World Bank loan conditions for South Africa: cut the wage bill, and no bailouts for state companies

The World Bank has told South Africa’s government it has to cut its wage bill to qualify for a loan of as much as $2 billion and agree the money won’t be used to bail out insolvent state companies, a person familiar with the situation said.

Those conditions have stalled negotiations on the loan that began in April, the person said, asking not to be identified because the content of the discussions have not been made public. The World Bank said it will only comment if an agreement is reached. South Africa’s National Treasury didn’t respond to requests for comment.

South Africa this year has turned to multilateral lenders for the first time since the end of apartheid, overcoming political opposition from within the ruling party, as it tries to kick-start an economy forecast to contract the most in nine decades.

Finance Minister Tito Mboweni is expected to outline plans to fund a revival in output when he presents the medium-term budget on Wednesday and is under pressure to earmark more money to bail out state companies.

So far the country has borrowed $1 billion from the New Development Bank, the lending arm of the BRICS group of nations, $4.3 billion from the International Monetary Fund, R5 billion ($310 million) from the African Development Bank and $50 million from the World Bank.

All of those were deemed as emergency loans to combat the immediate impact of the coronavirus outbreak. The additional World Bank loan is a standard borrowing facility and therefore may carry more conditions.

South Africa’s state-owned companies, ranging from the national power utility to the state arms firm, are surviving on government bailouts and straining national finances. A recent pledge by the South African cabinet to support the insolvent national airline has attracted criticism from opposition parties who say it is unviable.

South Africa is making an attempt to cut its wage bill. In April it reneged on an agreement to raise pay for the more than 1.2 million workers, saying it couldn’t afford it. That decision has been challenged legally by labor unions.

Still, any conditions could be difficult to enforce because loans and the proceeds of bond sales are not ring-fenced and are pooled in South Africa’s National Revenue Fund.

The only major loan by the World Bank to a South African state entity, a $3.75 billion loan extended to Eskom Holdings SOC Ltd to help it build its Medupi coal-fired power plant, has run into complications, with the utility wanting the World Bank to waive a condition that stipulates that it must install equipment to reduce sulphur dioxide pollution.

The flue-gas desulfurization equipment would cost 42 billion rand, Eskom has said.


Read: Mboweni on South Africa’s R70 billion IMF loan

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World Bank loan conditions for South Africa: cut the wage bill, and no bailouts for state companies