SA has won the World Bank’s stamp of approval for its progress on structural economic reforms, with the bank advancing a $750m (about R11.4bn) concessional loan to the government on the strength of “breakthroughs” in its management of the electricity crisis, climate change and digitalisation.
The loan, which has taken more than 18 months to negotiate, will be used for general budget purposes rather than being tied to particular projects. It gives SA recognition for actions taken, rather than setting explicit conditions for it to meet in future.
The bank said the government took bold steps to contain the Covid-19 virus and mitigate its adverse socioeconomic impact, and it used the crisis to tackle structural reforms.
The government has made progress with reforms since its October 2020 economic recovery and reconstruction plan, the bank said in its loan programme document on Friday. It cited “major breakthroughs” in 2021 in digitising social grants and health programmes, as well as the lifting of the licensing threshold for embedded electricity generation to 100MW and the adoption of the National Climate Change Bill by the cabinet.
It also referred to promises of reform in several other areas, including in visas and water.
“Across the world these World Bank development policy loans require governments to achieve certain policy or institutional objectives. This is a loan that acknowledges the actions the government has taken both to respond to Covid-19 and to implement its reform agenda,” Treasury deputy director-general for asset and liability management Duncan Pieterse said on Friday.
This is the first time the government has borrowed from the World Bank to support SA’s national budget, though the bank lent SA $3.75bn in 2010 to support the building of Eskom’s new power stations.
The government has historically avoided borrowing from multilateral institutions such as the IMF and World Bank because of concerns about the conditions attached to those loans. However, it changed tack at the height of the Covid-19 pandemic in 2020, when those institutions made hundreds of billions of dollars of unconditional support available and SA’s own borrowing and borrowing costs spiked.
Former finance minister Tito Mboweni announced in his June 2020 emergency budget that the government would source $7bn from multilateral development banks and the IMF to help it finance the increase in the budget deficit. The government has raised $5.6bn of this amount, including from the IMF (the largest portion at $4.2bn), the New Development Bank and African Development Bank. But the planned World Bank loan — originally expected to be more than $1bn — had until now been conspicuously absent.
Talk in the market is that negotiations were complicated by the sluggish pace at which the government has been implementing reforms, which meant it was unable to commit to certain of the reforms the World Bank wanted included in the list of prior actions.
The $750m is a 10-year dollar-denominated loan, though there is a three-year grace period, so SA has to repay it within 13 years.
Pieterse estimates the interest rate SA has negotiated is 300 to 400 basis points better than it would pay to raise new dollar debt on international markets.
He confirmed that the government is still looking to raise $3bn on international markets this year, in line with the funding plan outlined in November’s medium-term budget.
The funding plan, which includes the $750m World Bank loan, envisaged that the government would raise $5.3bn of foreign borrowing in the 2021/2022 fiscal year, which is about 16% of the government’s total R475bn borrowing requirement for the year. An international bond market issue would be the government’s first since before the pandemic.
Pieterse said the intention is to keep the proceeds of the World Bank loan in dollars to meet SA’s dollar commitments, including interest payments and redemptions of foreign debt. This is in contrast to the loans from the IMF and other multilaterals, where the bulk of the proceeds in 2020 were converted into rand to help fund sharp hikes in the government’s domestic spending commitments at a time of volatile markets.
The Treasury disclosed in a recent debt management report that $4.6bn of the about $5.6bn raised from multilateral development banks and the IMF by March 31 had been converted to rand.
The government’s total borrowing requirement was revised downwards in November, thanks mainly to better than expected tax collections, which meant the deficit came in substantially lower than projected in February 2021.
Finance minister Enoch Godongwana will update debt and deficit numbers when he presents the national budget on February 23, a date that has been confirmed by parliament.
President Cyril Ramaphosa is expected to provide an update on the government’s progress on the structural reform programme when he presents his state of the nation address on February 10.
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