COVID-19 government intervention to stimulate economy; with Ministry

Meeting report

Co-Chairperson Maswanganyi welcomed everyone to the National Treasury briefing on the fiscal implication of COVID-19 and interventions by government to stimulate the economy. He invited an opening statement from the Minister before the presentation from National Treasury.

Opening statement by the Minister of Finance
Minister Tito Mboweni highlighted that the economy was already in a technical recession before the COVID-19 crisis hit. The pandemic has made the situation more severe. The projections indicate that the economy will take a very sharp downturn, with the potential for a very sharp upturn in a "V-shape" if managed properly. The lockdown had brought economic activity to a standstill such that revenue collection is not possible, yet the pressure on the expenditure side is there. Notably, the announcement of a R500 billion intervention package has given the incorrect impression that there is "money in the bank”. That was far from the truth. Honouring the relief package will be dependent on inflow of revenue, borrowing from international organisations and the national credit guarantee scheme. The fiscus was under very tremendous pressure and a way to inhibit expenditure without compromising economic growth had to be found.
 
Briefing by National Treasury
Mr Dondo Mogajane, Director-General, National Treasury, took the Committee through a presentation on the financial implications of COVID-19 on both the economy and budget. The implications of COVID-19 on the economy were quite dire. There were high levels of uncertainty due to the pandemic itself, its macroeconomic fallout, and the associated stresses in financial and commodity markets. The crisis will need to be dealt with in two phases: i) containment and stabilization and ii) the recovery phase with swift action from policy makers.

Four simultaneous shocks of COVID-19
The health of South Africans must come first as an out-of control pandemic would hit the economy extremely hard. An early lockdown was the right decision but has serious domestic supply side implications and mitigating measures were urgently required in the short, medium and long-term. The collapse in the global economy was expected to reduce foreign income – exports and tourism are particularly affected. Therefore, economic response should focus on affected industries such that measures to support capital markets are required.
There are serious downside risks and all scenarios contain common elements as follows: the direct impact of measures to contain the spread of the virus; tightening in financial conditions discretionary policy measures to support incomes and ease financial conditions; scarring resulting from the economic dislocation that policy measures are unable to fully offset.
 
Mr Mogajane pointed out that the COVID 19 pandemic is simultaneously a health crisis and a far reaching global economic crisis. Government had acted decisively to prioritise the health and lives of all South Africans yet the economy, which was already weak before the emergence of the novel coronavirus, has been hit hard by interlocking shocks to supply and demand. The immediate priority is to support economic activity and alleviate hardship. Pursuant to this objective, government has adopted a risk adjusted approach to reopening the economy, with the initial easing of lockdown measures on 1 May. The economic interventions over the next 18 months, a period during which the most severe effects of the public health crisis are expected to be resolved, will amount to over R 1 trillion, consisting of a fiscal support package of R 500 billion, and monetary and financial market interventions worth another R 500 billion. In the next several months, a special adjustments budget will set out a range of economic reform proposals and measures to stabilise the public finances. Over the longer term, the economy could not merely be returned to where it was before the pandemic. Forging a new economy in a new global reality will require a social compact between business, labour, communities and government as well as far-reaching structural reforms enabling millions of South Africans to participate in building a more productive and prosperous society and steps to promote industrialisation, and an overhaul of state-owned enterprises (SOEs).

Domestic economic outlook
South Africa faces a confluence of economic difficulties that compound the impact of the public health emergency. By the first quarter of 2020, the country was already in an economic downturn, and at the end of March, South Africa’s sovereign credit rating was downgraded, which will raise the cost of government borrowing. Estimates from the IMF, the Reserve Bank and the Organisation for Economic Cooperation and
Development (OECD) suggests that economic growth in South Africa will contract by between 6 and 7 percent in 2020. The economy currently faces overlapping aggregate demand and supply shocks, which are occurring sequentially. These domestic shocks will be the most significant drag on growth. Treasury estimates that approximately one third of the resources that were productive in February 2020 have been idled, largely as a result of the domestic lockdown. Real time economic data, such as average daily transaction values through the payment system have more than halved as economic activity has declined.

South Africa’s fiscal position including the response package
Going into this crisis, South Africa’s fiscal position was weak, as outlined in the 2020 Budget Review. Gross government debt has continued to rise as a result of weak economic growth, high levels of expenditure and repeated funding support to state owned companies. Government’s R500 billion support package will provide substantial support to the economy, but will increase the fiscal deficit as a result of increased spending and a decline in tax revenues. These measures are temporary and are targeted to provide support where it is most needed. Notably, the loan guarantee scheme does not require immediate funding fiscal support. Additional support will be secured by shifting resources from non-urgent and non-priority programmes, and drawing down surplus funds in institutions such as the Unemployment Insurance Fund. The consolidated budget deficit will worsen further due to drawing down surpluses from social security funds Gross debt outlook would also worsen further. However, government is committed to implementing structural reforms to move South Africa onto a higher growth path. The specific measures to do so, and details on the fiscal position, will be set out in the forthcoming adjustments budget.

Loan guarantees
Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, highlighted that Treasury and the Reserve Bank have been working with commercial banks to provide government guaranteed loans to small and medium sized businesses that may not be able to meet their financial obligations during the lockdown and when the economy reopens. The loan guarantee arrangement will make R200 billion in new loans available to existing customers, of which R100 billion will be available in the first phase. The key features were as follows:

-Businesses with annual turnover of less than R300 million, which are in good standing with their commercial banks, will be eligible for bank loans
-Funds borrowed can be used for operational expenses including salaries, rent and lease agreements, and supplier contracts Loans will cover up to three months of operational costs and will be drawn down monthly
-Banks are not obliged to extend COVID-19 loans, and those that do will use their normal risk evaluation and credit application processes Business owners may be required to sign surety for the loan
-Each business may accept only one COVID-19 loan
-Loans will be offered at a single agreed lending rate, which tracks the repo rate, by all participating banks
-A six month repayment holiday will commence from the first drawdown, although interest will accumulate from the date on which the first drawdown occurs.
-Interest and capital repayments will start after six months, and businesses have a maximum of 60 months to repay the loans.

Monetary policy and financial regulatory measures
The Reserve Bank has unveiled a monetary and financial regulatory policy package of approximately R500 billion, complementing the fiscal stimulus of the same amount. This is in line with the international approach, which will help support global economic activity. The monetary policy and financial regulatory measures, introduced by the Reserve Bank, financial sector regulators and private-sector banks include: reducing interest rates; relaxing regulatory requirements to support the flow of credit to households and business; introducing temporary payment holidays and other measures to support debtors. Monetary policy is helping to support the cost of borrowing by providing liquidity in the bond market, and helping to reduce bond yields.

Division of Revenue considerations
Mr Momoniat indicated that provincial treasuries, working with the National Treasury, were already identifying savings that could be used to fund the COVID-19 response. Provincial health departments are responding directly to the virus, conducting testing, overseeing quarantine facilities and providing care and treatment for those who need to be hospitalised. Health departments will receive additional funding as part of the R500 billion support package. Municipalities are also providing additional services to communities during the lockdown, but local government revenue collection has been negatively affected by the sharp economic downturn. As announced by the President, additional funding of R20 billion will be made available to municipalities to provide emergency water supply, sanitise public transport facilities and support vulnerable communities. National Treasury is working with the Department of Cooperative Governance and other key stakeholders to determine how to allocate and transfer these funds so that they reach the intended beneficiaries.

Discussion
Co-Chairperson Buthelezi invited comments and questions from Members, and advised that inputs be kept short and straight to the point owing time constraints.

Mr F du Toit (FF+, North West) asked if government could guarantee that private pension funds will be safe and would not be used to finance any initiatives that are COVID-19-related. He asked for detailed information on how the fund to save businesses would be disbursed. Can banks refuse loans to deserving entities and businesses?

Mr R Lees (DA) asked about funding for SOEs. Was there any further funding that was going to be made available to South African Airways (SAA) as working capital as opposed to debt financing? How much were the Cuban doctors costing the fiscus and which department had to pick up that cost?
 
Dr D George (DA) said the need for structural reform was clear, particularly if the IMF was to be approached for loans. What would be the nature of such structural reforms? Before the pandemic hit, the economy was already teetering. When will the economy be allowed to be as efficient as it possibly could be without policies that have not achieved their objectives, which hinder economic growth, such as the B-BBEE? On living annuities, the fact that there is liberalisation is welcomed. However, why were deductions not being reduced to zero for individuals who do not need the money now; because it is completely inefficient for them to make a withdrawal now at or near the bottom of the market?

Mr F Shivambu (EFF) sought clarity about composition of the R500 billion economic and social relief package. The only new money that must be borrowed was to the tune of about R100 billion, adding to R200 billion worth of loan guarantees. It appears approaching the IMF was on government’s priorities list despite the revelation that such loans would be paid off with interest and had conditionalities. Treasury must be clear about the conditionalities of these loans if this route was to be pursued. SA would not want to be trapped in inter-generational debt that might have implications on the country’s sovereignty and ability to decide its own macroeconomic and monetary policy trajectory in the future. What exactly did Treasury mean by structural reforms? This proposal did not speak to what is broadly government policy. Further, under what procurement policy regime was the Solidarity Fund operating under? There seems to be one company, Imperial, with links to the President, which is the sole procurer on that fund. This was problematic. There was need for clarity and transparency as everyone was making contributions towards the fund.

Mr A Shaik Emam (NFP) said Members had heard a lot of what was being said by Treasury for many years. What measures were being put in place to deal with corruption at all levels and to ensure efficient spending of the funds that will be disbursed? The production of personal protective equipment (PPEs) was currently being controlled by certain monopoly capitalists. This space needed to be opened up to everyone.

Mr G Hill-Lewis (DA) appreciated Treasury’s efforts. He referred to the three to seven million job loss forecast due to the pandemic. These figures were stunning and terrifying. Did Treasury believe the economy should be opened sooner to try and ameliorate this devastating prediction and reduce job losses? How was expenditure reprioritisation going to be done; this was not clear. Where were savings going to come from? He asked for an update on the negotiations between government and unions on public service rationalisation and wage cuts? Was there an agreement? He wanted to know how far parties in the negotiating table were from an agreement, and the nature of it.
 
Mr W Aucamp (DA, Northern Cape) asked for more information about the funds to be availed to small businesses. There was a huge difference between theory and practice. The way in which government plans to implement its proposals might be fraught with challenges. Race-based criteria will be detrimental to meeting the objective of saving jobs. He urged government to look into this and ensure that proposed interventions benefits SA as a whole.

Mr O Mathafa (ANC) noted the R130 billion worth of savings expected to be realised by provinces and municipalities, largely in infrastructure grants. If savings were made on public infrastructure grants, will this not slow down infrastructure development? Was there a financial model used to arrive to the R1 trillion- the estimated total size of the package, consisting of a fiscal support package of R500 billion, and monetary and financial market interventions worth another R500 billion. He asked for an indication whether Treasury would propose any additional tax reforms to reduce the incidence of jobs losses.

Mr X Qayiso (ANC) asked for assurances that structural reforms proposed by Treasury did not necessarily imply privatisation and wage cuts; to the detriment of public service workers.

Co-Chairperson Mahlangu commented on the proposed structural reforms. While reforms were needed in a number of sectors, these should not mean privatisation and slashing of public sector wages. What measures were being taken to strengthen and build state’s capacity to ensure that future disasters are dealt with effectively? There was need for a more interventionist and effective role for the State. How was government planning to stabilise the economy and to deal with externalisation of funds?

Co-Chairperson Hlengwa referred to SA’s debt servicing costs and asked whether a new scope for loan repayments had been devised, and its implications to the highlighted interventions. Had Treasury set up frameworks to safeguard against the abuse of the relief funds in their disbursement and procurement space?

Co-Chairperson Carrim said health and economic considerations should not be polarised. Under the circumstances, both are important and the right balance had to be found. This would not be easy but could be done. What exactly is meant by structural reforms? Treasury should respond fully in writing or during the next meeting. Members also needed answers on how the Solidarity Fund would be managed.

Mr D Ryder (DA, Gauteng) asked for an indication of the extent of adjustments to the budget. How much interaction is there at Cabinet level between Ministers; because it seems the Minister and the President were perhaps on the same page but there were other Ministers such as Ebrahim Patel and Nkosazana Dlamini-Zuma who quite clearly are not on the same page in taking both health and economic considerations into account when formulating Regulations?

Mr W Wessels (FF+) asked about the criteria for the R200 billion fund currently being disbursed by banks. There were a lot of people in good standing being refused loans and not receiving debt relief. What was the rationale behind this? Was it only credit scoring or race also mattered? There had to be clarity on this.

Mr A Sarupen (DA) wanted to know which areas had been identified to make cuts for the R170 billion reprioritization in the 2020/21 budget. With regards to the collapse in revenue that the Minister alluded to, was South Africa at risk of defaulting on its sovereign debt obligations and facing balance of payment problems? Will SAA and SA Express' liquidations trigger a wider debt recall considering large amounts were State guaranteed?

Ms D Peters (ANC) said while prioritisation of the health sector was well-understood, supporting the education sector in mitigating the challenges that came with the pandemic should also be paramount. Social interventions should be made available for the longer term. 

Ms V Mente (EFF) expressed concern that Treasury had not spoken to how continuity of the school programme will be ensured. Lessons could be held on virtual platforms- the same system that Parliament has adopted can be rolled out to schools. Further, it should be ensured that PPEs are procured from small businesses within SA rather than from questionable sources.
           
Co-Chairperson Buthelezi said inequality within the economy, largely along racial lines, needed to be given due consideration. Also, there were persistent complaints that government does not process invoices and does not pay small businesses timeously. This had to be addressed. How will it be ensured that small and black businesses are not left out of the COVID-19 relief fund?

Mr D Joseph (DA) wanted to know what the South African Revenue Service was doing to deal with illegal trade in cigarettes as well as online gambling. There was a lot of money going down the drain from these.

National Treasury responses
Minister Mboweni, in response, highlighted that government revenues were expected to fall by around 32% due to the lockdown. The further downgrade by ratings agency Standard and Poor’s was a big blow for South Africa as it would likely be thrown out of the JP Morgan World Bank index. Negotiations with multilateral institutions, particularly the IMF, for loans were expected to be protracted but had not commenced. Will there be any conditions attached? His understanding is, there will be no conditions attached. In fact he was not interested in discussing any conditionalities with the IMF. “We know what to do for our economy and we'll do what we can ourselves, so I'm not interested in discussions on conditionalities.” Special provisions to support municipalities were being made available. Some SOEs such as the Land Bank would have to be saved- the Land Bank is too big to fail in the sense that it has a big role in the agriculture sector. The Land Bank had to be rescued. There were other SOEs that are not deserving of funding, at all. It would be a mistake to fund them purely because they are state owned. He added that once Cabinet has taken a decision, those decisions are binding on all Ministers, even if one does not like it. I did not like the continuous ban on tobacco and alcohol but I lost the debate and therefore I have to toe the line. I know I'm losing a lot of revenue in the middle of being under pressure to spend but nevertheless that's a decision of cabinet and I have to fall in line if want to (continue being) a member of the executive. If you can't fall in line you must leave, so one has to fall in line in that regard. The Solidarity Fund has a properly constituted governance structure with a board of directors, to which he was a part of. Imperial’s relationship with the Fund is on a pro bono basis.

Mr Mogajane welcomed inputs from Members and highlighted that some of the Treasury proposals had not yet being finalised as stakeholder consultations were still ongoing. The criteria and policy framework for the disbursement of the relief fund is work in progress and would see to it that funds reach deserving recipients and there are no opportunities for wrong-doing. Treasury had already met with key departments that were going to be spending heavily during the pandemic. Treasury will also be meeting with provincial departments and all relevant stakeholders to outline the guidelines to go with the funding. A lot of groundwork had been done and Treasury would be happy to share with the Committees in writing about what structural reforms meant in this context. Although funding costs of borrowing from multilateral institutions will be favourable, there are risks to multilateral development bank funding, namely that SA is competing with other countries for funding and the loan covenants and general conditions of the institutions need to be interrogated. He reiterated the R95 billion will contribute to the R500 billion stimulus package, with R200 billion being allocated for the national credit guarantee scheme; R130 billion coming from the base reprioritisation of budgets; R60 billion from additional transfers from social security funds; and R15 billion from available funds from the Department of Social Development.

Mr Mogajane added the existing procurement framework is in the spirit of empowering SA citizens and it was up to Parliament to retract laws it believes are no longer relevant. He appealed to the Committees to pass the Division of Revenue Bill and Appropriation Bill as quickly as possible, so Treasury could move to table an adjustments budget. If every intervention that has been made in the fight against COVID-19 is counted, whether monetary or fiscal, it amounts to over R800 billion. If health is not prioritised, the country was going to be found wanting. Revenue collapse and its implications to debt servicing was a real concern. On concerns about defaults in SOEs, currently the guarantee agreements are written in such a way that there is no cross-default among entities such that a default in one SOE would not lead to debts of other entities being recalled. 

Mr Edward Kieswetter, Commissioner, SARS, said there has been an under-recovery by the revenue authority of over R1.5 billion on the sale of alcohol and cigarettes in the month of April. The under-recovery on beer was R664 million, on wine was almost R300 million, on spirits was just over R400 million and cigarettes just over R300 million. It will become worse once tax relief measures kick in. He noted that the prohibition had encouraged the sale of illicit cigarettes, which was of concern. At a time like this when the legal sale is not permitted, it encourages the trade of these products in the illicit economy. A significant decline in tax revenue was expected, purely driven by the state of the economy as well as the tax relief measures that government has announced.

Mr Momoniat, in response to questions on the guarantees scheme, said further proposals would be made as and when necessary down the road. Many proposals were coming in and to the extent that people have lost income, it will be seen how the tax system could assist in reaching deserving individuals and companies. On how living annuities should be treated, this was put out for public comment and Treasury would consider all tabled proposals. On the disbursement of relief funds, generally, banks would provide the funding to their customers and, overall, the funding criteria was quite flexible.

Mr David Masondo, Deputy Minister of Finance, agreed with Co-Chairperson Buthelezi that inequality is a huge economic challenge and constraint to holistic development. Failure to honour payment obligations to small businesses timeously presents problems and many a times contributes to their collapse. These discussions would be taken further. He appreciated inputs from Members.

Co-Chairperson Hlengwa, in closing, indicated the briefing was part of an ongoing engagement and Members will be sending written questions to Treasury to seek clarity on issues if need be. He wished Treasury and everyone in attendance well.

The meeting was adjourned.