South Africa’s Ramaphosa warns that ‘difficult days lie ahead’ as crucial budget approaches

Key Points

  • Aware of the economic toll being wreaked by the lockdowns, the government has begun lifting restrictions, but South Africa now has 101,590 confirmed cases of Covid-19, the most on the continent.
  • Finance Minister Tito Mboweni is set to deliver an emergency budget on Wednesday, and Ramaphosa said that plummeting revenue meant that “difficult decisions will be made in the coming weeks and months.”

South African President Cyril Ramaphosa has warned that “difficult decisions and difficult days lie ahead” as the country stares down the economic fallout from the coronavirus pandemic.

In an address to the nation Monday, Ramaphosa highlighted that businesses in all sectors had announced job cuts or total closures as a result of losses incurred since the nation implemented strict lockdown measures on March 26.

Aware of the economic toll being wreaked by the lockdowns, the government has begun lifting restrictions, but South Africa now has 101,590 confirmed cases of Covid-19, the most on the continent, with 1,991 deaths as of Tuesday morning, according to Johns Hopkins University.

“For a country such as ours, which was already facing an unemployment crisis and weak economic growth, difficult decisions and difficult days lie ahead,” Ramaphosa said.

“We would urge that the difficult decisions to be taken are taken with care and with due regard to balancing the sustainability of companies and the livelihoods of workers.”

He emphasized the importance of continuing measures to aid small businesses, including tax relief, debt restructuring, extended credit lines and retail rental exemptions, along with temporary financial assistance to poor households, but said these measures could only go so far.

Ramaphosa argued that although the economic impact will extend long beyond the pandemic, investments in sustainable infrastructure would form an integral part of the recovery.

A Reuters poll released Tuesday showed that the South African budget deficit is expected to widen to a record 14% of GDP (gross domestic product) in 2020, far outstripping an official estimate of 6.3% for the last financial year.

A budget for the ages

Finance Minister Tito Mboweni is set to deliver an emergency budget on Wednesday, and Ramaphosa said that plummeting revenue meant that “difficult decisions will be made in the coming weeks and months” as the government seeks to reprioritize its programs, manage public spending and “scale back on projects where necessary.”

“The economic hardship that has been forced on a number of companies in the private sector will be forced on a number of entities in the public sector as well,” Ramaphosa said.

“The government, business, labor and civil society will have to deepen their collaboration as never before in driving the national recovery effort.”

At the heart of the budget will be a dispute over financial support from the International Monetary Fund (IMF) to plug the massive gap in government revenues. In a research report published last week, risk consultancy EXX Africa said the budget would be pivotal in determining South Africa’s future direction.

“Opponents of IMF conditionalities favor tapping into state pension funds or stepping up central bank bond buying to make up the shortfall,” said EXX Africa Executive Director Robert Besseling.

“With ‘battle’ lines drawn across the ruling alliance’s ideological divisions, the outcome of the contest will determine the country’s political leadership and economic policy outlook for years to come.”

The South African government has announced a $30 billion economic and social support package while potentially dealing with $17 billion in lost tax revenue this year, Besseling highlighted.

PRETORIA, SOUTH AFRICA - MARCH 16: Finance minister, Tito Mboweni briefs the media on the details of government interventions in various sectors of the departmental portfolios on COVID-19 at DIRCO Media Centre.
PRETORIA, SOUTH AFRICA – MARCH 16: Finance minister, Tito Mboweni briefs the media on the details of government interventions in various sectors of the departmental portfolios on COVID-19 at DIRCO Media Centre.Phill Magakoe/Gallo Images via Getty Images

IMF proponents argue that these measures are unsustainable without extensive international financial support, which would also anchor policy reform that attracts private creditors.

Mboweni’s supporters in the business community argue that South Africa needs an Egypt-style economic turnaround, according to Besseling, aimed at increasing per capita income, boosting economic growth through an improving business environment, and reducing unemployment and poverty.

“However, unlike Egypt, South Africa’s governing alliance is deeply fractured, and the anti-IMF faction is exceptionally influential,” he explained. “Mboweni is close to President Cyril Ramaphosa, but he lacks the political constituency of his policy adversaries.”

Advocates of state intervention oppose the conditions that accompany international financing from institutions such as the IMF and the World Bank, and instead favor bailouts to embattled state-owned enterprises, aggressive quantitative easing and drawing from state pension funds.

Ramaphosa’s ruling ANC (African National Congress) is still heavily influenced by followers of former president Jacob Zuma, who are mobilizing support in favor of Minister of Co-operative Governance and Traditional Affairs Nkosazana Dlamini-Zuma, Besseling explained.

He anticipates a “bruising battle for control of South Africa’s ruling party and political direction,” and suggested Mboweni’s choice of how to plug the revenue gap and fund economic stimulus would be a crucial moment in determining how this internal division may play out.

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