The economic war on the covid-19 pandemic

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To understand the magnitude of the economic challenge facing the country over the next two years due to Covid-19, one should compare our current state to the last global recession just over a decade ago. Then, what was essentially a financial house of cards came crashing down, with about 62% of all countries experiencing negative growth. Now, in what the IMF has termed the “great lockdown”, about 90% of the world’s economies are set to contract.

There’s no booming China with an insatiable appetite for our raw materials to offset some of the worst effects of a global contraction this time around. That factor, I imagine, brought about a sense of complacency from some of the world’s leading emerging markets in years past and most definitely in us.

Complacency is certainly not on the menu for our finance minister, Tito Mboweni. With very little wiggle room because of our well-known fiscal constraints, National Treasury has stepped up to the plate with the first phase of its economic policy response. Working in tandem, the South African Reserve Bank sprung a surprise cut in interest rates of 100 basis points. It’s the second cut in less than a month, a move in line with most of the world’s leading central bankers.

Over a conference call with journalists earlier this week, Mboweni said that he is in daily conversations, sometimes up to four times a day, with the governor of the Reserve Bank, Lesetja Kganyago. It’s encouraging co-ordination between the two arms of fiscal and monetary policy in the face of an economy that may contract by about 10% this year.

There’s much-needed sobriety in how dealing with the fallout from this crisis that the recently formed business alliance, Business for SA, sees as many as one million jobs being lost. That would be the best-case scenario, given that during the last global recession we lost as many jobs. With the IMF comparing our current economic calamity to that of the depression of the 1930s, much will ride on the ability of Treasury – along with business and social partners – to protect small and medium-sized companies.

As such we welcome the broad-based measures announced in the first round of government’s response to the crisis aimed at lowering the cost of doing business. A survey by University of Cape Town students of 250 small businesses across the country found that a staggering 95% couldn’t afford to pay their staff and half didn’t believe they would survive to the end of this crisis.

Looking at the measures to safeguard the jobs centre which is small business, it does seems that Treasury is taking advantage of the crisis to put into action the department’s 77-page report, Economic transformation, inclusive growth, and competitiveness: towards an economic strategy for South Africa. Released last August, the plan sought to increase economic growth by up to three percentage points per year and create up to a million jobs.

Now, given the greatest exogenous factor ever seen in any economic history textbook, those goals are definitely off the cards in our immediate future. But if we are to emerge from the ruin of this pandemic, it’s a proposal that Cabinet and all of us are going to have to work off as a blueprint, with some tweaks, that will come with the new world that Covid-19 has abruptly thrown us into.

There’s been countless column inches dedicated to the structural reforms that South Africa has to embark upon to boost our competitiveness, so perhaps I won’t be harbour the point too much, except to say we’ll fall deeper into “junk” if we don’t take the necessary measures. The crisis is an opportunity to put to bed the old debates that in some cases belong to the Cold War era, lost in an era of this health crisis that will change everything about the way we live and breathe.

For one, we should use this opportunity to review the strategic importance, or lack thereof, of the country’s more than 700 state-owned institutions. Already, the pandemic has certainly made a call on the future of our national vanity project, SAA, something that we’ve been unable to do for more than a decade. The business rescue practitioners have asked for a R10bn injection into the airline against a backdrop of health crisis that quite literally threatens millions of lives.

With Treasury reprioritising its most recently delivered budget to build an arsenal for the state to wage a war against Covid-19, for its own credibility, it can’t at this stage throw good money after what’s been a terrible investment for decades,  exacerbated by “state capture”.

We will need this sobriety brought about by this crisis to once and for all deal with the problem of Eskom, a question that will once again emerge on the national discourse as we try ramp up growth in the country. The many stakeholders in the electricity giant must accept that its reorganisation and division into three separate companies is the path towards to reducing its weight on our growth prospects. I know there exists an obsession with full ownership in the governing party, but to recapitalise this most important of institutions, a cash injection is at some point needed.

And the source of that injection needn’t be from already stretched state resources: partial privatisation is a reality. Let’s not leave the decision until it gets to the point where SAA or SA Express are, where there weren’t too many interested investors, if any.

The war we’ve waged on Covid-19 on both the health front and economically has been rightfully lauded. It doesn’t end anytime soon, and we are heavily invested in the sobriety of policymakers on both fronts in the months and years to come. It’s a sobriety that we understand will come with some hard choices. Treasury certainly gets it.

This column was first published in Business Report. 

For more economic policy posts, click here.

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