Pandemic has Created Dire Effects on the Economy

By: Laura Pisanello & Sarah Koning: Fourways Review

Finance Minister Tito Mboweni delivered an unprecedented interim budget on 24 June to outline how the budget will need to be readjusted to account for the significant measures that President Cyril Ramaphosa put in place to combat the Covid-19 pandemic as well as the dire socio-economic effects it has had on citizens.

To start off his address, Mboweni highlighted that it is important to ensure that the economy not only returns to the state that it was in before the pandemic reached South Africa but to make sure it improves.

He said that, on 21 April, Ramaphosa outlined the direction to, ‘not merely return our economy to where it was before the coronavirus, but to forge a new economy in a new global reality’.

“This supplementary budget sets out a roadmap to stabilise debt, by improving our spending patterns, and creating a foundation for economic revival. Most of our energies and resources have been focused on the Covid-19 pandemic. We have quickly adopted temporary counter cyclical fiscal and monetary policy measures. After the storm ends, we must work just as quickly to emerge with a sustainable fiscus.”

Mboweni highlighted that South Africa has many strengths, which include ambitious young people, an independent judiciary and a diverse industrial base.

However, growing debt continues to have a dire effect on the budget. “We have accumulated far too much debt; this downturn will add more. This year, out of every rand that we pay in tax, 21 cents goes to paying the interest on our past debts. This indebtedness condemns us to ever higher interest rates. If we reduce debt, we will reduce interest rates for everyone and we will unleash investment and growth.”

Budgets allocated to health care, protecting those from impoverished backgrounds and paying public service workers have dramatically increased.

CEO of the Fourways Chamber of Commerce and Industry Linda Blackbeard and president of the chamber Danie Bezuidenhout shared their thoughts on Tito Mboweni’s recent supplementary budget speech.

Blackbeard said that small businesses in the Fourways area have already shut down, while others have had to cut back staff contingencies.

“[This is] a very sad time and business is in dire need of an economic upsurge,” said Blackbeard.

She said that the chamber struggles to understand why workers still need to receive a wage increase during this tough economic time.

“We as a chamber find it difficult to understand any wage increases at this time when everyone is taking a reduction in salaries and so many have had to close. Yet we seem to be expected to pay salary increases just because there was a previous agreement to do so. Well, Covid-19 was not here then,” said Blackbeard.

“Although we understand the plight of the workers, we also need to understand the economy of the country and how we need everyone to pull together and work together to make things better and then increases can come through. But for now, we all have to tighten our belts and pull through to get our economy going.”

Blackbeard also shared her thoughts on the sufficiency of the budget to recover the local economy saying, “It has to be more than this. Perhaps the payments should be coupled with a business rescue support mechanism. Many chambers have highly-skilled people in this area, that are small businesses themselves, and that could come to the rescue where they too could get paid a small amount. This way, we share and everyone benefits.”

Bezuidenhout commented on the allocations for social relief and job creation saying that it is not sufficient in the long term. He said that there has been a lot of talk concerning job creation, but the level of relief finding is disappointing. He added, “The high number of incomplete applications are of great concern because people lack understanding of how these applications work, resulting in some good small businesses not getting the help they need.

Mboweni explained that the projected total consolidated budget spending, including debt service costs, will exceedR2 trillion for the first time ever. Essentially, he highlighted that the government expected to receive R177.3 billion from gross tax revenue in the first two months of the 2020/2021 financial year, however, it is already behind R35.3 billion. “As a consequence, gross tax revenue for the 2020/21 fiscal year is revised down from R1.43 trillion to R1.12 trillion. That means that we expect to miss our tax target for this year by over R300 billion.”

He added that the early projection of gross national debt is expected to be close to R4 trillion, which is equivalent to about 80 per cent of the gross domestic product. “Without external support, these borrowings will almost entirely consume all of our annual domestic saving, leaving no scope for investment or borrowing by anyone else.

“For this reason, we need to access new sources of funding. Government intends to borrow about US$7 billion from international finance institutions to support the pandemic response. We must make no mistake, these are still borrowings. They are not a source of revenue. They must be paid back.”

Mboweni said that South Africa has responded to this economic shock with an unprecedented set  of measures. “Never before has government worked together so closely with the private sector, labour, community and the central bank.

Standing as a united people, it is clear we can achieve anything. “Government’s Covid-19 economic support package directs R500 billion straight at the problem. This is one of the largest economic response packages in the developing world. The South African Reserve Bank has reduced interest rates and made it easier for banks to lend money. The SARB has also supported liquidity in the domestic bond market. The Bank has stated that it stands ready to take additional action, should the need arise.”

Mboweni added that more than two million customers have received around R30 billion in relief from their commercial banks. Insurers and medical aid schemes have provided premium holidays and landlords have provided rental relief.

“Early statistics on the government Covid-19 loan scheme through the banks reflect a similar picture, with banks now approaching the Reserve Bank to consider relaxing some of the qualifying criteria.”

Mboweni said that the Covid-19 pandemic has not only affected South Africa but has turned the global economy upside down.

“In the February budget, we expected that the global economy would expand by 3.3 per cent in 2020. We  now expect a global contraction of 5.2 per cent this year. This will bring about the broadest collapse in per capita incomes since 1870. Throughout the world, tens of millions of workers have lost their jobs. South African unemployment increased by one percentage point, reaching 30.1 per cent in the first three months of this year.

“The South African economy is now expected to contract by 7.2 per cent in 2020. This is the largest contraction in nearly 90 years [in South Africa].”

This article first appeared in Fourways review: https://fourwaysreview.co.za/epapers/fourways-review-03-july-2020/#book/3