Massive doubts linger over IMF financing for South Africa – was it even supposed to qualify?

South Africa has been handed over R70 billion in funding from the International Monetary Fund (IMF), with only loose commitments and lofty promises given that it will be put to good use – but everyone has doubts, including the IMF itself.

The $4.3 billion (R70.7 billion) loan granted to South Africa by the IMF represents a surprise ‘Rubicon’ moment for the country, says Intellidex analyst Peter Attard Montalto.

And instead of this being a once-off event to tackle the Covid-19 crisis, this could be a major stepping stone in the direction of full conditional financing from the group, he said.

“At the start of 2019, a debate raged about South Africa going to the IMF which was misplaced and dismissing, given the political dynamic of getting a conditionality based programme – yet here we are with a Rapid Financing Instrument (RFI) being disbursed.

“The facility is different, the times and the backdrop are different, but still, an unexpected Rubicon has been crossed,” the analyst said. “The fact National Treasury has been forced to go through this process with the IMF, however, is important for them to readjust their stance on international financial institutions.”

Attard Montalto said that National Treasury has had a “somewhat standoffish relationship” with these institutions in the past, believing that South Africa had deep capital market access, and did not need the support from these groups that ‘poorer’ countries did.

However, this view is shifting, particularly over the last year, as the tightness of funding has become apparent.

“This move now – alongside the ongoing scraping of the barrel of non-conditionality based programmes that is ongoing this fiscal year – cements that shift,” he said.

South Africa on the back foot

Attard Montalto said that massive doubts linger over the IMF financing – even from within the IMF itself. This includes views on whether South Africa was even supposed to qualify for the funding, given its financial markets were in severe distress before the Covid-19 pandemic even hit.

In an IMF staff report accompanying the approval of the loan to the country, the financial institution tacitly acknowledged this, stressing the need for South Africa’s financial authorities to establish credibility in dealing with the problems it faces.

This includes promises to build business confidence, implement a successful growth strategy and to implement fiscal reforms. As the group states:

Should the authorities not achieve consensus to implement the envisaged reform agenda to reverse the economic stagnation of the last decade, growth and debt would follow the path in the passive scenario presented in the authorities’ Supplementary Budget Review, posing serious threats to debt sustainability, and generating destabilising effects such as inflation or financial repression.

In particular, specific and well-defined fiscal consolidation and reform commitments in the October MTBPS will be a critical first step to establish the credibility of the reform efforts, followed by steadfast implementation.

Cutting through the IMF’s “diplomatic wording”, Attard Montalto said it is clear that the group is sceptical. As is almost everyone else.

“South Africa would not require the financing instrument with its deep liquid markets if the debt was going from 40% to 70%GDP on this (coronavirus) crisis. Instead, it is going from 60% to 90%.

“The financing is required here precisely because South Africa has not reformed the fiscus, state-owned companies, or adopted growth-enhancing structural measures.

“As a result, we do not believe it is right to view the financing as a one-off Covid related event – instead, it’s a stepping stone as these long-run issues play out towards and eventual conditionality based programme,” he said.

Credibility is shot

While the IMF loan carries no post-loan conditions – the South African government can use the funding as it pleases – it did require some ‘commitments’ from government to get the loan approved in the first place.

This was explicitly linked to finance minister Tito Mboweni’s economic plan published in 2019, and the more recent ‘must happen’ scenario presented in his emergency budget, tabled in June.

These submissions focus on network industries, reorienting export policies, lowering barriers to entry and supporting labour-intensive sectors – yet there is no evidence of new momentum or movement on any of these plans.

Key among these is the public sector wage bill, which Treasury is looking to cut by R160 billion – but this is still to be negotiated with unions, where government has a poor track record of coming out with the upper hand.

However, Attard Montalto noted two new loose commitments to come out of the letter of intent with the IMF: a statement from Treasury that it is “open to introducing a debt ceiling”, counter to a decades-long stance that there should be no limits; as well as a commitment to complete transparency around how the money will be spent in relation to Covid-19.

These concessions – while in no way guaranteed, or a condition of the loan – are a clear black mark against Treasury’s credibility to handle debt.

“Credibility is now shot…we think National Treasury is more on the back foot in government at large, now more than ever,” he said.

For its part, National Treasury, through director-general Dondo Mogajane, has promised that the money will be put to good use, assisting South Africa to deal with the Covid-19 pandemic.

“I think it is important that South Africans be comfortable and know that we did not put the country at risk, and the sovereignty of the country is intact in term of what we have agreed to with the IMF.

“We will be finalising the details in the next few days, but we are excited that the Covid-19 response will be boosted by this loan and we will make sure the money is spent within the prescripts of the law,” he said.

Meanwhile, president Cyril Ramaphosa has authorised the Special Investigation Unit to probe contracts and tenders related to Covid-19 procurement in governments, to root out alleged corruption which has seen billions of rands looted from emergency funds.

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