R750bn to save the economy

The stimulus measures that South Africa has announced to soften the blow the Covid-19 coronavirus epidemic will have on the economy to date is not a tenth of what is required to make an impact.

This was according to Peter Attard Montalto of Intellidex.

The current measures, which constitute about 1.6% of GDP, are some of the lowest in the world.

At least 10% of GDP – between R500 billion and R750 billion – will have to be found to have an impact, he wrote in a note on Thursday.

According to Professor Raymond Parsons, of the business school of North-West University, the best Covid-19 outcomes for South Africa estimate that it would cost about R300 billion (at last year’s prices) to soften the effect of the virus on the economy.

Roughly estimated, that was 4.3% of GDP, very far from the target of 10% needed in an ideal world, he said.

Parsons said it was disappointing that phase 2 of government’s economic recovery plan was not made known after a Cabinet meeting, and a meeting between economists and the presidency this week.

Another meeting was planned tomorrow “for further consultation”, the government had indicated.

In the meantime, the national lockdown was costing the economy an estimated R13 billion a day.

The Reserve Bank, which lowered the repo rate by another 100 basis points to 4.25%, expected the economy to contract by 6% as a result of the extension of the lockdown to 35 days.

Intellidex expected a more significant contraction of more than 9%, a budgetary deficit of 14.5% of GDP and 1.5 million job losses.

He said the national income fund had considerable buffers that could help.

Surpluses at government institutions, such as the Unemployment Insurance Fund, could be gradually used, and external sources that offered favourable credit, such as the International Monetary Fund, the World Bank and China, should also be considered.

But the increasing challenge that Covid-19 posed required that appropriate use of the state pension funds and the balance sheet of the Reserve Bank should also be considered.

To make money available, temporary budget allocations could be considered; the skills development levy could be used; capital projects could be postponed to 2021; and capital allowances for housing, municipal and provincial infrastructure could be used.

Money from the Government Employees’ Pension Fund (GEPF) and other pension funds could be used to mitigate the effect on salaries in the public sector.

Read: Mboweni expects a ‘deep recession’ as a result of the Covid-19 pandemic

The GEPF should be able to maintain monthly payments to pensioners, but the benefits could be limited to the minimum increase of 75% of inflation, said Sachs in his presentation.

He also mentioned the possibility that a solidarity tax on the income of richer South Africans should be considered as a temporary measure.

Tito Mboweni, the finance minister, said this week at a press conference that phase 2 of the government’s plans to combat Covid-19 included clear estimates of additional healthcare costs, the effects of an economic slowdown and a clear plan to ensure fiscal sustainability, as well as to limit the pace at which the debt burden was growing and the increase in liability.

This had to be supported by an economic recovery programme and reforms such as clarity about toll fees, reform of the Road Accident Fund, which placed a massive burden on Treasury, consolidation of public entities and a review of state-owned enterprises.

These were the plans which would now be further discussed.

Mboweni said a major risk after the Covid-19 crisis would be that economic growth remained around 1% to 2% a year.

Much better growth was needed.

“Without urgent structural reforms, the considerable fiscal stimulus measures to soften the crisis will leave Treasury on the edge of the fiscal cliff.”

Lesetja Kganyago, governor of the Reserve Bank, said on Tuesday that the monetary policy could bring slight relief for individuals and businesses that were struggling, but could not in itself increase the growth potential of the economy or lessen the fiscal risks.

“It must receive attention through carefully considered and sensible macroeconomic policy, and by implementing structural reforms that lower costs, but that offer investment opportunities and growth and that boost job creation.”

Parsons said any economic recovery measures to fight Covid-19 had to be quick, effective, flexible and specifically targeted. Phase 2 of the economic reaction plan should be implemented as soon as possible to protect confidence.

“The economic reaction is now just as important as the medical reaction.”

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