The current economic stimulus package presented by South Africa’s Finance Minister, Tito Mboweni, undermines the basis of a radical alternative to transform and sustain the economy out of and post COVID-19. This does not come as a surprise, however, because it remains consistent with the African National Congress (ANC) government’s general “talk left and walk right” economic policy. It has become clear, however, that the political will to implement radical economic transformation—a macro-economic policy programme adopted by the ruling party at its fifty-fourth National Conference—is a smokescreen. While the government continues to reiterate the need for a radical restructuring of the economy in its rhetoric, its macro-economic policy continues to be orthodox even as a global pandemic provides an opportunity for a paradigm shift to address socio-economic inequalities. As the government scrambled to make up for the lack of access to water and sanitation, announcing that the Department of Water and Sanitation had requested to buy-out all water tanks in the country in a bid to distribute water to more than 2,000 communities, the coronavirus continues to expose a lack of investment in the economy. Moreover, the government’s relative size of its debt service no doubt constitutes a huge obstacle to any economic recovery.
Sikho Luthango works as a Programme Manager for Labour Relations and Economy at the Rosa-Luxemburg-Stiftung’s Southern Africa Regional Office in Johannesburg.
Ndongo Samba Sylla is a development economist at the Rosa-Luxemburg-Stiftung’s West Africa Office in Dakar, Senegal.
On 22 April 2020, nearly one month after the imposition of a lockdown, President Ramaphosa announced a 500 billion rand economic stimulus package and acknowledged that the country needed a coherent economic recovery strategy underpinned by radical economic transformation. Ramaphosa further highlighted the need for localization, reindustrialization, and an infrastructure building programme to stimulate demand and supply and achieve inclusive growth and transformation for rural and urban areas. This is the type of economic stimulus that South Africa needs—one that is dedicated to investment in the economy to address its high unemployment rates reaching 65 percent of them Black South Africans.. In addition, as of 2015, poverty continues to rise, with about 14 million South Africans living in extreme poverty—
Instead, the National Treasury, led by the Minister of Finance, strongly and continuously reiterates a rhetoric of high government debt as bad for growth and remains committed to servicing the national debt. This has had a considerable impact on investing in sustainable sectors of the economy and on social spending, including housing, sanitation, and income grants.
The government now intends to issue more debt in order to finance its fiscal package. The question is not one of acquiring debt, but rather that as South African debt grows, without greater control over the interest rates on its domestic debt, such a move would not only be costly but it would also undermine the basis of a radical alternative to transform and sustain the economy out of and post COVID-19.
Inconsistent Economic Rhetoric Is Consistent
Government macro-economic policy, led by the ANC whose ideology is rooted in the Freedom Charter, can be situated within a context of conservative macro-economic policy. It can be described as an orthodox neoliberal programme that can be traced back to “GEAR” (Growth, Economic and Redistribution) and the President Mbeki era. GEAR, adopted in 1996, exposed the country to the volatility of global markets through its export-led strategy. Additionally, its export-led trade- and capital markets liberalization policy ultimately increased unemployment while achieving only limited growth and redistribution.
The ANC’s economic policy has been described by scholars such as Vishnu Padaychee as a “treasury view of economics”, and is constantly used to justify a decline in government spending to highlight what is made to be an urgent need to service debt at the expense of growth-enhancing public investments. IMF data shows that South Africa ran primary surpluses from the early 2000s until 2008. The higher primary deficits observed following the global financial crisis declined steadily until the coronavirus outbreak. As a consequence, over the years a significant part of consolidated government spending has been continuously redirected to the servicing of debt. For this reason, a significant shift in the ANC macro-economic policy needs to be considered as the government intends to incur more debt.
With the ailing power of the tripartite alliance between the ANC , the Congress of South Africa Trade Unions (COSATU), and the South African Communist Party (SACP), the government’s macro-economic policy is mostly left unchecked. The tripartite alliance had considerable influence over ANC economic strategy in the past, in a bid to ensure that socio-economic challenges were addressed. However, with the introduction of GEAR, a more conservative economic policy, it has since declined.
Furthermore, nearly halfway into the lockdown and amid claims that South Africa is considering approaching the International Monetary Fund (IMF), the World Bank (WB) and the New Development Bank (NDB) to finance health interventions, the tripartite alliance vehemently rejected this possibility citing the loss of national sovereignty as a concern. The alliance is yet to provide an alternative proposal and welcomed Mboweni’s plans to seek funding from international sources as long as it is not accompanied by structural reforms.
The declining influence of the tripartite alliance over the ruling party allows economic policy within the ruling party to remain centred among a few individuals within the economic cluster, as observed by Adam Habib and Vishnu Padaychee when analysing interviews of former Minister of Finance, Trevor Manuel. And while in the 2000s such power was not left unchecked, with the subsequent ousting of President Mbeki, a GEAR proponent, the vigorousness to do the same by questioning the ruling party, its intentions and policies has been lacklustre. It is therefore doubtful that any economic proposal to steer the economy out of and post-COVID-19 will receive any meaningful pushback from the tripartite alliance, thus reinforcing a “treasury view” of macro-economic policy.
The Minister of Finance re-tabled the budget on 24 April 2020, reiterating that the government will not abandon its structural adjustment programs, will continue to work with the private sector, and is considering a “restructuring” of State Owned Enterprises (SOEs) including the restructuring of the national airline, South African Airways. Mitigating the impact of the virus will require a shift in South Africa’s macro-economic policy towards more state-led investment. This amounts to a significant paradigm shift away from the “treasury view” that prioritizes austerity.
Therefore, a paradigm shift within the government’s macro-economic policy requires an expansion and not reduction of the role of the state. However, Mboweni’s rhetoric effectively reinforces a path of continued orthodox government spending that is inconsistent with a radical economic transformation. This suggests that the dominance of neo-liberalism in government ideology will continue to prevail.
Restructuring Public Spending away from Huge Debt Servicing Costs
As the government awaits feedback from the IMF, WB, and NDB, the debt question has become a subject of debate. The country may see a re-commitment to the reduction of government debt and a further restructuring of the role of the state. These are policies that already fit into the agenda of the IMF. That is to say: permanent structural adjustment, the economic and social costs of which are borne by the poorest, particularly in the form of chronic unemployment among the youth. The IMF noted in a recent report:
"Real per capita GDP growth has averaged 1.2 percent since 1994 compared to 2.8 percent for emerging market (EM) comparators and 5 percent for the top EM growth performers within the sample. Underperformance became more marked in the last 5 years [2014–2018] when per-capita GDP growth was negative. Except for a growth acceleration period (2001–07), job creation was persistently insufficient to absorb a rapidly growing labor force, driving the unemployment rate to about 29 percent (56 percent for the youth). Moreover, 40 percent of the unemployed (60 percent of the youth) have never had a job, and one third of the unemployed have not been employed for 5 years."
The COVID-19 pandemic thus comes at a time when real per capita income has been declining steadily since 2014. According to IMF estimates, GDP is expected to contract by 5.8 percent this year (-6.1 per cent according to the South African Reserve Bank (SARB)) and unemployment is expected to affect 35 percent of the labour force. If in “normal” times the South African economy functions to the benefit of the top 10 percent , which represents 85.6 percent of net personal wealth, in exceptional times it is doubtful that the situation will improve for the 90 percent.
The 500 billion rand fiscal package (26 billion US dollars, or 10 per cent of GDP) announced by President Ramaphosa includes a social protection measure in the form of the COVID-19 grant for unemployed South Africans and an increase in social income grants for caregivers and pensioners to stimulate liquidity in South African homes and the economy. However, this R 500 billion fiscal package is less ambitious than it seems. Of this amount, 200 billion rand will be used as a guarantee fund to encourage the banking sector to grant loans, and 130 billion will be re-prioritized from the current national budget, as the government has expressed its intentions to borrow from the IMF, World Bank or/and the NDB. This means that the actual amount of the fiscal stimulus is 170 billion rand, or 3 percent of GDP. As argued by Brett Hamilton from the University of Stellenbosch Business School, the package ignores the estimated 3 million people working in the informal sector.
The effectiveness of the guarantee fund can also be questioned. When the economy is sluggish, lower interest rates and increased bank liquidity are not enough to stimulate credit demand from businesses, especially in a context where private investment has been lacklustre, prompting a controversy about an “investment strike”.
The method of financing the fiscal package through additional debt issuance is also problematic. The issue is not about the debt per se nor its level, but rather the fact that the South African government does not seem to have control over the interest rates on its debt (10 percent per year for bonds denominated in rand with a ten year maturity), especially in a context of weak nominal growth (1.2 per cent annual average between 2014 and 2018). In 2010-2011, debt service costs represented 9.8 percent of government revenue vs. 15.2 percent in 2019. Before the COVID-19 outbreak, debt service costs were planned to have the same size as public health spending in the government consolidated budget. For the period 2019-2023, debt service was expected to be the fastest spending item, with an annual average growth rate of 12.3 per cent – more than double the average growth rate for total expenditure.
This is unusual because unlike many African countries, for which public debt is mostly in foreign currency, South Africa’s government debt is mainly held in rand (90 percent of gross debt). There is therefore no reason for debt servicing to reach such proportions if the privately owned SARB is cooperative. However, when asked about potentially “printing money” to finance the government funding shortfall instead of seeking assistance from International Financial Institutions, Mboweni declined to engage and dismissed the question as an ideological question that has not yet occurred to the government.
Nonetheless, there is some consensus among economists within a broader debate about financing the economy that there is nothing legally preventing the SARB from directly financing the government. The acknowledgement of this fact certainly led the SARB to argue that such a measure would be inflationary. But this is a very poor and inconsistent argument, especially with regard to the SARB’s current quantitative easing efforts. In addition, as argued by Redge Nkosi, it is caused by a lack of understanding of macroeconomics or rather that it is an ideological question.
In view of the challenges facing South Africa—low investor confidence, capital flight, and a depreciating rand—the relative size of its debt service is no doubt a huge obstacle to any economic recovery. This can be situated within a broader macroeconomic policy crisis. In the current circumstances, monetary financing of the government deficit would be more appropriate as a financing strategy and more coherent in terms of the “sovereignty” argument made by the tripartite alliance, which dismisses IMF and World Bank concessional loans over the issuance of new debts that would be subject to relatively high interest rates, given the “junk” credit rating status currently enjoyed by South African bonds.
In addition, in a “financialized” South African economy characterized by sluggish private-sector investment, it must be made clear that the private sector cannot be relied upon to solve, or even attenuate, the unemployment problem. The state has to step in. A job guarantee is an option to be seriously considered for post-COVID-19.
A better approach to supporting economic activity would be for the government to engage in targeted spending, such as providing significant support for households, communities, workers, and businesses as well as strengthening the health response to the pandemic. Additionally, post-COVID-19, the government needs to target spending in sectors that will contribute to the countries’ energy and food security and use the opportunity for a just ecological transition.
COVID-19 presents an opportunity for a paradigm shift in addressing South Africa’s existing inequalities by re-evaluating its macro-economic policy. Short of a radical restructuring of public spending away from huge debt service costs towards public service provision and direct employment creation in addition to other necessary reforms, it is difficult to contemplate a scenario where South Africa could escape its current predicament.