Unpacking South Africa’s COVID-19 “rescue package”
South Africa's R50bn ($26bn) rescue package is 10% of its GDP. It is a major step forward, but some warning lights are flashing.
On Tuesday night, April 21, 2020, South Africa’s President, Cyril Ramaphosa, announced the country’s first major COVID-19 economic rescue package, amounting to R500 billion ($26 billion USD). This occurred towards the tail end of a five-week long lockdown, which has pushed the already ailing economy into further crisis.
The announcement follows weeks of intense lobbying and debate within the country. Until this point the government’s intransigence was best represented by the Minister of Finance, Tito Mboweni, blocking increases to social grants, which civil society groups and researchers had pushed. It took an independent think tank—the Institute for Economic Justice (IEJ)—to present the first coherent, costed emergency rescue package before the government had put anything on the table. Prior to the announcement, South Africa had allocated 0.1% of GDP to COVID-19 relief, compared to a G20 average of 10.1%.
The plan announced by Ramaphosa therefore represents a major step forward. If effectively implemented, it will make a material difference in the lives of millions of people and support tens of thousands of businesses. However, although the absence of details makes the package difficult to analyze, a number of weaknesses exist.
As a rule of thumb, special COVID-19 government spending announced around the world has been roughly equal to the size of the expected economic contraction in each country. This is because, in the economics of lockdown, each dollar spent is likely to have less of a stimulatory impact than in normal times.
In South Africa, estimates of the economic contraction have increased from 4% of Gross Domestic Product (GDP) two weeks ago, to 6 to 8% last week, to around 10% before the announcement of the package. 10% of GDP is just over R500 billion. This is the total the President announced.
But not all of it is new spending, nor necessarily government spending at all.
R200 billion comes in the form of loan guarantees, and R70 billion in the form of tax deferments or deductions. This is not additional government spending, though it will be an important lifeline for businesses and households. This means there is R230 billion in actual spending, or 4.5% of GDP (shown in the table below).
This means there is R230 billion in actual spending, or 4.5% of GDP—R20 billion to health spend and municipalities each, R50 billion to social grants, R100 to job support, and R40 billion to wage guarantees.
On the revenue side, R130 billion of this comes from “reprioritizing” existing planned budget expenditure. It makes sense to use money that may have been saved during the lockdown. But shifting money from one budget line to another will not necessarily be a long-term net gain for the economy. This is particularly true if we underfund long-term “capital expenditure” (investments in roads, ports, trains and so on).
A further R100 billion is likely to come from the surplus sitting in the country’s Unemployment Insurance Fund (UIF).
This means that the logic of austerity—which appears to have a death grip on South Africa’s National Treasury—remains in place, as the package doesn’t necessarily cost the fiscus anything. It also means that far greater spending should be leveraged for additional rescue measures and to set the economy on a new footing in the medium term.
Researchers, activists, and some admirable government officials, fought a month-long battle against the National Treasury to dedicate additional spending to social grants, i.e. social security transfers to the poor. These grants directly benefit over 18 million people, and indirectly another 14 million.
The announced plan increases the child support grant by R500 ($26) per month, and other grants (such as, old age pensions, disability grants, and foster grants) by R250 ($13) per month.
A new special COVID-19 grant, of R350 ($18) per month is introduced to benefit those “who are currently unemployed and do not receive any other form of social grant or UIF payment”.
Unfortunately, the numbers announced don’t add up, and the President didn’t tell us how many people this new grant will reach, so it’s difficult to tell what’s going on here.
The most recent proposal on the table covered 8 million people—aged 21 to 59, earning below R3,500 ($260), not employed, and not getting another social grant. Those who proposed the grant originally sought to cover between 13 and 15 million people.
This package will cushion the rise in extreme poverty and hunger. But depending on the fall in incomes in both formal and informal economies, a rise in poverty may still occur. Further, despite proposals on the table, the COVID-19 grant is too little, and its targeting will be complex to administer. A universal basic income grant, at a significantly higher level, would be a better option.
President Ramaphosa announced R100 billion ($5 billion) set aside “for the protection of jobs and to create jobs.” How this is to be spent is unclear.
R40 billion ($2 billion) has been set aside to support wage payments for businesses unable to pay their workers. It’s unclear whether this includes the R30 billion already allocated for this purpose, or is in addition to it. The IEJ showed that the original R30 billion did not guarantee a minimum wage and would only be enough to cover about 2.4 million workers, a share of those affected.
It is also uncertain whether the other challenges facing this scheme will be attended to. It is slow, cumbersome, and difficult to access. The UIF, mandated to administer it, seems ill-equipped. And the current, illogical, requirement that it only covers businesses who have experienced a total or partial closure of operations as a direct result of COVID-19, must be removed. Restrictions on other funding streams, for example, a requirement of local ownership, also need to be relaxed.
Bringing South Africa in line with other countries, an amount of R70 billion (just under $4 billion) is dedicated to tax relief. Most of these measures delay the payment of taxes, although there are some tax deductions and holidays. How households (as opposed to businesses) will benefit is unstated.
There is also, it seems, no concrete package of compulsory measures around deferral of rent, mortgage or other loan payments. To date, this has been left to the goodwill of the private sector to offer, coordinated by the banks themselves. The state must step in and regulate this.
The largest chunk of money—R200 billion—is dedicated to a loan guarantee scheme. Essentially, banks will extend special loans to struggling businesses and the National Treasury and South African Reserve Bank will bear the risk of default.
This is an important step forward and the commercial banks should be effective at getting this relief to businesses. But there are four issues to consider:
- The Reserve Bank, not the Treasury, should stand behind these loans and absorb any losses, protecting funds for future expenditure.
- Some businesses need bailouts not loans. As the IEJ notes: “additional debt, even at concessional interest rates, will not be appropriate for businesses facing a risk of insolvency. Similarly, it may prove optimistic that short-term tax deferrals will be an adequate or effective measure given the likely persistence of severe disruption and low demand beyond the end of the lockdown.”
- Strict conditions should accompany these loans. For banks, the loan guarantee scheme should impose maximum interest rates and fees, limiting the scope for profiteering. For the businesses, borrowing conditions restricting executive bonuses, safeguarding jobs, and promoting equity requirements should be considered. These should not be so onerous as to discourage businesses from making use of the scheme.
- There doesn’t seem to be a provision for big business (with turnover above R300 million a year). How many of these businesses are in trouble isn’t clear, but support may be needed. This support should also come with strings attached, and if the money is in bailouts, then government should receive a commensurate equity stake in the companies.
Ramaphosa says South Africa will pay for all this from “local sources, such as the UIF, and from global partners and international financial institutions”.
This is the weakest element of the package.
The plan is silent on additional tax measures. (The IEJ has estimated that “solidarity taxation” on rich people could yield R48 billion.) It is also silent on a special COVID-19 solidarity bond that would secure funds, on favorable terms and at low interest rates, from public and private institutional investors. Private local finance must step up to the table.
Increasingly it seems as if the South African government is leaning towards seeking financing from the World Bank, International Monetary Fund and other development banks. The first two are viewed, rightly, with great suspicion in South Africa. They are notorious for accompanying loans with anti-poor, pro-market measures of deregulation and slashing government and social spending. The IMF appears to have somewhat stepped back from this during the crisis but a flashing neon “proceed with caution” sign is required.
While progressives should support global transfers from developed to developing countries, we should ensure that these loans come without strict anti-poor conditions, and that the loan terms are agreed to by all major social partners.
This is particularly important in South Africa, because the Minister of Finance seems hellbent on using such loans as a means to push through his pre-existing pro-market agenda.
The bigger picture
Mr. Ramaphosa’s address is bookended by references to the need to ensure “structural reforms” in the post-COVID-19 recovery phrase. While economic reform is certainly needed, “structural reform”—as articulated by the Minister of Finance—is usually code for privatization, cutting wages, and slashing spending. In line with this logic, the rescue packages do not include the necessary measures to stabilize the economy—further reducing borrowing costs, stabilizing the exchange rate, and imposing measures to limit money leaving South Africa.
These worrying elements are, however, at odds with more progressive pronouncements by the President, for example that we should not “merely return our economy to where it was before” but “forge a new economy”.
The COVID-19 crisis is teaching the world that there is a need for more effective governance and a more proactive role for the state. It is showing South Africa that despite a decade or more of waste, corruption, and mismanagement, the state can play a developmental—and life-saving—role.