Covid-19: How can government support the economy?

A look at its policy response options.
The coronavirus may actually present an opportunity: monetary easing combined with fast-tracking of economic reforms could lift GDP in the coming year. Image: Sumaya Hisham, Reuters

In his address to the nation on Sunday, President Cyril Ramaphosa emphasised that the coronavirus is not just a health concern. It is a real danger to the country’s economy.

He emphasised that the state will be putting together a “package of interventions” of “various fiscal and other measures” to help the economy through this period.

Read: How much could Covid-19 impact the SA economy?

“Policymakers around the world have in recent weeks been debating, coordinating, and implementing diverse policy responses to counter the negative effects of Covid-19 on their respective economies,” PwC economists Lullu Krugel and Dr Christie Viljoen point out in a note.

“Supply chain disruptions and reduced business activity are posing tremendous risks to economies large and small.”

Ramaphosa did not reveal any details in his speech, as these are still to be finalised in consultation with stakeholders including business and labour. However, it is likely that they will be similar to those implemented in other countries.

“Apart from providing fiscal and monetary stimulus, a wide variety of targeted relief measures are under discussion in many countries of the world,” Krugel and Viljoen note. “In the USA, for example, a temporary expansion of paid sick leave and a temporary payroll tax cut were being debated. Provisions under discussion in Italy include helping workers who are facing temporary lay-offs, a guarantee fund for loans to SMMEs, and compensation to firms whose turnover has plunged by over 25%, as well as a moratorium for bond repayments. Relief measures in China include reductions in employers’ required social insurance payments, lower electricity fees, and Vat waivers.”

The options

As the table below shows, governments have started to implement a range of measures to mitigate the economic impact of the virus. These fall into three broad categories:

Source: PwC

“The priority for South African policymakers should be twofold,” say Krugel and Viljoen. “One issue is to ensure that the outbreak is contained as much as possible. A second challenge is to ensure that neither the shock it is giving to the economy – nor the economic policy responses aimed at alleviating it – push the already fragile economy off the cliff and into a long-term recession.”

Monetary stimulus

A standard policy response to a stalling economy is to cut interest rates. This is to encourage more borrowing and spending.

In the US, the Federal Reserve cut interest rates by a full percentage point on Sunday to 0.25%. This followed a 0.5% cut in early March.

Read: Fed brings out big guns, investors fear the worst

However, with interest rates in many economies already near zero, there is little scope for this in many parts of the world.

In this respect, South Africa is at an advantage.

“The South African Reserve Bank (Sarb) has more leeway to cut interest rates than its counterparts in the US, the UK or the European Central Bank,” note Krugel and Viljoen. “The local repo rate of 6.5% is joint 50th highest in the world out of 166 countries.”

Sarb has said for some time that lower interest rates are not a solution to South Africa’s growth problems, as a 0.25% cut would only deliver an extra 0.1% growth. However, even this would help.

“At this stage, a boost like that would be more than welcome,” Krugel and Viljoen suggest. “There is no real risk to the inflation outlook from cutting interest rates – there is no demand-pull on consumers prices at the moment.”

Fiscal stimulus

The second big policy option is in the form of government spending. Around the world, governments are making money available to both fund interventions to deal with the pandemic, and to stimulate the economy.

This includes spending on medical supplies, additional test kits, and interest-free or low-interest loans for small and medium enterprises that are likely to be most affected.

“Unfortunately, a major fiscal stimulus package is not an option for the South African government,” point out Krugel and Viljoen.

“Finance Minister Tito Mboweni, in his budget speech on February 26, indicated that strain on the fiscus will result in the country seeing its largest budget deficit (as percentage of GDP) in three decades during the coming 2020/2021 financial year,” they say.

The government can’t, however, avoid some degree of spending, illustrated by its decision to declare a national state of disaster.

Read: Covid-19: Averting a national disaster

“This includes additional resources for adequate health and testing facilities, and other prevention, containment and mitigation measures,” say Krugel and Viljoen. “Redirecting funding through existing budget line items would be preferable to increased borrowing.”

The final alternative

The South African government does however also have a third option, which is potentially even the least costly: economic reform.

“South Africa is already aware of the potential boost to the economy that microeconomic reforms could have,” note Krugel and Viljoen. “In the Budget Review 2020, the National Treasury augmented its baseline GDP growth forecasts with an upside scenario based on faster progress in the reform pipeline.”

The coronavirus may just present the best opportunity yet for Ramaphosa and Mboweni to push this agenda.

Read: Business: Take money from non-essential SOEs to fight Covid-19

“Combined with monetary easing, the fast-tracking of economic reforms could lift local GDP growth by around 0.3 percentage points over the coming year,” Krugel and Viljoen argue.

“This will be a welcome boost: forecasts for growth in 2020 are dwindling as the Covid-19 impact deepens. The Sarb will publish its latest economic growth projections on March 19 and the numbers are unlikely to be encouraging. A combination of monetary and economic reform actions could improve the short-term outlook somewhat.”

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They’ve got this in the wrong order..

First you need to reign in all the Covid cases and prevent community spread. The associated medical costs and funeral costs for affected can spiral out of control really quickly costing families and businesses. This is priority number 1.

The less Covid cases, minimal fiscal and monetary stimulus is required. This means government must ensure free tests and treatments for affected.

In China when the epidemic went exponential, government had to pay people with symptoms to encourage them to go to hospitals. If they didn’t, the poor would brush it off since treatment expenses would be too much i.e. further spreading the virus in their communities.

Dropping interest rates does nothing to the average SA household having to fork out several thousand in medical and funeral expenses and who are further infected their neighborhoods/townships.. Logic?

While the developed world is starting to understand this, Africa’s going to be left holding the bag (of viruses).

Someone has been reading Superfreakonomics.
To change behaviour through positive reinforcement will help with anything from getting kids to wash their hands more with the reward of a sucker to giving a $5 for checking the health conditions of 15 week pregnant Indian woman and then if the baby is a girl given the father an $25 to not force the abortion.

However be careful in SA where rewards become entitlements very quick.

The Reserve bank cannot drop the interest more than 1% this would cause a bond market sell off of ZA Bonds.
It might help the average family and business settle their debts at a better rate, but who actually does that???

If government really wanted to help, bailout the consumers with a all current debts fixed at 10 years & 2% and then raise interest rate and VAT to 19%.

Business must undergo a similar correction with all debt reset to 1% interest over 20 years and all new debt set at 10%

This would help the state owned enterprises and municipalities.

Hopefully companies are looking at Made In China and saying we need to diversify our factory location.
@ANC this is the Obvious HINT, allow for Labour Price Discrimination and let businesses decide how much Labour is worth. You can either have high wages or you can have low unemployment but your cannot have both until your workers are educated and productive on a merit comparison with international Labour.

The electricity, Cyril, the electricity.

My thoughts exactly.

Covid 19 is really just flu isn’t it?
https://www.worldometers.info/coronavirus/

See the above website for world statistics. All those with a good immune system are going to be fine. So we don’t all need to panic.

However perhaps the silver lining is that with all the self isolating we will see a dip in electricity consumption and perhaps a reduction in load shedding.

Also just change rules for renewable solar and gas imports and voila the economy will be stimulated

Something an expert needs to explain to me :

Yes federal funds rate is 0.25%

Why do small businesses in the US still pay 10% for finance leases? There is a massive friction between policy and implementation.

Locally, I recently considered a lease for security equipment. No money down, 9k something a month. Put down R150k and the lease drops to about 4K. Do the math (with those 15% escalations) and the return on my R150k is 37%

First, shoot the bankers.

They can’t even support their poor & sickly. D.Q.

End of comments.

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