The government's stimulus package should at least equal the expected shock to the South African economy. But at 4.1% of GDP, against the 17% benchmark, it is hopelessly inadequate.
The ink had barely dried on the National Treasury's recent presentation of President Cyril Ramaphosa's R500 billion stimulus package to Parliament when two reports outlined shock scenarios for South Africa: the economy could plunge into a depression in 2020 and experience its deepest decline for more than a century.
The reports - commissioned by the United Nations University, the academic and research arm of the UN, and business association Business for South Africa - said the economy could contract up to 16% and 17% respectively, depending on the length of the government's Covid-19 lockdown, and shed up to seven million jobs. This would intensify a humanitarian crisis, which has resulted in 24% of South Africans having no money to buy food, according to a survey by the Human Sciences Research Council, a government social research agency.
This means that the treasury and the Reserve Bank must provide more support for the collapsing economy. In other words, the government's stimulus package is inadequate and outdated.
Deputy Finance Minister David Masondo told The Sunday Times newspaper that the Reserve Bank could do more and buy government bonds on the primary market, which refers to new issues of debt on South Africa's bond market. Last month, the bank implemented quantitative easing when it purchased government bonds on the secondary market, where existing debt instruments are traded, after a spike in yields or interest costs as investors fled South Africa and other emerging markets for the safety of the United States dollar in the wake of the Covid-19 pandemic.
In a recent paper, former treasury deputy director general Andrew Donaldson called for the Reserve Bank to step up its quantitative easing programme and provide liquidity to the market by purchasing government bonds worth R10 billion to R20 billion a week. This would reduce the cost of government debt and stabilise the market.
Internationally, unlimited central bank purchases of state and corporate debt instruments have effectively nationalised bond markets, according to a recent article in the Financial Times newspaper. The bond buying has "made it impossible for investors to punish overspending" by governments, according to the newspaper.
Japan, which started quantitative easing in 2001, has gone further. It owns about 44% of government debt, which is worth 240% of gross domestic product (GDP), the value of all goods and services produced in the economy. It has also implemented "yield curve control", a policy whereby the central bank determines the cost of capital on the bond market. Across the wide spectrum of possible monetary policy interventions, the Reserve Bank can also provide "helicopter money" and directly finance government spending at no cost.
In an editorial a day after the Bank of England said it would directly finance government spending, the Financial Times said: "Printing money is a valid response to the coronavirus crisis." Such monetary financing, as the practice is also called, would blur the line between monetary and fiscal policy and eventually bring an end to the institution of central bank independence.
In a presentation to Parliament on 30 April, the treasury provided financing details of the stimulus package. "The total size of the package is estimated at over R1 trillion, consisting of a fiscal support package of R500 billion, and monetary and financial market interventions worth another R500 billion," it said.
The monetary interventions referred to steps taken by the Reserve Bank to reduce regulatory requirements relating to the buffers - capital and liquid assets - that banks must hold to shield themselves during bad times. The reduction of these required buffers should allow banks to lend more, according to the treasury's logic. But in a recent paper, Stuart Theobald, the chairperson of financial markets research firm Intellidex, says such measures are unlikely to result in an increase in bank lending. They will just allow banks to accommodate, or absorb, the pressures they face in their existing business.
The treasury said R240 billion of the R500 billion fiscal stimulus would not have an immediate impact on the national budget. This included a R200 billion loan guarantee scheme, which will start with an initial R100 billion. It does not require an upfront financial contribution from the government.
The Unemployment Insurance Fund has set aside R40 billion to provide financial support for workers who are laid off temporarily because of the lockdown. Therefore, spending of only R260 billion will be made through the national budget: R100 billion on job creation and support for small, medium and informal enterprises; R70 billion on tax relief measures; grants of R50 billion for vulnerable households for six months; R20 billion on public health measures; and R20 billion to support municipalities.
As a stimulus refers to the injection of new money into the economy, some funding sources must be deducted from the package. These include the R130 billion reprioritisation of existing spending and R15 billion related to available funds in the Department of Social Development, which will be diverted to pay new grants. Tax deferrals of R44 billion should not count as part of the stimulus package because they have to be paid back during the current fiscal year; they are only a temporary hit to state revenue.
After these exclusions, the net contribution from the treasury is R71 billion or 1.4% of GDP. The total package, after excluding half of the loan scheme because it has not yet been allocated, is R211 billion or 4.1% of GDP. As it is accepted that a Covid-19 stimulus package must be at least equal to the expected shock to the economy of up to 17%, South Africa's effort falls far short of this benchmark.
Economy and job scenarios
If one adds the net treasury contribution to the estimated R285 billion hit to government revenue, the budget deficit will soar to about R726 billion from a budgeted R371 billion. The planned R100 billion raised from the International Monetary Fund and the World Bank will account for just 14% of this deficit. It will not make much of a difference.
The United Nations University report, published by the Southern Africa - Towards Inclusive Economic Development (SA-TIED) programme, a research collaboration with government departments, outlined three quick, slow and long-term scenarios based on the length of the lockdown.
The more realistic slow and long-term scenarios, based on an eight-week lockdown, said the economy would contract by between 12.1% and 16.1% respectively. The economy will shed between five and seven million jobs. The worst affected sectors will be manufacturing, construction, trade, catering and accommodation, and financial and business services.
Business for South Africa, which brings together Business Unity South Africa and the Black Business Council, outlined two scenarios. In the first, where all provinces move from level four to level two of the government's lockdown on 1 June and remain there until the end of the year, the economy will contract by 10.3%. In the second, in which the Covid-19 infection rate peaks during August and September, the economy will contract by 16.7%.
Both scenarios take into account the impact of the government's fiscal and monetary policy interventions and provide further evidence that they are hopelessly inadequate.
The Human Sciences Research Council survey showed the depth of the unfolding humanitarian crisis. It says 55% of people living in shack settlements had no money to buy food. In townships, the figure was 66%. The Reserve Bank and the treasury will have no option but to provide more stimulus to the collapsing economy.