IMF loan option welcomed with a pinch of salt

30 July 2020 | Economics



While the reputation of the International Monetary Fund has not been seen as favourable, local economic commentators have welcomed the government's intention to borrow from the Bretton Woods institution, arguing that its relatively low rates in the face of the Covid-19 pandemic makes it the ideal lender.

Namibia had submitted a request to borrow N$4.5 billion in an effort to fund its responses to the Covid-19 pandemic. This breaks a 30-year commitment not to borrow from the IMF, which often attaches strict conditionalities to money it lends.

Many countries lose their fiscal sovereignty because of the terms of these loans. The institution has made funding available for the pandemic and with that, relaxed some conditions, which countries like Namibia find appealing.

Namibia's debt to Gross Domestic Product is expected to reach 69% by the end of the fiscal year while elevated debt levels have always drawn concern from rating agencies Moody's and Fitch.

The Bank of Namibia indicated in June that the country's debt to GDP ratio stood at 56.8%.

Low rates tempting

University of Namibia academic Omu Kakujaha-Matundu says although the rates are attractive, there are concerns going forward about how Namibia will service this debt.

“The low rates at which these IMF Covid-19 loans are offered are tempting. However, the main concern is that the Namibian economy will take long to recover, and government could struggle to service its increasing debt stock. Another risk is if the Namibia dollar depreciates against the US dollar, the N$4.5 billion could increase and balloon the total debt stock,” Kakujaha-Matundu said.

IJG head of research Eric Van Zyl agreed with Kakujaha-Matundu that the low rates would be more attractive than other conventional sources of finance.

“The IMF is generally also a relatively cheap source of funding given the risky situations in which they extend credit. In return for this relatively cheap funding the IMF may impose conditions on the fiscus with regards to economic policy,” he said.

“It may be the case that Namibia is able to secure relatively cheap funding with few of the restrictive conditions which generally accompany these loans,” he said.

He added that taking up an IMF loan could affect Namibia's fiscal sovereignty, leaving the treasury with limited control over spending.

Klaus Schade, who serves on President Hage Geingob's High-Level Panel on the Economy, also welcomed the loan application, provided it was attractive.

“The final decision where to borrow the required funds should be based on the terms and conditions, such as repayment period, interest rate, currency, as well as conditions regarding the use of the loan. As long as these conditions are favourable to Namibia, the government should consider making use of available loan facilities from the IMF,” he said.

Domestic borrowing insufficient

Kakujaha-Matundu also argued that Namibia's financing options internally are limited.

“Borrowing locally seems foreclosed. Local lenders could charge government speculative rates, which are much higher than the IMF rates. Also, there is a risk of crowding out the private sector by driving up interest rates, which will fly in the face of Bank of Namibia's low interest rate strategy.”

Schade held the same view, saying: “The government faces an extraordinarily high budget deficit this financial year that cannot be covered by borrowing from the domestic market alone.”

According to Schade, the government could also use other approaches to raise funds.

“There are also various options to increase revenue, such as leveraging state assets and improving the business environment in order to attract more investment, but to implement these will take time. Therefore, the government needs to seek funding from abroad and should explore all available options,” he said.

Treasury's new normal

With the take-up of the loan, Van Zyl said the government would be required to walk a financial tightrope in future and rein in existing debt.

“Guidance from the IMF should also put some pressure on the fiscus to slow the growth trajectory of debt levels. Thus, if a loan is granted it would be adding to the debt burden in the short term but placing pressure on government to bring the debt burden under control going forward,” he said.

“Given that the IMF has vastly relaxed conditions on funding which may limit fiscal independence due to the crisis, and that the funding is generally cheap, it is unlikely that there are better sources of funding in international capital markets,” Van Zyl added.