FIRST NATIONAL BANK, banker to seven of the nine provinces, is collecting interest on R2-billion in overdrafts, the Business Day reported on Wednesday. The debt is probably at the prime overdraft rate of 19,25%, considerably more than the usual rate for government borrowing, which is below 14%.
KwaZulu-Natal and the Eastern Cape, currently defaulting on payments to its pensioners, have been the main borrowers.
Despite the absence of government guarantees for the loan, FNB is confident that there will be no defaulting if provinces run out of money, as central government transfers funds to them on a weekly basis. The lack of guarantees has deterred neither banks nor the provinces, currently struggling to make ends meet. It is believed that FNB MD Viv Bartlett and Finance Minister Trevor Manuel have been in touch over the issue.
Manuel is keen to discourage the practice and avoid a baleout, but cannot allow the provinces to default on loans either, leaving government little choice other than to repay the debt. It seems that so far, government measures to discourage provincial borrowing of this kind have failed.
Provincial spending on overdrafts is not shown on monthly exchequer statements, which show that government is already likely to exceed its deficit, with total provincial spending likely to reach R4-billion. Official have said however, that the deficit will not exceed 4,5% of GDP, still well below the last fiscal year’s figure of 5,4%.