institutions, which - apart from the IMF - include the New Development Bank and the African Development Bank.  The World Bank is also being approached.

The IMF loan is particularly contentious because the institution is known for attaching stringent conditions to loans, which some argue compromises the sovereignty of borrowing states. The $4.3 billion emergency loan, however, is part of the IMF's Rapid Financing Instrument (RFI) facility and a fully-fledged economic programme is not required.

Mogajane says the terms of payment would likely be made available by the end of the week, as would the funds. "Towards the end of the week we may just see those billions flowing through."

Mboweni and Reserve Bank Governor Lesetja Kganyago have co-signed a letter of intent to the IMF which lays out the country's commitments - these are not prescribed by the IMF, he emphasises.

"South Africa does not have outstanding credit from the IMF and its capacity to repay the RFI purchase is adequate. We intend to meet our financial obligations to the IMF on a timely basis," the letter reads.

According to the letter, the Reserve Bank has committed to remain an inflation targeting bank, and ensuring the soundness of the financial system

From the next financial year, government commits to reversing the upward trajectory of the debt-to-GDP ratio, to stabilise debt, the letter indicates. "To facilitate this effort, we are open to introducing a debt ceiling in addition to the nominal spending ceiling currently in place," it reads.

Other measures to achieve fiscal consolidation are also to be implemented, with public debt set to peak at 87.4% of GDP in FY2023/24. Zero-based budgeting will be instrumental to this. "We intend to take measures that include further reductions in the wage-to GDP ratio, rationalisation of transfers to SOEs, and streamlining of subsidies."

Government has also said that support to SOEs will be "strictly conditional" on them improving operations and financial health.

"SOCs (state-owned companies) remain a challenge and it is important that we approach them carefully to be properly run, self-sustainable businesses, without relying on the state for their existence and support," says Mogajane.

"We can't willy nilly give guarantees and support."

The letter of intent also refers to reforming Eskom to reduce its burden on the fiscus. The power utility has been dogged by financial and operational challenges for years, and has about R450 billion in debt. 

Furthermore, efforts to remove structural constraints to growth, as outlined in Treasury's economic paper accepted by Cabinet last year, are to be implemented.  These include modernising and reforming network industries such as rail, ports and telecommunications as well as improving the ease of doing business, among other things.

"All that is waiting for us is to make sure that we do these things we have been talking about for a long time. We have been talking about it forever," Mogajane says. "Implementation, implementation and implementation is key to take us out of the deep hole that we are currently in as a country."

When asked what the barrier to implementation has been in the past, Mogajane says that its "uncertainty" and lack of "common understanding" on where the country should be heading. While we have been good at holding workshops and talking - we have not gotten around to the details of how to go about implementing, he explains.

There is also a risk that if we do not manage to stabilise debt, or lift growth by implementing structural reforms ourselves, the country may have to return to the IMF this time for a loan that calls for a fully-fledged economic programme. "That will be a really unfortunate day for South Africa, and I hope we will never get there," says Mogajane. "We must at all costs avoid going to the IMF on a fully-fledged programme."

University of Western Cape professor of economics, Matthew Ocran, says that loans by multilateral institutions are not to be taken lightly. "The IMF and international financial institutions do not give money out just for the sake of it. They tend to get their monies back and they always expect borrowers to give an undertaking regarding certain issues and this is done to ensure they indeed get their resources back," he adds.

Ocran says the country's commitment to pursue structural reforms should not be considered a conditionality.  

But if we do not deliver on the RFI we risk getting a poor track record; we may be forced to borrow from the market at rates which are far more expensive, he explains. 

Transparency

Commenting on concerns of South Africans that the funds could potentially be looted or misappropriated, Mogajane says that those who do not "respect" internal controls put in place by Treasury should be held accountable, and even be criminally charged and prosecuted.

In terms of its commitments, the country intends to monitor its Covid-19 related spending to ensure it reaches targeted objectives. This expenditure is to be audited and findings are to be published by the Auditor General. Covid-19 related procurement contracts are also to be publicly disseminated, with details on contract awards to be provided.

Speaking for a vision of a post-Covid-19 economy, Mogajane says that achieving an inclusive economy which bridges the gap between the rich and the poor is imperative. Government should find ways to partner with the private sector in uplifting the majority of people, he adds.

Social distancing calls for spatial planning to create an environment which is far healthier for schools and housing. Or developing an industry such as the local manufacturing of much needed medical equipment. "It's important to leverage the opportunities Covid-19 brings," he says.

"There is an opportunity for us to emerge as a powerhouse that we want to be in Africa."

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