Accumulation of foreign currency denominated debt undermining our democratic national sovereignty unacceptable, must be denounced

31 October 2023

On Wednesday, 25 October, the World Bank announced it has approved a US$1 billion loan to “support” the reform of South Africa’s energy sector. The first reform is the unbundling of Eskom. The second is for Eskom to invest—not in new, clean power generation capacity and carbon capture, storage and re-use to lower carbon emissions at its coal-fired power stations but—“in transmission and maintenance of existing power plants”. The third is liberalisation or “opening” of electric power generation—in favour of investment not by Eskom or the state but by private interests in this space. There are serious problems with this reactionary path.

First, contrary to what the World Bank wants us to believe, its foreign currency-denominated loan is not support at all. Rather, it is a financialised product, a loan which must be paid back with interest. The World Bank’s conveyance of the loan to South Africa’s government will involve other costs over and above the interest.

Second, while the World Bank has couched the loan as an “operation [that] supports a low carbon transition”, the reforms it has approved for the loan exclude investment by Eskom in new, clean power generation capacity and carbon capture, storage and re-use to lower carbon emissions at its coal-fired power stations.

Third, the reforms the World Bank promotes through the loan are neoliberal. This is a glaring tangent against the ANC’s May 2019 election manifesto.

As Alliance partners, we were consulted in the manifesto drafting process. Afterwards, we both endorsed and took to the manifesto to the people to vote for the ANC.

The manifesto commits the ANC-led government to “reposition Eskom to play an active role in the renewable energy sector and [to] promote public ownership in renewable energy infrastructure.” In its text, the manifesto clarifies that this must form part of “revitalising the developmental state and promoting a developmental growth path”.

A capable democratic developmental state with its own capacity to serve the people diligently does not elevate serving private interests above the interests of the people as a whole. Participation in the economy by such a state on behalf of the people as a whole is sacrosanct.

Unacceptable and must be denounced.

We were sincere when we took the manifesto to the people, campaigning for the ANC to win the 2019 election.

To us, saying one thing to the people and doing something else in contradiction after receiving their support is unacceptable and must be denounced.

A warning is worth underlining here. History is littered with examples of movements that were once popular but gradually lost support from the people. All talk by those movements and never following through in their actions was one reason behind their decline. This is important to underline since we are in the May 2019 election manifesto review process, ahead of the next election.

Accumulating foreign currency-denominated debt comes with disadvantages and risks.

There are many disadvantages and risks with accumulating foreign currency-denominated debt when the government has access to local currency-denominated finance, but which must itself be approached for good reasons as opposed to neoliberal reforms. The disadvantages and risks are often associated with the exchange rate, economic factors, politically motivated actions, and loss of democratic policy sovereignty.

Undermining of national self-determination

Borrowing in foreign currency means that the government has less control over interest rate setting and terms of the loans, as these are often determined by foreign lenders. It also leads to rigidity in managing the debt. Its consequences include undermining the nation’s sovereign monetary policy setting and fiscal policy determination.

The imperialist controlled IMF and World Bank have a history of using the terms of their loans to undermine the fundamental right of national self-determination. They have done this in many countries, mostly in the Global South, by converting their loan conditionalities into domestic economic policies. Through this action, the IMF and World Bank undermined, and even contributed to, the destruction of national democracy in the affected countries. This is how they imposed the destructive Structural Adjustment Programmes and other neoliberal policies, turning governments against the people and the people against their governments and thus causing political destabilisation.

We have also seen the affected governments making monetary policy decisions that are not in the best interest of the people and the domestic economy.

Exchange rate risks.

Governments that accumulate foreign currency denominated debt are vulnerable to the depreciation of their domestic currency. This has led to a higher debt burden in many Global South countries. Sudden and significant domestic currency devaluations have made debt repayment for the affected countries much more expensive. In the end, this is sustaining their national under-development.

If, in our situation, the rand depreciates against the US dollar, the government will have to repay more in rand value terms, making the debt more expensive. This will strain the government’s budget and increase the burden through increases in foreign currency denominated debt servicing costs.

Currency exchange rate volatility can reduce the government’s fiscal flexibility. When the rand depreciates significantly, among the first things that the government has the tendency to do is to rush to divert funds from other national priorities and important programmes to service the foreign currency denominated debt—elevated as an apex priority above all else. This is part of the neoliberal regime of austerity, which chokes economic transformation, diversification and growth, and has contributed in no small measure to stagnation in South Africa.

Foreign-denominated loans can make a government vulnerable to profit-driven speculative attacks and market sentiment.

Speculative actions and certain politically motivated events, as it happened more than once in South Africa, can lead to rapid depreciation of the rand and increase the government’s foreign currency denominated debt burden. It is important to highlight some examples here.

The hysterically reckless United States ambassador to South Africa, Dr Reuben Brigety, recently caused a massive rand depreciation and damage to the economy through baseless allegations. His was part of a wider political agenda to force the South African government to abandon our national independence and self-determination and instead follow the imperialist United States propaganda and actions in the NATO-provoked war in Ukraine. While we called for him to be sent packing, he is still lingering around. No action has been taken to undo the damage he caused and recover the losses our economy and public finances incurred.

In 2017, the Competition Tribunal entered into settlements with foreign-controlled multinational and local commercial banks. They had engaged in speculative activities, notably including unlawful conduct. Their actions caused the rand to depreciate and damage to the economy. The settlements did not undo the damage and ensure recovery of every loss our economy and public finances incurred.

In 1998 and 2001, the rand experienced a depreciation crisis, among others, because of financial liberalisation. The losses were massive, and the commission of inquiry appointed to investigate the 2001 rand crisis did not help recover the losses our economy and public finances incurred.

The government’s limited or lack of control on a liberalised or floating exchange rate, with foreign exchange markets exercising decisive control, leaves the rand exposed to volatility.

The decision to accumulate foreign currency denominated debt has other negative implications. It may as well be interpreted as the government’s lack of confidence in the rand, or as the government declaring that the availability of rand denominated capital is not deep but shallow. This may erode public trust in the government itself and our currency.

Urgent reconsideration

Our energy policy must be geared to making energy ever cheaper, uninterruptedly available for every family and the economy on a developmental basis.

The transition to low carbon or clean energy production must include carbon capture and storage for Eskom’s coal-fired power stations to bring down carbon emissions: the captured carbon must be used in environmentally protective productive activity.

The state must invest both in this and in clean energy for public participation to serve as the mainstay of our energy supply and national security.

The public pathway must prevail, as opposed to the profit-driven private accumulation-facilitating neoliberal reforms.

The working-class movement, including inside the Alliance, must push harder for an urgent reconsideration, to stop the accumulation of foreign currency denominated debt and to defend our democratic national sovereignty. This must take place on all fronts of the struggle.

Our policies must be determined by us the nation democratically, as opposed to foreign-controlled finance capital and other sections of the tiny minority of exploiters through loans or by any other means.

Solly Mapaila is the SACP General Secretary. This article first appeared in Umsebenzi Online.