Ramaphosa’s Covid-19 ‘stimulus’ an attempt to pull wool over SA’s eyes – IRR

Institute says package does not reflect real value the govt is able to add to the economy

Ramaphosa’s Covid-19 ‘stimulus’ an attempt to pull wool over SA’s eyes – IRR

23 April 2020

The figure of R500 billion in the Covid-19 economic stimulus and social relief package announced by President Cyril Ramaphosa on Tuesday is disingenuous, for it does not reflect the real value the government is able to add to the economy.

This is partly because R130 billion is to be redirected from other items in the budget. Moreover, R200 billion is a loan guarantee for banks and it is estimated that R70 billion extra will result from various tax relief measures. However, given the dire state of the economy, it is doubtful that such an amount of tax revenue would have been collected in the first place. Therefore the total amount of new money entering the economy is closer to 3% of GDP.

Says IRR Deputy Head of Policy Research Hermann Pretorius: “The relief package was unveiled with much fanfare, but the government risks seeming to be trying to pull the wool over our eyes.”

IRR analyst Nicholas Babaya notes that, given the national lockdown, there is no economy to stimulate. As businesses are prevented from operating, any money they receive will simply go to financing fixed costs. This “stimulus” cannot stimulate if businesses are barred from operating. Thus, the effects of this package will likely be more akin to a one-time welfare package.

Says Babaya: “Stimulus is useless if you have no economy to stimulate. A cash injection for businesses will be of little help if they cannot use that cash to be productive. The notion that the economy can be shut down and that the South African state can somehow afford to ensure some form of income for all South Africans is farcical.”

He adds: “The president’s package contained no mentioned of long-term reforms which would allow the economy to grow faster under normal circumstances. You cannot throw money at a problem and expect it to go away. Any stimulus should be coupled with a policy environment that encourages growth, otherwise that stimulus may simply be used up keeping businesses afloat instead of actually growing the economy.”

The IRR has long argued that decisive and far-reaching policy reforms are unavoidable if South Africa is to cut costs, save jobs and unleash growth.

These must include, among others, scrapping BEE, getting rid of failing SOEs that waste billions of rands, and doing away with the minimum wage and replacing it with labour law flexibility that has the potential to price poor people into jobs.

Issued by Nicholas Babaya, IRR Analyst, 23 April 2020