Interest rate on $4.2bn IMF loan to South Africa will be ‘very, very low’

29th June 2020 By: Terence Creamer - Creamer Media Editor

Interest rate on $4.2bn IMF loan to South Africa will be ‘very, very low’

The International Monetary Fund (IMF) reported on Monday that its funding talks with South Africa had proceeded at a “measured pace” owing to the country’s favourable access to deep and liquid financial markets, which meant that the negotiations had focused primarily on the terms of the funding rather than the urgent disbursement of funds.

In a move that is controversial domestically, South Africa has approached the IMF for a $4.2-billion loan to assist it in closing a funding gap that has developed as a result of additional government spending commitments that have been announced as part of the country’s response to the Covid-19 pandemic.

Finance Minister Tito Mboweni announced on June 24 that the National Treasury and the IMF had reached a “common understanding” following difficult negotiations and that he anticipated that the IMF would consider South Africa’s submission in early July.

IMF African Department director Abebe Aemro Selassie confirmed that South Africa had requested support under the fund’s Rapid Financing Instrument (RFI) and indicated that a final outcome was likely in the “coming weeks”.

“The key benefit of the financing that we are able to provide under the Rapid Financing Instrument for South Africa is the fact that they would be able to access this finance at very, very low interest rates, almost negligible interest rates relative to the higher cost of borrowing that South Africa faces,” Selassie said.

The RFI is one of the emergency facilities that the IMF has made more broadly available to member countries since the onset of the Covid-19 pandemic, following which 102 countries approached it for support. Together with the Rapid Credit Facility, the RFI is expected to position the IMF to meet expected financing demand of about $100-billion.

“I want to stress, however, that South Africa is in the very well-placed position of having deep and liquid financial markets, so they are able to have access to reasonable financing at the moment.

“Therefore, the discussions are taking place at a measured pace, because the key is not so much urgency in us providing financing, but rather that we are able to provide much cheaper financing than would otherwise be the case.

“So, discussions are taking a bit of time and we hope we will have a final outcome in the coming weeks, and we will hear back from the South African authorities,” Selassie said in response to a question posed following the release of the IMF Regional Economic Outlook for sub-Saharan Africa (SSA).

The report forecasts that the South African economy will contract by 8% in 2020, a 2.2 percentage point downward revision on the IMF’s projection for the country published in April.

The figure is also worse than the 7.2% contraction outlined by the National Treasury in its Supplementary Budget of June 24.

The IMF expects South Africa to rebound by 3.5% in 2021 on the back of improving business activity and confidence as the authorities make progress in implementing policies to boost growth and stabilise public debt.

The downward revision to South Africa’s growth outlook was also worse than the one outlined for the regional economy as a whole, with SSA projected to contract by 3.2% in 2020, which is 1.6 percentage points deeper than the IMF projected in April.

“Growth in SSA is projected to recover only gradually assuming that the pandemic abates and lockdowns ease further in the second half of 2020,” the IMF states.

Regional growth is projected at 3.4% in 2021, which is 0.6 percentage points below the April 2020 forecast.

The recovery projected for 2021 is shallower than the expected world growth rate because the policy packages deployed by sub-Saharan African countries to facilitate the recovery are considerably smaller than those implemented in advanced and many emerging market economies.

In its recently released World Economic Outlook Update, the IMF forecasts that global growth will contract by 4.9% in 2020 but recover to 5.4% in 2021.

“In the region’s largest economies (Angola, Nigeria, South Africa), real gross domestic product is projected to return to precrisis levels only by 2023 or 2024.”