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SA can afford $1bn loan to Zimbabwe, but real cost will be political - analysts
Ayanda Shezi, Business Day (SA)
July 22, 2005

http://www.businessday.co.za/articles/article.aspx?ID=BD4A72110

SA CAN afford to lend Zimbabwe $1bn to service its debt to the International Monetary Fund (IMF), but the financial aid may carry a huge political cost, economists say.

If granted, the loan would be unprecedented in the history of democratic SA.

The IMF is threatening to expel Zimbabwe for reneging on a $1bn debt. A Zimbabwean delegation, led by its reserve bank governor Gideon Gono, met Finance Minister Trevor Manuel and South African Reserve Bank governor Tito Mboweni last Friday to ask for a lifeline.

The loan might give SA the financial and political clout to force President Robert Mugabe and his cabinet to effect political change and alleviate the economic and humanitarian crisis.

Economists all agree that SA can, without much difficulty, raise $1bn for its neighbour. Government is sitting on an extra R18,2bn in cash after last year’s revenue overrun.

But many South Africans are unlikely to take kindly to government using money that could be spent on critical local sectors such as health, education and general service delivery.

SA could, however, go to domestic or international debt markets to raise the money.

SA is regarded as a net-creditor nation, economists say, and the possible loan to Zimbabwe is an exceptional case.

"We can lend money to Zimbabwe without compromising any benchmark fiscal indicators," says Standard Bank economist Goolam Ballim.

Should a loan be provided, Ballim says, it would add only less than half a percentage point to SA’s debt-to-GDP (gross domestic product) ratio, which is estimated to be 35,4% in the fiscal year that ends next March.

"This is still noticeably shallower than the 48% state debt-to-GDP ratio in 1995-96," Ballim says. "Giving Zimbabwe the money will not make South Africa any more or less poor."

However, the loan involves far more than just the R6,6bn it equals in local currency terms.

"When considering the matter, government will have to take into account the financial risk, and promoting the broader interests of the Southern African Development Community," says Brait economist Colen Garrow.

A more prosperous Zimbabwe will reflect positively on the region. But there is also a possibility that Zimbabwe may never be able to repay the loan. "That is a risk the government will have to take if it considers giving them the money," Garrow says.

Last month, Zimbabwe’s Electricity Supply Authority (Zesa) paid off its long-term R100m debt to South African power utility Eskom. The country imports about 4% of its power from Eskom.

The debt had resulted in Zimbabwe being classified an "interruptible customer" by Eskom, allowing it to cut power if Zesa reneges on its payments.

Zimbabwe could be the second country — after Czechoslovakia in the 1950s — to be expelled from the IMF for non-compliance.

The Czech government failed then to repay a $306m debt.

Ballim says the debate on a loan to Zimbabwe should be more than just about the effect on SA’s fiscus.

The focus on reimbursement is "missing the point", he says.

"The humanitarian element fosters a more considered approach. SA can attach some political leverage to providing financial assistance to Zimbabwe — and in this manner possibly fashion a constructive political and economic path for our neighbour," says Ballim.

Which, in less diplomatic terms, means that through the loan Mugabe will probably be encouraged to "play nicely".

China could come to the aid of Zimbabwe, and would probably demand no more of Mugabe than that he repay the loan at some time in the future.

China is the only country among the five permanent United Nations Security Council members that has not expressed outrage at Mugabe’s Operation Restore Order. The Zimbabwean leader visited China this week to seek help.

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