In his address on 21 April 2020, President Cyril Ramaphosa announced that government will be approaching international finance institutions such as the International Monetary Fund, the World Bank, the BRICS New Development Bank and the African Development Bank to help fund the R500 billion COVID-19 economic relief package that will be provided by government.
International financing institutions have responded to the COVID-19 pandemic by introducing additional finance packages to governments and affected companies, which provide financial assistance to address the effects of the pandemic. We briefly discuss the finance packages that are available to the South African government and affected companies:
- International Monetary Fund (IMF)
The IMF has made a number of facilities and instruments available to assist countries in response to the economic impact of COVID-19. These consist of: rapid financing facilities, which provide emergency financial assistance; extended credit facilities, which provide a flexible tool for providing medium-term support to member states; and facilities from the Catastrophe Containment and Relief Trust. The IMF has already said South Africa is entitled to as much as $4.2 billion in emergency funding.
- World Bank
The World Bank offers a comprehensive range of financial assistance, which includes grants, concessional loans as well as equity investment in infrastructure projects and private companies. The World Bank also offers trust funds and grants, which are typically used to provide immediate assistance when a crisis occurs. The World Bank has recently approved $14 billion of fast-track financing to assist countries and companies in responses to COVID-19. This package covers a range of interventions that seek to strengthen healthcare in the private and public sector. Finance Minister, Tito Mboweni, indicated that South Africa would seek financing ranging from $55 million to $60 million from the World Bank for COVID-19-related programmes.
The International Finance Corporation (IFC), the World Bank Group’s private sector arm, has also increased its COVID-19-related financing to $8 billion in order to support private companies and their employees affected by the economic downturn caused by COVID-19. The bulk of this financing is provided to financial institutions to enable them to continue to offer trade financing, working-capital support and medium-term financing to private companies struggling with supply chain disruptions and rapid demand reduction. The IFC supports SMMEs and large corporates alike by offering technical advice in addition to financing through their Real Sector Crisis Response Facility, Global Trade Finance Program and Working Capital Solutions Programme.
- BRICS New Development Bank
The government has indicated that it will seek financing of $1 billion from the BRICS Bank. This funding will be obtained from the Emergency Assistance Facility, established to finance direct expenses related to the fight against the COVID-19 pandemic. This Facility has already provided financing of $1 billion to both the Chinese and Indian governments. Ordinarily, the BRICS Bank focuses on sustainable infrastructure development, predominantly providing project-specific financing. The BRICS Contingent Reserve Arrangement has an initial total committed capital of $100 billion. Member states requiring additional financing may request access to the committed reserves at any time. Under the Contingent Reserve Arrangement, the maximum amount that the South African government is entitled to request is $10 billion, being the maximum access limit tied to South Africa’s contribution.
One of the reasons for the establishment of the BRICS Bank is to offer alternatives to the dominant Western institutions, such as the IMF and World Bank. As a member of the BRICS block, some argue that South Africa should consider the BRICS Bank first for funding.
- African Development Bank
The African Development Bank, with a reported capital of $208 billion, is the leading multilateral development finance institution in Africa. The bank’s standard loans are categorised as Sovereign Guarantee Loans and Non-Sovereign Guaranteed Loans. The Sovereign Guarantee loans are made directly to member countries, or public sector enterprises, with a government guarantee. The Non-Sovereign Guaranteed loans are made to public sector enterprises or private companies.
In response to the COVID-19 pandemic, the African Development Bank offers financial products to provide fast and flexible support. The primary channel for this effort is the COVID-19 Rapid Response Facility, which has up to $10 billion to assist member states and their private sector enterprises. This includes the Emergency Liquidity Facility, with an allocated $405 million to assist private sector clients facing short-term liquidity challenges caused by the pandemic, and the Trade Finance and Guarantees facility; which has been allocated $270 million to assist companies in accessing trade finance and guarantees.
Benefits and costs of loans from international financing institutions
There is reluctance by the government to procure financing from international financing institutions such as the IMF and World Bank due to the stringent structural and policy adjustment programmes imposed as conditions to financing. Policy adjustments may include macroeconomic adjustments, such as free market reforms sought to spur economic activity, cuts to government expenditure instead of tax increases, and the privatisation of state-owned enterprises. The Finance Minister sought to confront the fears of obtaining financing from international financing institutions and explained that “South Africa is a member of the IMF and World Bank and therefore we are entitled to approach these institutions if we so need”. He made it clear that any financing sought would be “specific to the crisis” and not the “usual budget support” with policy intervention and subject to conditionality.
The IFC has reported that the main obstacles faced by companies in developing countries, such as South Africa, are access to finance, poor infrastructure, the investment climate, and employee skills. These obstacles will be exacerbated by the economic downturn following the pandemic. International financing institutions can assist South Africa’s private sector by providing a range of advisory products, technical assistance and financing, which will be beneficial for many of our clients where alternative financing and support is unavailable in the current COVID-19 climate. The project-specific financing and technical advice provided by the institutions detailed above should therefore be considered by all companies affected by COVID-19 and not only by the South African government.