A Chance at Redemption - South Africa’s R11 billion World Bank Loan
On 20 January 2022, South Africa secured a $750 million (approximately R11 billion) Development Policy Loan (DPL) from the World Bank Group for supporting the implementation of the Economic Reconstruction and Recovery Plan (ERRP) and the World Bank’s Crisis Response Approach in achieving sustainable growth and poverty reduction. This loan features an interest rate below the market rate and a thirteen-year repayment period, including a three-year grace period. It has favourable terms for South Africa’s financing needs, but the loan also has no conditions attached.
This low-interest, concessional loan comes at a time when South Africa’s fiscal position is at its weakest, with debt service costs consuming approximately 21% of government revenue servicing a rising deficit and accumulated debt. The $750 million is already accounted for under the national budget, forming part of the estimated $5.3 billion (or R77 billion) to be raised from international financial institutions in 2021/22. In other words, it should not be seen as a “new” or “additional” source of funding for recurring spending but rather a fortunate, concessional, temporary liquidity injection to help reduce the overall fiscal burden at the margins.
Moreover, this loan builds on the World Bank’s 2021 Country Partnership Framework (CPF) with South Africa for the period 2022 to 2026, with an overarching goal to support South Africa in stimulating investment and job creation to foster an inclusive and resilient economy. Its three focus areas include: promoting increased competition in the business environment, strengthening SMMEs and skills development to support job creation, and improving infrastructure services and enticing investment. The approval of the DPL can be viewed as a vote of confidence for South Africa’s response to COVID-19 and its proposed macroeconomic framework, which the World Bank reviewed before issuance.
Indeed, in comparison to the rest of the external financing needs, the DPL is not significant in size. It contributes only around one-ninth of external financing needs and two per cent of the total financing needs for 2021/22, with the bulk remainder comprised of domestic loans. However, the loan holds some weight and significance in political implications as it marks the beginning of a new era of relationship between the World Bank and South Africa.
Since the onset of the pandemic, South Africa has also received concessional funding from other multilateral lenders, including the R70 billion IMF loan in July 2020 and additional support from the New Development Bank and African Development Bank. Despite the economic potential associated with the World Bank loan, South Africans may want to refrain from any excess optimism. Given South Africa’s reputation of fiscal leakages and wasteful spending, concerns over whether this loan will be used productively are warranted.
Overall, the DPL is ideal in terms of its low borrowing costs and grace period, especially as the South African government strives to reduce the cost of debt and continue on its path of consolidation. The success of the DPL ultimately depends on how it is used. This presents an opportunity for the government to redeem its credibility by acting to restore growth and productivity.