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Financial Planning
Governance
April 24, 2020

South Africa's economic and social response to Covid-19

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<p><strong>By: STANLIB Economist, Ndivhuho Netshitenzhe</strong></p>

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<p><span style="font-weight: 400;">According to the President Cyril Ramaphosa, South Africa’s economic response to the effects of the virus will be in three phases. </span></p>

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<p><span style="font-weight: 400;">The first phase which was announced on 23 March included the introduction of the Solidarity Fund to support the vulnerable and combat the spread of the virus; tax relief measures; and providing funds to affected individuals and businesses by making use of available schemes like the UIF. So far, the UIF has already paid out R1.6 billion to over 37 000 companies and assisting 600 000 workers.</span></p>

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<p><span style="font-weight: 400;">The second phase, announced on 21 April, aims to stabilise the economy by targeting the supply and demand side shocks from the lockdown and the spread of the virus, in an effort to protect jobs. As such, </span><b>government has announced a R500 billion fiscal stimulus package that will go towards four objectives</b><span style="font-weight: 400;">:</span></p>

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<ol><li style="font-weight: 400;"><b>Increasing the health budget</b><span style="font-weight: 400;"> to ensure that the healthcare system can respond appropriately to contain and delay the spread of the virus (around R20 billion)</span></li><li style="font-weight: 400;"><b>Relief of hunger and social distress</b><span style="font-weight: 400;"> by improving food parcel distribution efforts; increasing social grant amounts (like child support) for 6 months; and introducing a 6-month long coronavirus social relief of distress grant for those who are unemployed, not protected under the UIF, and do not receive any other grant(R50 billion)</span></li><li style="font-weight: 400;"><b>Increase support of businesses, particularly SMMEs, and employees</b><span style="font-weight: 400;"> through a wide range of additional tax relief measures; introducing a loan guarantee scheme for companies; and assisting informal businesses (around R400 billion)</span></li><li style="font-weight: 400;"><b>A phased re-opening of the economy</b><span style="font-weight: 400;">, balancing the continued need to limit the spread of the coronavirus with the need restart economic activity</span></li></ol>

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<p><span style="font-weight: 400;">The third phase will involve the execution of an economic strategy that will drive South Africa’s economic recovery. This phase requires the implementation some much-needed structural reforms and policies that will ensure sustainable and inclusive economic growth. </span></p>

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<p><span style="font-weight: 400;">The size of fiscal stimulus package is meaningful, making up around 10% of GDP, and if implemented efficiently, could be successful in limiting the economic effects from the spread of the virus. According to the president, the </span><b>stimulus plan will be funded by redirecting R130 billion within the current budget and by obtaining funds from local sources and international financial institutions</b><span style="font-weight: 400;"> including the IMF and New Development Bank. Unfortunately, funding agreements with these institutions have not been reached yet, which could delay the implementation of the measures. </span></p>

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<p><span style="font-weight: 400;">It can be argued, however, that the package may be excessive, especially compared to the fiscal stimulus plans in other countries; and given South Africa’s current fiscal position. For example, the Brazilian government announced a series of fiscal measures amounting to only 6.5% of GDP, while the fiscal measures announced by India, Russia, Argentina, Egypt and Turkey were well below 5% of their respective GDPs. Countries with similar fiscal packages to South Africa are few, including, the United States (11% of GDP), Australia (10.8% of GDP) and Austria (9% of GDP).</span></p>

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<p><span style="font-weight: 400;">It is important to note that this package is not purely a cash injection, it includes a range of measures like tax payment holidays and low-cost financial assistance. All this, however, </span><b>will add to government’s debt level, either through additional borrowing or lower tax revenue collection. Based on these figures, the fiscal response by government alone should add at least R170 billion (or 3.3% of GDP) to government debt for 2020/21</b><span style="font-weight: 400;">. This, along with the expected shortfall in revenue collection (given the lower economic growth), would most likely push the SA budget deficit from a projected -6.8% of GDP in 2020/21 to around -13.0% of GDP.</span></p>

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<p><span style="font-weight: 400;">In addition, </span><b>some of the measures may prove difficult from an administrative perspective and may take longer than expected to roll-out especially given government’s track record in terms of administrative capability.</b><span style="font-weight: 400;"> The efficacy of the coronavirus grant for instance will depend on how government co-ordinates the application and payment process. Since eligible individuals are not employed, not part of the grant system; or under the UIF system, the process of distributing the funds may be slow and prove cumbersome, especially given the current unemployment rate. Not to mention work required to limit the number of fraudulent applications. A more concrete plan for the proposed payments needs to be presented as soon as possible to prevent further delays as this may cause further distress and increase social unrest. </span></p>

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<p><span style="font-weight: 400;">More detail on these measures are expected in the coming days, including the tabling of an adjustment budget and the process to be followed for the phased re-opening of the economy.</span></p>

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