RAYMOND PARSONS: SA needs a sound strategy to exit lockdown
Tough choices must inevitably be made and additional borrowing may be necessary
Economic literature is full of good advice to countries on how to deal with external economic “shocks”. Though no economic textbooks have yet been written on the unprecedented, “sudden-stop” economics associated with Covid-19, many older works still provide useful guidelines that can be adapted to current circumstances. In particular, it is crucial to retain a realistic grasp of the challenge and make hard choices.
In confronting the Covid-19 pandemic, President Cyril Ramaphosa has already shown the necessary leadership, boldness and willingness to make difficult decisions, as the extension of the lockdown to April 30 demonstrates. Yet, as the president has acknowledged, whatever the merits of the data-driven health strategy behind the decision to extend the lockdown, the heavy damage to the economy and livelihoods is widely apparent.
The balance of risks is changing, which will require a shift of emphasis in decision-making as time moves on and we acquire new insights
In fact, pessimistic economic data has already accumulated, with Covid-19 and junk status adding significantly to an already weak economy. The NWU Business School’s Policy Uncertainty Index for 1Q 2020 was at its highest level since the index was launched five years ago. Things will get worse before they get better. The current worst-case scenario for SA is that GDP in 2020 will contract by between 5% and 7% and as many as 400,000 formal-sector jobs could be lost. In any event, a recession this year is now inevitable.
And to what extent will the economic measures announced so far mitigate the anticipated negative outcomes and cushion the damage to the economy? At the outset it needs to be generally accepted that the lockdown cannot be a permanent solution. A healthy economy and a healthy society are interdependent. Ramaphosa promised in his address on April 9 that strictly controlled relaxations in the present regulations would be announced shortly to assist particular sectors of the economy. But what happens post-April 30?
Ramaphosa’s strong leadership in dealing with Covid-19 so far must now also be felt on the economic front as the economy rapidly deteriorates. The balance of risks is changing, which will require a shift of emphasis in decision-making as time moves on and we acquire new insights. For all the health and economic traumas it is unleashing, Covid-19 is not a permanent phenomenon either. SA now needs a sound exit strategy to begin to bring the country and the economy back (or closer) to “normal”.
Compared to dealing with the 2008 Great Recession, SA now, unlike many countries in the developed world, is unable to do “anything it takes” to underpin the economy. SA’s vulnerable public finances, the causes of which range from the excessive public-sector wage bill to the predatory state-capture system, mean limited fiscal space. SA has been excessively exposed to the fallout from Covid-19 because of past failures in economic management and various other factors.
So, what does a possible fiscal scenario now look like? If we adjust the 2020 budget projections to the new realities on both the spending and revenue side, and include the estimated cost of the various assistance measures announced thus far at about R75bn, it looks like SA may still need to find about R150bn. This could be covered largely by tapping UIF and reserve funds, freezing public-sector pay rises for 2020, and ruthlessly diverting money from other, lesser priorities such as the dysfunctional SAA.
Indeed, tough choices must inevitably be made. Additional borrowing may be necessary. If domestic resources are not adequate, then SA must be prepared to seek external financial assistance, even from IMF emergency funds, In the final analysis, the country needs to access the cheapest finance, despite “junk” status. This is a time for pragmatism, not ideology. And pro-growth economic reforms are also even more imperative now.
While making money available is one thing, successfully delivering it to needy and distressed recipients is another. Businesses and households have been pushed to the brink and over. We have already witnessed several implementation problems. Applications to the Temporary Employer/Employee Relief Scheme (Ters) and other assistance schemes will overwhelm the capacity of these programmes. A recent survey of small business by post-graduate students from UCT and two entrepreneurs revealed that, unless the period from application to funding can be ideally limited to seven days, many SMMEs will simply not survive. Cash flows are severely strained. Now more than ever, time is of the essence.
To ensure that support measures in SA are rapidly deployed and sufficiently responsive means making existing mechanisms more generous and effective. Mechanisms such as dispensing UIF benefits, increasing social grants and government paying its small business suppliers’ invoices within 30 days all offer immediate relief. However, some good but completely new sources of help are taking too long to implement or still involve too much red tape. “Smart tape, not red tape” must be the adage.
To ensure maximum economic impact, micro and macro measures need to work in tandem. At the macro level, the Reserve Bank continues to be supportive, especially in wanting to avert a liquidity problem in the economy. SA has a resilient banking sector. There is now room for the central bank to further reduce borrowing costs by cutting interest rates again as the economic consequences of Covid-19 bite much deeper.
An exit strategy brings its own health and economic challenges. Mistakes will be made but can be minimised or corrected through effective consultation and heightened collaboration. Balance sheet considerations and economic forecasting aside, however, the extended lockdown is generating even bigger stresses and strains in South African society than have been felt up to now. Social cohesion and economic recovery remain two sides of the same coin.
• Parsons is a professor at the North West University Business School.
Correction: April 14 2020
An earlier version quoted a survey of small business by the CDE. In fact, the survey was conducted by six post-graduate students from UCT and two entrepreneurs.
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