No money to spare as GDP set to fall

Cabinet has until Monday to have a consolidated economic recovery plan for the country.

This follows a virtual special Cabinet meeting held by the government on Wednesday to try to map out a socioeconomic plan post Covid-19 while also taking into account the recent downgrade by rating agencies Moody’s and Fitch.

Presentations were made by different clusters such as the economic sectors, international co-operation,  and trade and security, but it was resolved that further discussions and consultations are still required before finalising the economic plan.

All Cabinet clusters were asked to work together to produce a single consolidated plan which should be completed before Monday.

South Africa is unlikely to escape the exponential growth in the number of new coronavirus cases after the lockdown. According to the data provided by chairperson of the ministerial advisory group on Covid-19, epidemiologist Professor Salim Abdool Karim, the virus is expected to peak in the second quarter of the year, requiring the government to implement a partial lockdown until then.

That lockdown, as well as border closures and tracking and tracing programmes, seem to have dramatically reduced the rate of infection in South Africa. Speaking earlier this week, Karim said all these efforts have “managed to buy the country some time”.

The government has focused on buying time so that the health system — from emergency beds to testing — is ready for the predicted exponential growth when the lockdown eases. At the same time, it has given attention to how the economy can be saved. This week the Reserve Bank said it expects a gross domestic product (GDP) contraction of 6.1%, with an attendant growth in unemployment.

To survive the lockdown, many companies are negotiating rental holidays from landlords and implementing salary cuts, while some are relying on grants and other aid from the state to keep afloat.

To cushion the heavy blow that the pandemic will have on the country’s economy, Finance Minister Tito Mboweni said the government would reallocate the February budget to support the health sector and to support the state’s measures against Covid-19.

Mboweni said the department of health cannot be “ wanting” during the country’s fight against the coronavirus and that this requires the government to reallocate its funds. He added that this was not an “emergency budget”. But Mboweni said the reprioritisation should not come at the expense of budget items that promote the country’s growth.

He added that the government would also look to local and international finance institutions for aid as it grapples with the pandemic. South Africa’s problem is that it was already in a recession and, on the first day of the lockdown, it received its final credit rating downgrade, confirming junk status. This means there is little money to allocate to Covid-19, and taking out loans is even more expensive for the state.

One institution mooted as a source of funding is the International Monetary Fund (IMF). For internal party political reasons, the ANC has stayed away from this — the IMF might, for example, demand the privatisation of state assets and job cuts, which parts of the party refuse.

There are also other problems with turning to the IMF.

“Taking money from the IMF is usually considered as a last resort. It is not a question whether we should take it; the question is: what are the alternatives”, said Terry Contogiannis, professor emeritus of economics at the University of KwaZulu-Natal.

He cautioned that IMF money usually comes with conditions such as restructuring the economy, introducing sound macroeconomic policies, microeconomic reforms, and competitive environment, reducing the government sector and waste, and so on. These can represent dramatic changes in how the state functions. But he said at least 90 countries have approached the institution for assistance and it could be likely that “under the current economic conditions the IMF may soften its ‘conventional’ stance”.

Last week, the IMF said that it expected countries to demand financial help of $100-billion in total.

Dr Nthabiseng Moleko, a development economist from Stellenbosch Business School, said that any new loan finance should not be taken by governments if there are conditions attached because of the implications this might present in both the short and long run. “Any loan agreements or conditions that threaten the sovereignty of a democratic nation and inhibit its internal decision making capability weaken a state,” she said.

Moleko said that IMF conditions come in the form of policies that target healthcare, education and social support, which can mean that these are cut at a time when the opposite is needed.

She said that it also encourages capital market liberalisation — which is the easing of capital flow from one country to another. Since the end of February, South Africa has had the largest capital outflows in sub-Saharan Africa. This, in effect, means there is less money in the country.

This could be dire for developing countries because capital markets can be extremely volatile. Moleko added that this may lengthen developing countries’ recovery period because of continued currency depreciation and weakening balance of payments as they trade with more developed economies.

On Tuesday, the South African Reserve Bank cut interest rates by a further 100 basis points to 4.25% as a response to the extended lockdown. This means people pay less back on loans so, in theory, there is more money that can go into the economy.

There is also a more extreme step open to governments: printing money and lending it to the government at a zero interest rate. This is a path countries such as Zimbabwe have gone down. Reserve Bank governor Lesetja Kganyago said this is well beyond the bank’s mandate, which is to contain inflation.

He added that printing money will result in a situation in which there is a lot of money in the economy, but not enough goods and services. “When you have too many chasing too few goods, you will be faced with a situation where prices begin to rise,” he said.

Chief economist at the Bureau for Economic Research, Hugo Pienaar, said additional measures need to be taken by the government to ensure that the blow of the pandemic is not too severe on the economy. As well as prioritising funds to the healthcare sector, Pienaar said the government should provide temporary income assistance to the business sector, especially small businesses, and vulnerable households that are experiencing a sharp decline in income.

“As an example, the idea of temporarily increasing the monthly payments to social grant recipients has been mooted,” he said.

An increasing body of research has said that if the government cannot cushion the economic effects of the response to Covid-19, mass unemployment will follow. SAA, with its more than 4000 employees is potentially one of the first big victims. After years of mismanagement, last week it was denied R10-billion in government loan guarantees to help it through business rescue.

South Africa’s unemployment rate, officially at nearly 40%, could grow further as the economy contracts — possibly hitting the 50% mark, meaning that more people of a working age do not have jobs than have jobs. That means less income tax and less income from companies paying their taxes, which means less money in next year’s budget for items such as education and healthcare.

The national debt-to-GDP ratio was also already on the way to 70% with the pre-Covid-19 budget. More debt to get through the pandemic will mean even more of the budget goes towards paying off that debt. 

Tshegofatso Mathe & Thando Maeko are Adamela Trust business reporters at the Mail & Guardian

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

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