Amidst all the headlines dominating the news recently, you may have missed one relating to a R19 billion loan taken by the South African government from the New Development Bank – a bank established by the BRICS* nations.
The International Monetary Fund (IMF) and World Bank (WB) were also open to lending South Africa funds, but government declined the offers from these two more established financial institutions. They made it clear that large financial aid offers from these two institutions were a foreign threat to our country’s independence.
Is the New Development Bank better?
South Africa benefits from having ties with BRICS and the bank. Moving forward with a loan from the New Development Bank, even when we could receive more from the IMF or WB, will solidify South Africa’s position within BRICS.
This move away from the IMF and WB, from whom we have borrowed before, is also a strategic one. The IMF and WB also tend to “watch over” the countries they lend money to which could undermine policies for reform within our country.
By supporting BRICS, South Africa will also expect to benefit from the favourable trade relations, policies and increased foreign investment from member nations. This means South African business will have the potential to export more and imports into the country will be cheaper. Foreign investment could lead to local job creation and increased investment in local capital (equipment and buildings) – both crucial for economic growth.
Are there more benefits?
The New Development Bank also has a better credit rating than South Africa. This means that government will pay lower interest rates on the loan, by over 2%, and also reduces the size of repayments. South Africa doesn’t have much foreign debt, roughly 10% of total debt, which means that we are in a far better position than many countries to take on a dollar-denominated loan.
Although the loan adds to our growing debt burden, it will be needed to help the economy survive the Covid-19 pandemic. It’s important for us to continuously grow our global presence and BRICS offers South Africa the opportunity to do this. The successful management of the pandemic paired with a strong economic outlook would be a great scenario for South Africa post Covid-19. Spending and investing would increase, our governmental system would appear stronger and business confidence would benefit.
📚 Word of the Week*
BRICS – an acronym for the association of Brazil, Russia, India, China and South Africa – five major emerging economies. It’s an organisation which aims to advance the member countries status through various support measures.