South Africa heads for serious financial trouble

The South African government continues to take on massive loans from its international partners, with warnings that this could be dangerous for the country in the long term.

The National Treasury recently announced the successful closure of a $150 million (R2.5 billion) development policy loan agreement with the Organisation of Petroleum Exporting Countries (OPEC).

The loan seeks to address infrastructural bottlenecks in an attempt to encourage economic growth and job creation, specifically in the energy and freight transport sectors.

This is only the latest in a series of loans taken by the South African government to support structural reforms and boost local infrastructure.

The World Bank approved a $1.5 billion (R26.5 billion) loan to South Africa in June 2025, while the African Development Bank approved a $474.6 million loan to the country only a month later.

Just last month, Germany agreed to provide South Africa with a €200 million concessional climate loan towards restoring the country’s power grid and improving its renewable energy capacity.

This followed a number of similar loans granted by Germany in recent years as part of South Africa’s Just Energy Transition Partnership, estimated to now total over €2.68 billion in pledges.

Alternative Information and Development Centre economist Dick Forslund said the government’s continuance to take loans in foreign currencies presented a huge risk.

“At present exchange rates, you have to pay something like R16.50 for a dollar,” Forslund said. “The interest rate is a little less than 5% on this loan from OPEC, and the Treasury is saying this is favourable.”

“But if the exchange rate goes up to R17 for a dollar, then the effective local interest rate becomes closer to 9%. If it’s R18 per dollar, which it was for a long period, then the interest rate on this loan would be 15%.”

Forslund warned that exchange rate fluctuations could make these loans increasingly more expensive and unaffordable in the long-term, and said the government should use more domestic funds.

He also emphasised that loans such as the OPEC one are not typically politically neutral, and that there will likely be policy consequences somewhere down the line.

Loans are needed to fix South Africa’s infrastructure

While Forslund cautioned against the taking of loans by the South African government, Econometrix chief economist Dr Azar Jammine said the loans were necessary at this time.

“It’s not as if the government said it’s not going to borrow any more money,” Jammine said. “It has to borrow money because the amount that it spends far exceeds the amount it earns in tax revenue.”

“I think people are worried about the extent to which those overruns of expenditure relative to revenue continue to prevail. But the government does have to borrow money to fund the balance between the two.”

Jammine said that while there were some disadvantages to acquiring these loans, it made sense for the government to take these loans now while the rand is relatively strong.

He explained that the interest rate on these foreign loans is significantly lower than that of pension funds, which is where the government usually borrows money from.

As the country continues to take these loans, however, concerns have been raised about whether the money received is being correctly allocated to specific areas for improvement.

While Jammine said he could not directly answer this, he said recent improvements in certain sectors gave him the impression that the money is at least being partially allocated properly.

“The amount of tonnage going through Transnet’s ports increased by 9% over the last financial year,” Jammine said. “It’s certainly not enough.”

“But it reflects an improvement compared with the previous year, so I can only assume that some positive results are now beginning to emerge.”

However, he warned that the money is not guaranteed to be allocated correctly, as it showed the government consciously opted to find the cheapest solution to solving its infrastructural challenges.

Jammine also stressed that the OPEC loan amount of around R2.5 billion represents only a fraction of the country’s total debt of over R5 trillion, which is 78% of the country’s GDP.