GDP to contract 6.1% — Reserve Bank

Covid-19 has had a sudden and catastrophic effect on the global economy and South Africa has not been spared. The International Monetary Fund (IMF) expects the global economy to contract sharply by –3% in 2020, which is much worse than during the 2008–2009 financial crisis.

The South African Reserve Bank said on Tuesday that it expects the country’s gross domestic product (GDP) in 2020 to contract by 6.1%, compared with the -0.2% estimated just three weeks ago when the bank’s Monetary Policy Committee (MPC) last met. GDP is then expected to grow by 2.2% in 2021 and by 2.7% in 2022.

South Africa’s economy has been significantly weakened by the pandemic and the slowing down of global trade, prompting the Reserve Bank to cut the repo rate twice within two months. (The repo rate is the rate at which the central bank lends to other banks, who then lend money to people and businesses.)

On Tuesday, the Reserve Bank cut the repo rate by 100 basis points, or one percentage point. This brings South Africa’s repo rate to 4.25%. In March, the central bank cut the repo rate by one percentage point and in January it lowered the rate from 6.5% to 6.25%. 

The latest announcement came earlier than usual; the MPC’s meeting was scheduled to take place in early May. But Reserve Bank governor Lesetja Kganyago said much had changed since the meeting in March. At that time there were cases of the virus in the country, but the 21-day lockdown had not been announced. The lockdown has now been extended to the end of April. As a result, the MPC met over the Easter weekend to figure out what it would mean for the economy. 

Kganyago said the Covid-19 outbreak will have a “major health and social impact, and forecasting domestic economic activity presents unprecedented uncertainty”. 

He said the extension of the lockdown will no doubt reduce growth and deepen economic woes in the short-term because economic activity has come to a halt.

The governor was quick to caution that: “Monetary policy cannot on its own improve the potential growth rate of the economy or reduce fiscal risks. These should be addressed by implementing prudent macroeconomic policies and structural reforms that lower costs generally, and increase investment opportunities, potential growth and job creation.”

For an economy that is in a technical recession, the outbreak of the pandemic could not have come at a worse time. During a media briefing on Tuesday, Finance Minister Tito Mboweni said the government would have to rework the February budget to ensure that the country’s health system is adequately supported. 

Mboweni said the department of health cannot be “ wanting” during the country’s fight against the coronavirus and this requires that the government reallocate its funds. He added that this reallocation of the funds was not an “emergency budget”.

But he said the reprioritisation should not come at the expense of budget items that promote the country’s growth.

“We must be careful not to take too much resources away from growth enhancing initiatives,” he said. Instead, the pandemic was an opportunity for the government to implement structural reforms such as the country’s network industries and making it easier for small businesses to be “the engines of growth and employment”.

The crisis also presents an opportunity for the government to rework its position on ailing state-owned enterprises that continue to drown the fiscus. The finance minister said the closure of SAA and SA Express, which are both in business rescue, will be evaluated. 

With more than 2 500 infections and nearly 30 deaths, the virus is yet to reach its peak in South Africa. Coupled with the anticipated strain on the country’s public and private health sector, the government will need extra funds to combat the virus. 

Mboweni said that the government is looking to international and domestic institutions to fund its plans to curb the spread of Covid-19. These plans have not yet been finalised but the finance minister said they include expanding “support for SMME [small, medium and micro-sized enterprises] lending through the banking system, similar to in other countries”. 

The finance organisations the treasury is in discussion with include the African Development Bank, the IMF, the World Bank and the New Development Bank (formerly the Brics bank). 

“We are not looking for budget support. We will be looking at Covid-19 specific packages that we can access,” Mboweni said. “We are looking at programmes that will not be accompanied by any structural adjustment programmes.” 

Make sense of your world

Subscribe to Mail & Guardian at R10/mth for the first three months. Cancel anytime.

Subscribers get access to all our best journalism, subscriber-only newsletters, events and a weekly cryptic crossword.

Thando Maeko
Thando Maeko is an Adamela Trust business reporter at the Mail & Guardian
Tshegofatso Mathe
Tshegofatso Mathe
Tshegofatso Mathe is a financial trainee journalist at the Mail & Guardian.

Related stories

WELCOME TO YOUR M&G

Already a subscriber? Sign in here

Advertising

Latest stories

Why lawyers argue the case for a Madlanga constitutional court

The brilliance of Justice Mbuyiseli Madlanga’s mind and his transformative judgments can prove salutary at a time when the judiciary is under populist attack, his peers hope.

Solidarity vs University of Free State in vaccine mandate court...

The union wants the court to decide whether the policy of enforcing vaccinations at UFS holds water.

Informal waste collection shouldn’t let plastic polluters off the hook

The image of plastic recycling as the solution to plastic pollution is perpetuated by statistics that highlight successes, which are communicated in tonnes and percentages that are difficult to visualise.

Millions of rand lost as SANDF returns unauthorised Cuban Covid-19...

Remedial action against officials suspected of wrongdoing must be taken, says the ministerial task team investigating the defence department
Advertising

press releases

Loading latest Press Releases…
×