To get IMF money, SA will have to pledge tough action

The rapid financing instrument (RFI) for which SA has applied to the International Monetary Fund (IMF) is proving to be anything but rapid. It is more than three months since finance minister Tito Mboweni said SA planned to take advantage of the Covid-related funding the IMF had made available to its member countries. The IMF, which since the start of the crisis has provided $82bn of emergency loans to 77 countries, confirmed last month that SA had approached it for $4.2bn under the RFI. But the loan is the subject of “tough negotiations”, Mboweni said last week, with the IMF’s board likely to approve it only next month. The loan would be the largest of the Covid emergency packages and in line with SA’s quota at the IMF. Other countries that have put in for this kind of money — such as Egypt’s recent $5bn — have taken not just emergency lines but the more conventional, and more overtly conditional, IMF standby arrangement. There has been no mention of this in SA’s case, apparently. Even so, the IMF is unlikely to dish out the money just like that.

At issue is the letter of intent that a country must agree with the IMF to support its application, signed by its finance minister and central bank governor. The letters are public documents. Nigeria committed in its $3.3bn RFI letter to continue fiscal consolidation and to power sector reform, sound monetary policy, and its “home grown economic recovery and growth plan” and anti-corruption efforts. Pakistan promised to resume fiscal consolidation and anti-corruption measures.

Particularly interesting for SA is Tunisia. It committed to policy and fiscal reforms that include slashing its large civil servant wage bill. As part of its $753m RFI application it also promised to reform SOEs. Even so, it sees the RFI paving the way to a more extended IMF facility.

These commitments are not conditions, strictly speaking. They are dressed up as actions the country already had in mind, not what the

IMF has imposed. They are the subject of negotiation, not IMF-designed

“structural adjustment” packages. And with the emergency facilities, unlike with standby arrangements, the IMF has no way of enforcing, after the fact, that countries deliver on their promises. So Mboweni can legitimately say that the IMF loan would not put national sovereignty at risk, which is the basis on which the ANC gave its blessing to apply.

None of that means the loans are free lunches. As the sample of letters of intent suggests, if SA wants IMF money, it will have to commit to tough action in getting public finances and the economy back on track. Stabilising public debt, cutting the public sector wage bill, tackling corruption, implementing growth-boosting reforms are all on the government’s list. Now they’re conditions, of sorts, for a loan and the IMF’s board is unlikely to settle for vague promises.

Last week’s supplementary budget comes in that context. Mboweni’s medium-term numbers assume an “active scenario” in which the government stabilises its debt ratio by 2023/24, instead of heading straight into a sovereign debt crisis. That depends on a massive R250bn of spending cuts, in addition to the contentious R160bn of public sector pay cuts he pencilled into the budget. The cabinet approved this plan, but few believe there’s the political will to achieve spending cuts. And even if these were achieved, the cuts would dampen SA’s economic recovery in the short term, to avert debt disaster in the longer term — a case of damned if we do and damned if we don’t.

After years of fiscal slide, SA has little option but to make promises to the IMF. It has a huge funding gap this year, which the IMF money will help plug. And it’s cheap money at a time when the government finds it ever costlier to raise long-term debt because investors see SA as ever more risky.

As important is that an IMF facility, and the commitments, gives comfort to other lenders. The government will need that, given the massive borrowing it will need on local and international markets. Funding will become more of a challenge, especially if international investor sentiment turns sour. The question is whether the $4.2bn is the last IMF facility SA will need — or just the first. Unless the government can avert a sovereign debt crisis, holding on to economic sovereignty could get harder.

Is the IMF’s $4.2bn the last SA will need — or just the first?