South Africa rolls out $26bn economic stimulus plan to save virus-hit economy

The support package is equal to about 10% of South Africa’s gross domestic product and will add to government debt

A resident argues with a Johannesburg Metro Police Department (JMPD) officer during a protest over food parcels in Alexandra, Johannesburg, on April 20, 2020. South African Social Development minister Lindiwe Zulu last week promised to increase food aid deliveries after only 48,500 parcels were distributed in the first week of April. Government has budgeted 43 million rand ($2.2 million) to feed the most vulnerable and more will be needed. / AFP / MARCO LONGARI
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South Africa’s government unveiled a 500 billion rand ($26bn, Dh95.4bn) package to shore up an economy devastated by the fallout from the coronavirus pandemic and support those who have been worst affected.

The plan will be funded by reprioritising 130bn rand of expenditure from existing budgets, and borrowing from domestic and international lenders, President Cyril Ramaphosa said on Tuesday in a televised address to the nation. There will be 200bn rand in guarantees for banks to encourage them to lend, a 100bn rand allocation to protect and create jobs and an additional 50bn rand for welfare grants for the poor and unemployed, he said.

“The coronavirus pandemic requires an economic response equal to the scale of the disruption it is causing,” Mr Ramaphosa said. “The scale of this emergency relief program is historic. It demonstrates that we will not spare any effort or any expense in our determination to support our people and protect them from harm.”

The support package is equal to about 10 per cent of South Africa’s gross domestic product and will add to government debt, which the Treasury said was already approaching unsustainable levels before the virus struck.

The rand weakened as Mr Ramaphosa delivered his speech, dropping as much as 1.4 per cent against the dollar.

South Africa has been relatively spared the worst of the ravages of the pandemic, with 3,465 infections and 58 fatalities so far. Still, a lockdown aimed at curbing the spread of the disease and preventing the health system from being overwhelmed is devastating the economy, with the central bank expecting it to contract 6.1 per cent this year.

The government’s response packages is measured and necessary, said Philippe Burger, a professor who heads the University of the Free State’s economics and management science department.

“Internationally, we have seen packages of between 10 per cent and 20 per cent of GDP, so this is not on the small side,” he said in an interview. “I don’t really think we can afford more. We are already stretching the budget to the furthest extent possible.”

Details of how funding will be redirected will be announced in an adjustment budget tabled by the finance minister, Mr Ramaphosa said, without giving a date. The World Bank, the International Monetary Fund, the New Development Bank and the African Development Bank are among the institutions that have been approached for additional funding options.

“Despite the ostensibly large stimulus package announced, Treasury hasn’t injected as much new money into the economy. They have reshuffled expenditure and put out a massive loan-guarantee program. What you need is spending, not lending. Only 170bn rand of the package represents new discretionary spending, making the size of the actual support package announced closer to 3 per cent of GDP,” Boingotlo Gasealahwe, Bloomberg Africa economist, said.

Companies with revenue of less than 300 million rand a year will initially be eligible for guaranteed loans, and 700,000 are expected to benefit. Several banks will be ready to offer the financing before month-end, Mr Ramaphosa said.

“The risk sharing and funding arrangements between government and banks on these loans are specifically designed to ensure the stability of the financial system is maintained,” Nedbank chief executive Mike Brown, said.

The president also announced that companies with revenue of more than 100m rand a year can apply to defer their tax payments.

The government initially imposed a 21-day lockdown on March 27 and later extended it by another two weeks. Enforced by the police and military, it only allows people to leave their homes to buy food, collect welfare grants and seek medical care – unless they provide essential services.

Mr Ramaphosa said he will announce measures on April 23 to begin phasing out the lockdown to get the economy going again.

The support plan is positive, given the scale of the economic and social problems confronting South Africa and should strengthen Mr Ramaphosa politically if they have the desired effect, said Gina Schoeman, an economist at Citibank South Africa. Details on where the money will go and which budgets will be cut are needed “to figure out how sustainable a solution this is”, she said.