In a conversation with IMF Country Focus, National Treasury director-general Dondo Mogajane explains how government has responded to the Covid-19 coronavirus crisis, how financing from the International Monetary Fund (IMF) will help stabilise the economy, and discusses strategies for addressing debt and spurring growth.
South Africa’s economic activity is projected to contract by 8% in 2020, according to the IMF’s June update to the regional economic outlook for sub-Saharan Africa.
What has been the impact of Covid-19 on South Africa and what sectors have been hit the hardest?
Covid-19 brought many challenges – a decline of about 18% in employment between February and April; every third income earner in February did not earn income in April; and job losses were felt most among women and manual labour. Those at the bottom of the income distribution have suffered a great deal.
Based on our assessment, the most affected sectors are construction, personal services, trade, catering, hospitality, transport, storage and communications. The crisis also brought manufacturing and mining to a halt.
We are projecting a loss in government revenue of $18.2 billion this year.
What measures are being taken to provide relief to households and businesses?
Our relief strategy has three phases. The first phase started in mid-March with measures to mitigate the immediate effects of the pandemic – child support grants were targeted to alleviate child hunger; the Unemployment Insurance Fund provided wage support; and we funded emergency procurement and streamlined rules to support the health sector. We also funded direct grants to small businesses, in particular small tourism operators.
A second phase is aimed at stabilising the economy. This is driven by support from the IMF and other institutions. Assistance comes through a $29.9 billion (R516 billion) package announced by President Cyril Ramaphosa on April 21 to boost healthcare spending, provide financial relief to municipalities and temporarily expand the social grant payment system.
The third phase will help drive recovery and economic growth. Central to this recovery strategy will be measures that stimulate demand and supply through interventions such as infrastructure funding.
How will the recently approved $4.3 billion IMF Rapid Financing Instrument be deployed?
This funding will support five interventions laid out in the supplementary budget – supporting health and frontline services; protecting the vulnerable by extending child support, old age benefits, and disability grants by six months; creating more jobs; unlocking economic growth through our reform initiative; and taking measures to stabilise public debt.
We think that over time we will be able to augment these budget initiatives by reprioritising and ending certain programmes and projects that are not effective.
What measures are being put in place to ensure that the IMF assistance is used for its intended purpose?
We have agreed with the Auditor General, an independent body, to not wait until next year to audit Covid-19-related spending. General emergency procurement instructions were issued by the Treasury on April 28 to put measures in place to prevent and combat the abuse of supply chain management processes and ensure money goes where it is intended.
These instructions also specifically outline control measures that must be put in place in relation to Covid-19 spending, such as reporting frameworks, internal measures between and within departments, the establishment of audit committees, and reporting on a monthly basis what has been procured, who has ordered what and the amounts thereof. Procurement of personal protective equipment will also be based on a price reference list.
The president also recently announced a high-level committee that includes law enforcement agencies, the Special Investigating Unit and the Financial Intelligence Center to investigate corruption cases involving Covid-19 funding.
South Africa’s debt is expected to further increase this year. What actions are being taken to address this?
We have designated $9.6 billion for budget cuts. Some of this is part of $23.3 billion in designated spending over three years in relation to public wages and salaries. I recently filed an affidavit to the high court to explain that we cannot fulfil wage increases in the last year of the three-year wage agreement with labour unions because of lost revenue owing to the crisis.
We are committed to stabilising debt so that it peaks at 87% debt-to-GDP by 2023/24 and starts declining thereafter. Ahead of the medium-term budget policy statement in October, some debt reduction will be achieved as a result of the expenditure reviews that we are currently conducting.
We also agreed to a zero-based budgeting exercise. It will help us to focus on areas where we should cut to reverse the rise in debt.
Economic growth in South Africa has been low in the past decade and is now negative. What is government doing to reverse this trend?
Government is undertaking structural reforms to facilitate higher and more inclusive growth. Network industries in telecommunications, electricity, ports, rail and roads will undergo modernisation and reform. Trade policies will be reoriented to take advantage of the free trade area in Africa, pursue greater regional integration and establish South Africa as an export platform to the region.
Entry barriers will be lowered to make it easier for businesses to start, grow and compete. Support will be focused on labour-intensive sectors such as tourism and agriculture, where there is more potential for people to get jobs. Finally, reforms will be implemented to strengthen the governance of state-owned companies.