From Businesstech: South Africa’s response to prevent the spread of Covid-19, by implementing a level 5 national lockdown effective 26 March 2020, has faced mounting criticism in recent weeks, with several current legal battles proof of some of the push-back from business, and society.
The critics claim that government’s lockdown laws are draconian, and incoherent, while the alert level 3 and alert level 4 lockdown regulations were last week declared invalid and unconstitutional by the Gauteng High Court.
Economists generally agree that the the local economy will be adversely affected in the short, medium to long run – not necessarily because of Covid-19, but because of the nature of government’s response.
The World Bank on Tuesday (9 June), published its latest Global Economic Prospects report for June 2020, paining a bleak picture for global growth amid the Covid-19 pandemic. The financial services firm said that it expects South Africa’s GDP to contract by 7.1% this year – the deepest contraction in a century.
The Macroeconomics Research Unit (MRU) at the University of KwaZulu-Natal, believes that South Africa should not have undertaken a wholesale one-size-fits-all lockdown of the economy that commenced on 26 March 2020 in response to the spread of Covid-19.
Government should have taken into account the geographical spread of the pandemic across the country and all relevant trade-offs, it said. Instead, a populist approach was adopted.
Economists at the MRU said that while South Africa’s gross government debt-to-GDP ratio was roughly equal to the emerging market economies’ average in 2019, the domestic debt trajectory is seemingly at risk. South Africa’s public debt (as a ratio of GDP) increased by 33 percentage points between 2008 and 2019.
At the beginning of 2020, projections pointed to a further increase in the debt stock, from the current level of 61.6% of GDP, to 71.6% of GDP in 2023. However, the debt stock is likely to increase much faster than anticipated in light of the fiscal stimulus measures as announced by the National Treasury in April 2020 aimed at mitigating the economic impact of the lockdown.
According to International Monetary Fund (IMF) projections, the gross government debt-to-GDP ratio will reach 85.6% of GDP by the end of 2021.
As the debt service cost of government continues to increase, which accounts for 13% of government expenditure and 16.4% of revenue in the 2020/21 budget, the National Treasury projects that the debt service burden will rise to 15% of expenditure by 2023 as interest payments are the fastest-growing component of the budget.
“As pressure on the fiscus increases, the rising interest bill is likely to crowd-out other social and investment spending priorities. This, in turn, may adversely affect longer-term economic growth prospects, as improvements in the provision of health care, education and infrastructure provide the basis for future GDP growth,” the MRUsaid.
It said that once Covid-19 has been contained, a growth-friendly fiscal consolidation will be necessary to address the rise in public debt. “If government debt continues to increase unabated, government may face debt service challenges, which could have serious implications for financial stability,” it warned.
Before the pandemic, the local economy had been grappling with continuing deterioration of fiscal strength and a structurally weak growth. The country’s GDP growth slowed from 1.3% in 2017 to an estimated 0.7% in 2018. As a result, the country was downgraded into a full junk status or below investment grade in 2019.
“The outlook on the rating remains negative because of unreliable electricity supply, persistently weak business confidence and investment as well as long-standing structural labour market rigidities that continue to constrain the country’s economic growth.
“Relatedly, the country’s debt profile has also been a source of concern for policymakers as the most recent estimate puts the debt service-to-revenue ratio at 62.2%, which is likely to worsen and may reach 70% at the end of 2020,” it warned.
These factors will aggravate the economic impact of the country’s response to the Covid-19 outbreak and make it more difficult for the government to weather the crisis, the economists said.
Bloomberg reported this week that the economic calamity of the coronavirus broke South Africa’s resistance to borrowing from the International Monetary Fund.
It reported that president Cyril Ramaphosa is negotiating a $4.2 billion (R70.54 billion) loan with the Washington-based agency, which it said “marks the first step toward a slippery slope of submission”.
“This is a precursor because Cyril’s government doesn’t have the resources,” said Lumkile Mondi, economics lecturer at Johannesburg’s University of the Witwatersrand. “This is just to soften the alliance partners in preparation for a much bigger ask.”
In April, president Ramaphosa announced a R500 billion economic support package to help battle the impact of the coronavirus pandemic – equal to about 10% of the country’s annual GDP.
A special coronavirus grant of R350 per month would also be paid to the unemployed for the next six months, while grant beneficiaries would receive an extra R250 for the next three months, the president said.
“In order to ease the afflictions imposed by the lockdown, the South African government implemented a wide-range of initiatives aimed at keeping both households and businesses afloat,” the MRU said.
However, the question remains: how effective are these initiatives?
“From our viewpoint, everything about government’s response points towards adversity characterised by high and prolonged levels of unemployment,” the economists said.
What happens when the business loans are dried out? What happens in October when the Social relief of distress grants end?
As lockdown is eased, South Africa’s Covid-19 cases continue to rise, with many medical experts claiming that peak virus will be between July and September. By September, the government’s relief efforts would have ceased under current terms.
“Inevitably, the reality will eventually hit the economy. After the lockdown, some jobs that may have survived the period of significant economic inactivity might be lost when demand is sustained at a low level,” the MRU said.
This, it said, is the primary reason why some scholars support Professor Larry Wray’s (of Levy Economics Institute) view that government should be the employer of the last resort.
This class of scholars argue that instead of relying on implicit policies of employment, government must provide jobs to anyone willing to work at a minimum wage. In this manner, there will be no involuntary unemployment.
Opposing argument contend that that this should, however, not be implemented as typical public sector employment but rather as residual employment, such as community work, environmental work, etc. contingent on preferences of the society.
“In South Africa, this is closely related to the Expanded Public Work Programme (EPWP) — except that, this would need to be run more efficiently,” the MRU said.
“This proposal could possibly work better in the country, which has been battling with unemployment for a very long period of time.
“And it will also go a long way in alleviating the expected rise in unemployment levels. In addition, it will absorb the current crop of graduates, who now have a lower chance of getting employed (because of the expected prolonged economic slowdown) than was the case below the lockdown,” the economists said.