On February 1st, Minister of Finance Enoch Godongwana had to explain to the Parliament's Standing Committee on Finance why South Africa had accepted an R11 billion general budget financing from the World Bank.
South Africa required about R475 billion in borrowing. Of the gross borrowing requirements, 77 billion will be in dollars; the World Bank loan will form a part of that. The government needs the money for US dollar-denominated commitments, such as interest payments on the country's dollar debt, United Nations subscriptions, International Monetary Fund (IMF) payments, and government operations abroad.
According to Minister Godongwana, the loan has favorable terms, including a three-year repayment holiday, low interests, and no attached conditions.
The Loan Signals More US Dollar Debt in the Future
South Africa borrowing money from the World Bank for the first time is an important policy signal.
Because the country can borrow in its own currency in the long run, it currently has low levels of dollar borrowing. If South Africa ever needs to borrow in dollars, the potential is enormous.
Africa Doesn’t Trust the World Bank
In South Africa, much like in most third-world countries, the World Bank is viewed with suspicion. In the 70s, the multilateral institution forced nations to adopt structural programs to get loans. Those structural programs favored private capital and gutted many social institutions, policies, and services. Countries that adopted the structural reforms suffered substantial human costs.
The loan will form part of South Africa's fiscal relief package. The nation has received support from several international monetary groups, including the IMF, New Development Bank, and the African Development Bank.
South Africa’s Debt
South Africa had its credit ratings slashed due to fears of a looming debt crisis. Although there was a massive disruption to its economy during the pandemic, it has benefitted from high commodity prices.
Godongwana stated during a budget speech that the government would use an R182 billion ($12 billion) increase in tax revenues to reduce the deficit and borrowing. The government also intends to balance the budget before interest payments by 2024, and debts are expected to reach 75% of GDP by 2025.
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