Publication: Issued: Date: 2001-12-04 Reporter: Sapa Editor:

Arms Deal will not Affect Deficit


Date 2001-12-04
Reporter Sapa
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The rising costs associated with the arms deal will not impact on the country's projected budget deficit for 2002/03, National Treasury Director-General Maria Ramos said yesterday.

Addressing Parliament's finance portfolio committee, she said new estimates for the cost of the deal, taking into account the weaker rand, would be included in the 2002 Budget.

When approving the Budget, Cabinet would take into account all debt costs.

"When Cabinet approves the Budget it includes the cost of servicing debt which includes the cost of this package."

The budgeted deficit of 2,6% for next year was not at risk.

"We are not working towards a different deficit number."

The cost of servicing debt was identified before other financing decisions were taken.

Ramos said that the department of defence would have to make room in its budget should their costs linked to the defence package escalate.

She was briefing the committee on the joint investigating team's report on the procurement package released last month.

Questions have been raised about the actual cost of the deal, once financing costs and the impact of the local currency slide against the US dollar and Euro, are taken into account.

The original contract price was R30,3-billion (at 1999 prices). Treasury deputy director-general in the budget office Andrew Donaldson said 2001 Budget projections — excluding financing costs — showed a total cost of R43,8-billion.

This forecast was made using exchange rates of R7.11 against the US dollar, R7.68 to the Euro, and R11.09 against the British pound.

It included projections that the local currency would depreciate in line with the difference between average inflation in South Africa and other contract countries, he said.

The rand has since fallen sharply against the major currencies and is now trading at about R10.35 to the dollar, R14.70 to the pound, and about R9.25 against the Euro.

Ramos said when the deal was concluded the affordability team had used market-related forward exchange rates to estimate the future cost.

But, no one could have predicted the extent of the depreciation of the rand.

"Hindsight is perfect vision," she said.

Donaldson said according to the 2001 projection, the repayments would peak at R5,83-billion in the 2003/04 financial year, which accounted for less than 2% of the national budget.

The financing agreements negotiated to pay for the arms were favourable.

The loans were underwritten by the export credit agencies of the countries supplying the equipment, allowing the government to take advantage of favourable terms and conditions, he said.

The loan agreements for the main deals are: for the four German-built patrol corvettes:

- The total maximum loan facility is 611,9-million Euro. This is made up of a contract price of 469-million Euro, estimated maximum price adjustments of 101,6-million Euro, insurance costs of 3,7-million Euro and fees and premiums of 37,7-million Euro.

for French-built combat suites for the corvettes:
- The maximum loan facility of 188-million Euro includes a 142,9-million contract price, 34,7-million in maximum price adjustments and 10,5-million Euro for insurance.

for three German-built submarines:
- The total loan facility of 846,3-million Euro is made up of a contract price of 628,8-million Euro, 130,3-million Euro for price adjustments, interest for delayed payment of 31,5-million Euro, insurance costs of 4,9-million Euro and fees and premiums of 50,8-million Euro.

for 30 light utility helicopters.
- A maximum loan facility of US$199,8-million includes a contract price of US$187,8-million and premium and fees of US$12-million.

for 24 Hawk trainer aircraft and 28 Gripen fighter aircraft:
- The loan facilities are for UKŁ390,2-million for the trainers, and UKŁ305,2-million, US$461,6-million and 6,43-billion Swedish kroner for the fighter aircraft.

The agreement provides for two tranches of British loans for the Hawk trainer aircraft and three tranches for Gripen fighters in pounds, dollars and kroner.

Government can select a mix of currency commitments and fixed or floating rate commitments.

With acknowledgement to Sapa and