South Africa’s recent R11 billion loan from the World Bank is an above board credit facility with favourable conditions, says Finance Minister Enoch Godongwana.

The Minister and the National Treasury, led by Director-General, Dondo Mogajane, gave the assurance during a detailed presentation on the loan to Parliament’s Standing Committee on Finance on Tuesday.

During the virtual meeting, Members of Parliament sought to establish whether the loan was warranted and what it would cost to service the facility.

Godongwana in his opening remarks explained that government regularly seeks loans. In this particular circumstance, he said the World Bank had granted the country a Policy Development Loan (PDL).

“Given its terms and conditions, which were palatable to us, compared to what is available in the market, we went for the World Bank loan,” he said.

Providing background, the Minister said: “When we table the budget in Parliament, we say a couple of things; we say this is the revenue we are likely to raise; and we then say this is the expenditure we going to incur as a nation. There’s always a difference between those two, which we call the deficit. We go to the market to raise money every year for three things.

“The first is to raise money to find that deficit between expenditure and revenue. The second component of what we borrow is debt service cost, the third is the redemptions. So the total figure that we go and raise in the market this year is R630 billion. So if you look at R11 billion, in the scheme of things, is small.”

The Treasury approached institutions such as the BRICS New Development Bank, World Bank, the African Development Bank and the International Monetary Fund to raise the required instruments.

The Minister said rising “should worry all of us because it crowds out service delivery commitments”.

“As you can see now, we’re spending more debt service costs money than the security cluster combined. We’re spending more than the health budget. It should be worrying us as a nation. Useless we work towards containing that expenditure in the long term. It is necessary to go to the market to raise R630 billion,” he said.

Responding to questions on the rational of obtaining the World Bank loan, Godongwana said it was a “necessary thing that government does on an annual basis”.

“We go to the market every week. Are there conditions attached to (the loan)? To my knowledge; no. We’ve got to make sure that that expenditure which – some of it is related to current expenditure, some of it goes towards servicing debt, some of it redemptions – is a necessary.

He clarified that the Treasury had not used facilitators to secure the loan, saying the Department had a unit dedicated to the function.

“We’ve got people employed – a whole division in the Treasury called assets and liabilities. Those are the technical people who negotiate the loans and go to the market every week. They only thing they do to us is to tell us how much they’ve raised and we don’t interfere with their operations.

Insofar as the effective rate, he said the loan was 300 basis points lower than what the Department would have, had had it gone to the market.

“So it was cheaper for us. We also have a repayment holiday period of about three years and we’ll start paying in the fourth year. The terms are very favourable and these things form part of our debt strategy management. In that regard, it was a good approach.

Mogajane said DPLs generally used to provide budget support to member countries and their programmes, institutional reform issues, aimed at improving inclusive growth in countries and largely also aimed at poverty reduction.

“When we looked at this, the World Bank thought we qualified and we also saw ourselves qualifying for a DPL. Now this DPL was rapidly dispersed, compared to World Bank standards. They looked at our programmes and that’s how we got this loan.

“It’s on consentional basis in terms of the funding that we received and mainly also DPLs will look at countries like South Africa on what has been our crises responses to the pandemic and to the challenges. They saw them as sound and so we qualified. Secondly, they saw us as having taken bold steps that we instituted in dealing with the virus and the implications on public finances,” he said.

He added that as part of government’s own programmes to deal with the challenges, there were various reforms that the country launched as part of its economic reconstruction and recovery plan were instituted last year. These were aimed at immediate actions that would ensure that would recover in the shortest term.

“Again these were actions that they looked at and they saw us fit to give us this $750 million as a form of a budget support of some kind,” he said.

Source: South African Government News Agency