• Isaah Mhlanga – Chief Economist | Khanyisa Phika –

Government’s R500 billion package to fight COVID-19 health and economic crises


Highlights


  • President Cyril Ramaphosa announces a R500 billion fiscal package (10% of GDP) to support the local economy.

  • The details of the fiscal stimulus package reveal that the actual stimulus is much smaller than the headline figure, at approximately R200 billion.

  • Over a fifth of the fiscal stimulus package comes from budget reprioritisation within departments, which will likely not be spent due to the lockdown.

  • The South African government approaches the World Bank, the International Monetary Fund, the BRICS New Development Bank and the African Development Bank to finance the fiscal stimulus package deficit.

  • The government aims to apply a risk-adjusted approach to the return of economic activity.


President Cyril Ramaphosa announces a R500 billion fiscal package (10% of GDP) to support the local economy

South Africa (SA) has been spared the worst of the ravages of the coronavirus outbreak, for now. SA has recorded 3 465 COVID-19 infections and 58 deaths, with more than 126 000 tests conducted so far. The lockdown has curbed the spread of the disease significantly, which prevented the health system from being overwhelmed. However, the consequences of the lockdown have been devastating to local businesses as shown by Stats SA’s survey of the impact of COVID-19. Of the businesses surveyed, 65% of the respondents expected the impact of COVID-19 to be worse than that of the global financial crisis while 31% of the respondents said they would be out of business in less than a month if they do not make a turnover soon. This is the first official survey that hints at the potential contraction in economic growth this year, which the South African Reserve Bank forecasts at -6.1%.

How the R500 billion fiscal package (10% of GDP) will be spent

Approximately R20 billion of the package will be used to fund the government’s healthcare response to the coronavirus, such as increased testing, tracing and monitoring as well as the enforcement of lockdown regulations. To assist in monitoring the lockdown situation, the president released a press communication which states that about 73 000 additional South African Defence Force members have been deployed until the end of June 2020 at a cost of R4.6 billion.

Government will introduce a loan guarantee scheme, in partnership with major banks, amounting to R200 billion. National Treasury and the South African Reserve Bank will assist companies with operational costs, salaries, rent and supplier payments, among other things. Approximately R50 billion will be used to support individuals receiving welfare grants as well as unemployed people. Child support grant recipients will get an additional R300 in May and an extra R500 per month from June to October. All other grant recipients will get an extra R250 per month for the next six months. Unemployed people who are not receiving any form of grants or UIF payments will receive a special Social Relief of Distress grant of R350 per month for the next six months.

The coronavirus outbreak has left many companies distressed with loss of revenue, as some have been laying off employees or introducing pay cuts of between 30% and 50%. According to the survey, which covered the first two weeks of the lockdown, about 50% of businesses expect the size of their workforce to remain unchanged, while 37% expect their workforce to decline significantly. The government has set aside R100 billion for job protection and creation after the pandemic. To date, the UIF’s COVID-19 benefit has already paid out R1.6 billion, assisting over 37 000 companies and thousands of workers. The government will also continue to assist small businesses, spaza shops and other informal businesses by offering loans, grants and debt restructuring – the government has spent R100 million to date. Furthermore, the president announced tax relief of R70 billion, which includes a four-month holiday for companies who pay skills development levy contributions, fast-tracking of VAT refunds and granting of a delay for filing and paying carbon tax. Finance Minister Tito Mboweni is expected to provide details at a later stage. Government has increased the turnover threshold for tax deferrals to R100 million per year, while the portion of PAYE payments that can be deferred will be increased to 35%. Moreover, there will be no penalties for late payments if taxpayers can show they were disadvantaged by the coronavirus outbreak.

The nationwide lockdown has harmed the revenue of municipalities at a time where demands are increasing. An additional funding of R20 billion will be made available to municipalities for providing emergency water supply, increased sanitisation of public transport and facilities as well as food and shelter for homeless people.

The fiscal stimulus package is in addition to corresponding liquidity measures taken by the South African Reserve Bank, which has reduced the repo rate by 225 basis points cumulatively since the beginning of the year, and unlocked at least R80 billion in the real economy. More so, the bank reduced regulatory capital requirements, which released over R500 billion in liquidity into the financial system.

Several commercial banks and insurance companies have also assisted the economic relief effort by, among other things, delaying or reducing instalment payments, providing debt relief and waiving bank fees for grant beneficiaries.

The South African government approaches the World Bank, the International Monetary Fund, the BRICS New Development Bank and the African Development Bank to finance the fiscal stimulus package deficit

The government has approached international lenders, such as the World Bank, the International Monetary Fund, the BRICS New Development Bank and the African Development Bank to finance the fiscal stimulus package deficit. These organisations will work closely with National Treasury on various funding transactions. Further details will be announced in the Adjustment Budget tabled by the Minister of Finance on a date yet to be confirmed.

The IMF highlighted that the country is entitled to $4.2 billion (R79.8 billion) in emergency funding, should it request financial support to fight the coronavirus. This will require the country to commit to generally good economic management and transparency in the utilisation of resources. The loan would be payable over 3.25 to 5 years, at an interest rate of just over 1%. However, some politicians disagree with the suggestion by the Minister of Finance that the government might seek help from multilateral lenders for health funds, stating that the structural adjustments associated with loans from these institutions would undermine the nation’s sovereignty.

The government aims to apply a risk-adjusted approach to the return of economic activity

The Cabinet resolved to follow a risk-adjusted approach for the return of economic activity. The aim is to balance the continued need to limit the spread of the coronavirus with the need to get people back to work. If the lockdown ends too soon or too abruptly, it poses a massive risk and an uncontrollable resurgence of the disease. Therefore, the best available scientific evidence is to gradually ease the restrictions on economic activity, using a phased approach. The president is scheduled to provide a further update later in the week, detailing the government’s planned measures to reopen the economy. However, the deployment of 73 000 additional South African Defence Force members up to the end of June suggests that the lockdown may be extended. South Africa’s economic strategy will require a new social agreement among all role players, including business, labour, community and government, to restructure the economy and achieve inclusive growth.

Figure 1: Summary of allocation of R500 billion stimulus package to curb the economic impact of COVID-19

ENDS

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