• October 24th, 2020

IMF loan could result in ‘debt trap’ … economist concerned about repayment ability

Namibia’s N$4.5 billion loan application to the International Monetary Fund (IMF), through that institution’s Rapid Financing Instrument (RFI). could risk locking the country into a perpetual debt trap for many years. This is according to local economist, Mally Likukela, who also warns that Namibia’s financial ability to service this loan will be challenged by exchange rate risks that come with the loan and which Namibia has no control over. 

Responding to questions from New Era’s Inside Business, Likukela explained that Namibia was already in a depression before the Covid-19 pandemic and therefore using the coronavirus pandemic as a guise to approach the International Monetary Fund (IMF) for a loan does seem a bit odd and worrisome. 

“Without a proper economic rescue package to help channel these funds, Namibia’s already fragile economic recovery would be dangerously hampered by demands by the IMF. It is a loan, not a grant, so it is bound to come with some sort of conditions and of course repayment is key amongst them, so these conditions, minor as they may appear to be, will hamper Namibia’s economic recovery,” Likukela cautioned.  
He added that the IMF’s loan repayment conditions are well known and documented. 

Said Likukela: “One only needs to look at the previous and most recent Article IV IMF reports on Namibia; these conditions are the ones that will come with this new loan. The policy mix that has been suggested by the IMF for Namibia through their Article IV reports risks perpetuating an unsustainable cycle where public spending cuts lead to low growth, exacerbating the public debt burden and eventually leading to further cuts and even lower growth.”  

Likukela, who is the managing director of Twilight Capital, cited the examples of other countries such as Ghana, Jamaica and Turkey that have all signed these loans. While these countries did not apply to loans from the IMF’s RFI, he noted that generally the IMF imposes contractionary policies that prioritise the servicing of debt over growth and development and therefore his caution that Namibia cannot take this risk. 
In addition, Likukela pointed out that the IMF loan is denominated in foreign exchange and Namibia has to bear the risk that if the Rand, to which the Namibia Dollar is linked, depreciates then the loan and the interest on it will become more expensive. 

“Given the state of the South African economy, which influences the Rand, this is a big risk and must not be taken lightly,” Likukela warned. 
Likukela continued that given Namibia’s history of not using these types of loans for the intended purpose, such as with the African Development Bank loan, that the country’s economic situation will deteriorate and it will struggle to pay back the debt. 
“If these funds are misappropriated or the pandemic lasts longer than anticipated, then the country could be forced to seek additional support like other countries that have been perpetually on the books of the IMF. In either case whether it is the misappropriation of funds or the pandemic lasts longer, Namibia’s negotiating position would be significantly weaker and therefore will be pushed into a corner and left with no choice but to sign up for even more predatory loans,” Likukela concluded. 

The IMF on Monday approved a US$4.3 billion loan (more than N$71 billion at current exchange rates) for neighbouring South Africa after the institution recently made US$50 billion available to assist countries tackle the Covid-19 pandemic. 
The IMF’s RFI provides rapid financial assistance, which is available to all member countries facing an urgent balance of payments need. The IMF says it created the RFI as part of a broader reform to make financial support more flexible to address the diverse needs of member countries. The RFI, which can be used in a wide range of circumstances, replaced the IMF’s previous emergency assistance policy. 

Edgar Brandt
2020-07-31 12:11:07 | 2 months ago

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