The Lockdown ends at midnight on 16 April 2020. What happens next?

7 April 2020

INTRODUCTION

The lockdown period which was implemented by Government following the declaration of a state of disaster to deal with the Covid-19 pandemic, ends at midnight on 16 April 2020. The initial steps taken by Government were taken at a relatively early stage of the pandemic’s spread in South Africa and we support not only the steps that have been taken, but also the fact that there was no delay in doing so. 

What is to happen when the lockdown period ends? As we set out below, this is not an easy question to answer, as it is not only the spread of the Covid-19 pandemic which is a relevant consideration, but also the damage which a lockdown of this nature causes to the economy and the livelihood of the country’s people. 

SOUTH AFRICA’S ECONOMIC AND FINANCIAL SITUATION IS DIFFICULT

It is clear that the arrival of Covid-19 could not have come at a more troublesome time for South Africa. The latest IMF report on South Africa puts the country’s situation as follows:

With annual growth reaching only 0.2 percent in January-September 2019, per-capita GDP growth is set to contract for the fifth year in 2019. Sub-par returns and falling business confidence, derived from policy uncertainty and rigid labour and product markets, have depressed private investment and exports, and weakened the pace of productivity improvements.[1]

The availability of fiscal space proved useful to deal with the effects of the global financial crisis as countercyclical fiscal policy smoothed the impact of the global downturn. The current debt levels, contingent liabilities, and increasing interest bill have left the economy with no fiscal space, forcing larger adjustments than would otherwise be desirable in the context of subdued growth.[2]

Briefly put, South Africa has practically no room to manoeuvre. In our comments which have been published over the past few days, we have tried to illustrate the country’s situation by putting it in everyday language: it is that of a private household which has maxed out its credit card and now suddenly has to pay for repairs to the house’s roof which has collapsed in a storm. 

THE EFFECT ON THE LABOUR MARKET

The difficult fiscal situation of the country is not the only issue. Whilst Government is trying to use, for example, SARS and the Unemployment Insurance Fund to assist employees’ and business cashflows, this will only have a limited impact on those entities and persons directly involved. 

However, such measures have no effect on the informal sector. Official statistics[3] show that out of a total number of 16 420 000 persons who are employed (out of a total labour force of 23 146 000 persons), 2 918 000 are in informal employment. It therefore amounts to 18% of those employed - and this percentage may well underestimate the size of the informal sector. STATSSA’s own statistics exclude the 1 286 000 persons in the employ of private households from the informal sector - and we would be surprised if these workers are going to get relief from Government agencies.

In the current circumstances, the problem is that Government has no direct way of providing the informal sector with any financial or material support. Given that nearly all of those employed in the sector cannot work from home, many workers have no way of putting bread on the table. Amendments to the lockdown regulations have now been made to allow informal food traders to operate, but for many other informal sector workers there is no direct relief. The consequences for social hardship and ensuing discontent are obvious. A strict lockdown cannot be extended indefinitely, or for any extensive period beyond 16 April 2020, without very serious social consequences and equally serious damage to the economy. The damage inflicted on the economy will also be reflected in government revenue, as its tax receipts will decline drastically, whereas additional health expenditure relief will increase government expenditure, limiting potential financial relief measures which may be appropriate.

An indirect way of helping would be a temporary increase in the child support grant, which is well-targeted towards poorer households. Given that there are projected to be 13 million CSG recipients in 2020/21[4], every additional R100 per month per grant would entail additional spending of R1.3 billion per month.

WHAT ARE THE CHOICES?

The best outcome is obviously for the lockdown to stop the Covid-19 pandemic in its tracks, but if that does not happen within a relatively short timeframe, the choice which confronts Government is stark and the potential consequences of any decision are invidious. A vaccine will not become available within the next few months - at best, it is more than a year away.

The choice would be:

either

to allow people to work and take the risk that the coronavirus will not spread to the degree that the health system cannot cope, while continuing to isolate the most vulnerable - the elderly, those with serious health problems and possibly persons suffering from HIV/AIDS;

or

to continue the strict lockdown for an extensive period and take the risk of widespread hardship and social unrest, against the background of a steadily worsening economic situation, from which it will take years to recover. For its success, this strategy would require that the Covid-19 pandemic will be kept in bounds by such measures and that the infection curve will be “flattened”.

If a strict lockdown has not minimised the spread of the virus, ending it would have to be accompanied by a range of measures: including an extensive testing campaign, which would need to be flexible enough to be able to be despatched to specific areas in a targeted manner, to deal with sudden instances of positive cases. Regional, temporary lockdowns may be necessary to deal with such local outbreaks. In addition, strict rules will have to be enforced regarding sanitising of hands and, for instance, public transport facilities. A public education campaign will need to be carried out to emphasise the importance of individual behaviour, for example, keeping a distance from others, wearing a mask (the weight of opinion is slowly moving towards this step) and personal sanitising efforts.

EXTERNAL FINANCIAL SUPPORT SHOULD BE SOUGHT

Finally, in light of the country’s serious financial situation, we would suggest that the time has come to approach the IMF and other international organisations for financial support. According to press reports, South Africa has already decided to take up a USD1 billion loan from the BRICS New Development Bank and debt facilities from other international organisations are being considered.

The IMF has a facility - the Rapid Financing Instrument (RFI) - that provides emergency financial assistance to member countries without the need to have a full-fledged program in place. These loans can be disbursed very quickly to assist member countries implement policies to address emergencies such as the coronavirus. Emerging markets can apply for up to USD50 billion (nearly a trillion Rand, on current exchange rates) at an interest rate of about 1.5%. The loan would be repayable within three to five years. The key variable to consider is exchange rate risk. Each country is able to draw up to 50% of its IMF quota (ie. its share in the IMF’s capital). In South Africa’s case, 50% of its capital equates to just over USD2 billion (ie. R38 billion at current exchange rates).

South Africa is unable to deal with a sharp increase in the budget deficit on its own. Ideological or other reservations about applying to the IMF must be set aside, and we are pleased to learn that the Minister of Finance is considering the possibility of an application. The country’s already high indebtedness will increase in order to obtain funding to deal with the situation, whatever we do. The point of IMF assistance is to lessen the stress on domestic sources of finance.

Anton van Dalsen, Legal Counsellor, Helen Suzman Foundation. 

Footnotes:

[1] IMF Staff Report for the 2019 Article IV Consultation with South Africa, published on 30 January 2020, page 5.

[2] IMF Staff Report, page 17.

[3] STATSSA, Quarterly Labour Force Survey, Quarter 4: 2019. STATSSA defines “informal employment” as comprising all those who are not entitled to basic benefits such as a pension or medical aid contributions from their employer and who do not have a written contract of employment.

[4]National Treasury, Budget Review 2020, Table 5.8