The recent R11 billion loan to South Africa from the World Bank is an off-board credit facility with concessional terms, Finance Minister Enoch Godongwana has said.
The Minister and the National Treasury, led by Director General, Dondo Mogajane, gave the assurance during a detailed presentation on the loan to the Parliament’s Standing Finance Committee on Tuesday.
During the virtual meeting, MPs sought to establish whether the loan was justified and what it would cost to maintain the facility.
Godongwana in his opening remarks explained that the government regularly seeks loans. In this particular circumstance, he said the World Bank provided the country with a Policy Development Loan (PDL).
“Given its terms and conditions, which seemed acceptable to us, compared to what is available on the market, we opted for the loan from the World Bank,” he said.
Providing context, the Minister said: “When we table the budget in Parliament, we say a couple of things; we say these are the revenues that we are likely to generate; and then we say these are the expenditures that we are going to engage as a nation.. There is always a difference between these two, which we call the deficit. We go to the market to raise funds every year for three things.
“The first is to raise funds to find that shortfall between expenses and income. The second element of what we borrow is the cost of servicing the debt, the third is the repayments. So the total figure that we’re going to increase in the market this year is R630 billion, so if you look at R11 billion, in the scheme of things, that’s not much.
The Treasury has approached institutions such as the BRICS Development Bank, the World Bank, the African Development Bank and the International Monetary Fund to raise the necessary instruments.
The minister said the hike ‘should be of concern to all of us as it crowds out service delivery commitments’.
“As you can see now, we are spending more money on debt service than the security cluster combined. We are spending more than the health budget. That should worry us as a nation. We are working to contain this spending in the long term. It is necessary to go to the market to raise 630 billion rand,” he said.
Responding to questions about the rationale for securing the loan from the World Bank, Godongwana said it was “a necessary thing that the government does on an annual basis”.
“We go to the market every week. Are there any conditions attached to (the loan)? As far as I know, no. towards debt service, including some repayments – is necessary.
He clarified that the Treasury did not use facilitators to guarantee the loan, saying the Department had a unit dedicated to this function.
“We have people employed – a whole division of Treasury called assets and liabilities. They are the technicians who trade the loans and go to market every week. The only thing they do to us is tell us how much they raised and we do not interfere with their operations.
As for the effective rate, he said the loan was 300 basis points lower than what the Department would have had it been made in the market.
“So it was cheaper for us. We also have a repayment holiday period of about three years and we will start paying in the fourth year. The terms are very favorable and those things are part of our debt management strategy. debt. In this regard, it was a good approach.
Mogajane said DPLs are typically used to provide budget support to member countries and their programs, institutional reform issues, aimed at improving inclusive growth in countries and also largely aimed at reducing poverty.
“When we looked at this, the World Bank thought we were qualified and we also saw ourselves as eligible for a DPL. Now that DPL was quickly dispersed, by World Bank standards. They looked at our programs and it is how we got this loan.
“It’s been on a consensual basis in terms of funding that we have received and mainly also the DPLs will be looking at countries like South Africa on what has been our responses to the crises in the face of the pandemic and the challenges. They have them seen as strong and so we qualified. Secondly, they saw us as having taken bold steps that we instituted to deal with the virus and the implications on public finances,” he said.
He added that as part of the government’s own programs to deal with the challenges, various reforms launched by the country as part of its reconstruction and economic recovery plan were instituted last year. These were aimed at immediate actions that would ensure a recovery as soon as possible.
“Again, these are actions that they considered and they deemed us fit to give us this $750 million in the form of budget support of some kind,” he said.
(With contributions from the South African government press release)