The R500 billion stimulus package announced by President Cyril Ramaphosa raised many eyebrows, as it will go a long way to limit the economic destruction of the Covid-19 virus. It is a mammoth amount, around 33% government’s expenditure budget and 10% of GDP, and compares well with the stimulus packages of other emerging markets.
The package will make a big difference and is desperately needed. But the package and billions of rands on offer to assist businesses are not enough. South Africa also needs pragmatic thinking and decisions to limit the initial damage the economy will suffer. Unfortunately, this seems to be absent in the decision-making.
It also increases the fiscal risks for South Africa, as the stimulus package will inflate the already-spiralling government debt burden.
The risk is therefore that if the stimulus package does not result in a swift V-shaped economic recovery, the fiscal damage will be much more destructive.
The key to a V-shaped recovery is to limit the number of businesses who will be forced to close shop in May and June. This must be priority number one. It will be much more expensive to rebuild an economy and to ‘replace’ thousands of businesses than to create an environment where many companies can still operate and survive with limited assistance.
What happened in the wine industry is an excellent example of the absence of such pragmatic thinking. Despite getting approval to restart the exports of wine earlier in April, the decision was reversed after Transport Minister Fikile Mbalula placed a blanket ban on the transportation of alcohol.
This single decision, if not reversed now, will have a devastating effect on thousands of small and large businesses in the wine supply chain. Collectively, these businesses employ more than 300 000 people.
Time is really of the essence as it is not only a matter of exporting the wine after the lockdown. The bulk of the exports are destined for European retailers, who will have to find alternative suppliers if their shelves run empty. This will mean that South African producers will lose contracts.
Once this happens, the local industry will not have international buyers, and a significant portion of the local wine export industry will collapse. This is unnecessary as the transportation of wines only poses a very low risk of transmitting the virus.
The reality is that if the industry is allowed to export now, the sector will most likely survive and not need a bailout. If not, many businesses will close down, and it could take billions from the government to rebuild the sector.
Even if Mbalula orders that the police escort all trucks departing from the Boland for the Cape Town harbour, it would represent a fraction of the cost compared with providing financial assistance to the sector once it has collapsed.
The same lack of pragmatism is also visible in other industries, such as the sale of cigarettes and prepared foods. A decision to make home deliveries an essential service could have also made a big difference in the survival prospects of many small retailers.
South Africa still has a week, maybe two, to implement smart measures to assist businesses to survive. If not, the consequential financial cost will rise exponentially.