SA’s blanket lockdown approach is far from ideal

SA should not have undertaken a wholesale, one-size-fits-all lockdown of the economy.

The government should have taken into account the geographical spread of the coronavirus pandemic across the country and all relevant tradeoffs.

Instead, a populist approach was adopted, according to two Macroeconomics Research Unit economists.

After the outbreak of Covid19 in China and its subsequent spread across the globe in the first quarter of 2020, SA responded by implementing a level 5 national lockdown effective from March 27 with the intention of minimising the spread of the disease.

Economists, however, generally agree that the SA economy will be adversely affected not necessarily because of Covid-19, but because of the nature of government response.

While SA’s gross debt-to-GDP ratio was roughly equal to the emerging market economies’ average in 2019, the domestic debt trajectory is seemingly at risk.

SA’s public debt (as a ratio of GDP) increased by 33 percentage points between 2008-2019.

At the beginning of 2020, projections pointed to a further increase in the debt stock, from the current level of 61.6% of GDP to 71.6% of GDP in 2023.

However, the debt stock is likely to increase much faster than anticipated in light of the fiscal stimulus measures as announced by the national treasury in April aimed at mitigating the economic impact of the lockdown.

According to IMF projections, debt will reach 85.6% of GDP by the end of 2021.

The cost of servicing the debt is increasing. It accounts for 13% of government expenditure and 16.4% of revenue in the 2020/2021 budget, and the national treasury projects it will rise to 15% of expenditure by 2023. Interest payments are the fastest-growing component of the budget.

As pressure on the fiscus increases, the rising interest bill is likely to crowd out other social and investment spending priorities.

In turn, this may adversely affect longer-term economic growth prospects, as improvements in the provision of healthcare, education and infrastructure provide the basis for future GDP growth.

Once Covid-19 has been contained, a growth-friendly fiscal consolidation will be essential to stem the rise in public debt. If government debt continues to increase unabated, debt service challenges could have serious implications for financial stability.

Before the pandemic, the SA economy was already grappling with continuing deterioration of fiscal strength and a structurally weak growth.

Its GDP growth, according to StatsSA, slowed from 1.3% in 2017 to about 0.7% in 2018.

As a result, ratings agencies downgraded SA to below investment grade, or junk status, in 2019.

The outlook on the rating remains negative because of unreliable electricity supply, persistently weak business confidence and low investment, as well as long-standing structural labour market rigidities that constrain economic growth.

The country’s debt profile has also been a source of concern for policymakers as the most recent estimate puts the debt service-to-revenue ratio at 62.2%, which is likely to worsen and may reach 70% at the end of 2020.

The above factors will worsen the economic impact of the country’s response to the Covid-19 outbreak and make it more difficult for the government to weather the crisis.

With the total lockdown, the local unit exchange rates surrendered 3.2% against the dollar, 4.25% against the pound and 4.8% against the euro.

The JSE, like other global markets, was also under pressure, down nearly 6% to 48.99 points within the lockdown period.

The IMF and SA Reserve Bank project that the country’s GDP will shrink by about 6%, effectively placing more than 1.5 million SA jobs at risk.

To ease the afflictions imposed by the lockdown, the government implemented a wide range of initiatives aimed at keeping both households and businesses afloat. However, the question remains — how effective are these initiatives?

From our viewpoint, everything about government’s response points towards adversity characterised by high and prolonged levels of unemployment.

What happens when the business loans dry up? What happens in October when the social relief of distress grants ends?

Inevitably, the reality will eventually hit the economy. After the lockdown, some jobs that may have survived the period of significant economic inactivity might be lost when demand is sustained at a low level.

This is the primary reason some scholars support Professor Larry Wray’s view that government should be the employer of the last resort.

This class of scholars argues that instead of relying on implicit policies of employment, government must provide jobs to anyone willing to work at a minimum wage. In this manner, there will be no involuntary unemployment.

Australian academic Tony Aspromourgos advises that this should, however, not be implemented as typical public sector employment but rather as residual employment such as community work, environmental work, and so on, contingent on preferences of the society.

In SA, this is closely related to the Expanded Public Work Programme — except that, this would need to be run more efficiently.

This proposal could possibly work better in the country which has been battling with unemployment for a long time. And it will also go a long way in alleviating the expected rise in unemployment levels.

In addition, it will absorb the current crop of graduates, who now have a lower chance of getting employed because of the expected prolonged economic slowdown than was anticipated before the lockdown.

As pressure on the fiscus increases, the rising interest bill is likely to crowd out other social and investment spending priorities

Christian Tipoy, Ntokozo Nzimande, Malibongwe Nyathi, Harold Ngalawa, Simiso Msomi and Adebayo Kutu are members of the Macroeconomics Research Unit, University of Kwa-Zulu Natal