Treasury ups the ante on its economic policy response

By Tuesday evening, the latest coronavirus had infected nearly two million people across the world and killed more than 123 000 in around four months – and the global economic fallout is just as devastating.

As South Africa enters its third week of a five-week lockdown, it looks set for a deep recession in 2020 characterised by an economic contraction of up to 6.1%, according to the SA Reserve Bank’s latest projections. 

Speaking to journalists on Tuesday Finance Minister Tito Mboweni said the pandemic has caused three simultaneous shocks:

• A health shock that has increased the burden of services on the healthcare sector;
• Global economic shocks as growth sinks and lockdowns across countries impact external demand; and
• A domestic economic shock due to markedly decreased economic activity.

The solutions or support measures include exploring funding options from the various international lending institutions to fund government’s multipronged fight against Covid-19 and revising the fiscal framework to prioritise spending on health and growth initiatives.

In the same breath, government will push forward with well-iterated structural reform plans and increasing social support for the vulnerable. 

A more detailed economic response will be announced soon after a special cabinet meeting on Wednesday, at which the economic cluster ministers will table proposals. 

$60bn loan on the cards

Mboweni said National Treasury is “open-minded” in its efforts to get resources from all continental and international finance organisations.

The earliest of these was a meeting with the World Bank on Tuesday morning. 

Tshepiso Moahloli, Treasury’s acting head of asset and liability management, said the discussions were constructive and any agreements that are reached will be disclosed in due course.

“These are not a ‘pick and pay’ [type of negotiation],” said Moahloli. “You need to engage, you need to understand the pricing [and the] conditions, so we are undergoing that process … because at the end of the day these [are] loans that need to be repaid.” 

Mboweni said Treasury is looking to secure funding “somewhere in the region of $60 billion, specific to the interventions for the virus”.

Read: South Africa will approach IMF for health funds if needed

Mboweni said government is also talking to the International Monetary Fund (IMF) about accessing the funding packages it has strictly for Covid-19 support, stating that government is not considering fiscal support. 

“We are looking at programmes which will not be accompanied by any structural support programmes. We know what to do and what our structural reform programme is.”

Mboweni said the New Development Bank for Brics countries ((Brazil, Russia, India, China and South Africa) and the African Development Bank are among the institutions that have been approached, stating that government will “leave no stone unturned”. 

Fiscal overhaul 

The additional borrowing will add to the domestic financial resources that government has already deployed and continues to deploy. 

Mboweni said Treasury is revising the budget on a continuous basis and will make a consolidated budget statement soon, “fully aware that it’s a bit of a moving target all the time”. 

The fiscal revisions will involve determining clear estimates of how much should be put into healthcare costs and reprioritising unnecessary spending towards these costs. They will also be crafted as a third line of defence for the most vulnerable.

Mboweni said Treasury is seriously considering increasing child support grants and pension payments on a temporary basis, and should have a firm decision on this after Wednesday’s cabinet meeting.

Read: Treasury announces tax relief for SA businesses hit by coronavirus

It will also be necessary to assess the impact on revenue due to decreased economic activity, the banning of alcohol and cigarette sales, and tax support measures for businesses. 

“The fiscus’s ability to respond to crisis is weak,” said Mboweni, adding that Covid-19 has exacerbated an already precarious fiscal position and that measures to combat it will have to be sustainable in the long run.

“Nevertheless, given the current crisis, a higher deficit may be accommodated if it is a) temporary, and b) if reprioritised spending is directed towards crisis [health] response and direct fiscal support to the most vulnerable.”

Structural reforms

On being temporary measures, Mboweni said the fiscal framework revision should have a clear timeline of one year and be accompanied by a clear recovery plan which includes structural reforms that include “consolidation of public entities and closure of South African Airways [SAA] and SA Express”.

In his February budget, Mboweni pencilled in a R160 billion saving from stopping above-inflation growth in the public sector wage bill over the medium-term. This included reviewing the final year of the 2018 wage agreement, which comes into effect in April. With some public sector employees expected to get paid on Wednesday, Mboweni said “negotiations are continuing and may be interrupted in terms of the form”.

Mboweni said it is more critical now than ever to focus on raising long-term growth. 

“Beyond the Covid crisis, a major risk facing the economy and the fiscus is if long-run economic growth returns to the pre-crisis averages of between 1-2%,” he said.

“Higher levels of economic growth need to become a non-negotiable objective. In the absence of urgent structural reforms, the considerable fiscal actions to mitigate the current crisis may leave the fiscus on the edge of a cliff.” 

A deep recession in 2020

At this stage, Treasury expects a deep recession in 2020 followed by “a rapid upswing” in growth. 

It has modelled the expected budget deficit, government borrowing and fiscal response based on the economic impact of three lockdown scenarios:

• The current lockdown
• An extended lockdown
• A prolonged lockdown.

Mboweni said Treasury’s most preferable solution is an extended lockdown that considers a slow return to economic activity after the end of April on a risk-weighted basis.

“This is very important – there are certain aspects of the economy, like mining, which cannot be kept closed forever; you will find that if you prolong [the lockdown], those mines will be in a bad state,” said Mboweni.

“But there is no point in rushing a lift of the lockdown if we have not fully or reasonably contained the health crisis or else we might just go backwards.”