The slowing-down of the global economy due to lockdowns and quarantines is unprecedented. Economies are mostly just ticking over with activities deemed essential by governments. Charts of many indices of economic activity show a cliff-face-type drop.

Lockdowns have worked in China and in Italy, where confirmed cases began to drop earlier this week. But the economic impact is catastrophic compared to less restrictive measures and even voluntary stay-at-homes, which also bring on severe, but lesser, economic shocks.

Arguably, given that we do not know about the likely hospital-admission and death rate from the pandemic, the lockdown was justified on a precautionary basis. It has also given government time to learn, consider its options, and prepare.

South Africa cannot possibly afford to extend the lockdown beyond 16 April. Many people will have been without pay for a number of weeks and the social safety net and government and private sector assistance package will be inadequate to see people through the crisis. Many will be desperate if the lockdown is extended, which must raise the risk of civil disturbance. While much of the rich world can bear the economic cost of an extended lockdown, South Africa cannot.

Double crisis

For South Africa, the Covid-19 crisis is, in the words of economist Dawie Roodt, ‘a crisis on top of a crisis’. At the start of the outbreak, the economy was in a recession, government finances were weak, business confidence low, and unemployment rising.

There is a far higher degree of uncertainty in forecasts in this crisis than in more normal times, but some economists are expecting a contraction of the South African economy by three percent, and for a rise in unemployment in the millions.

Compounding the country’s problems is the downgrade of government debt by Moody’s last week. This downgrade means that the three rating agencies that count have all placed our debt in the junk category, forcing many bond funds to dispose of South African holdings.

It will be more expensive and difficult for the country to borrow. The Reserve Bank, ahead of the downgrade, said it would buy government debt to maintain market liquidity and orderly conditions. That will help, but the Rand still crashed to its weakest level against the US dollar earlier this week. Clearly, a very tough time lies ahead. If government borrows from the World Bank and emergency International Monetary Fund resources, there will be a degree of relief, but hardly enough for a turnaround.

Economic contraction

Although miniscule, the government’s support measures will put pressure on government finances, particularly at a time when a sharp drop in tax receipts must occur due to economic contraction.

South Africa’s Covid-19 fiscal stimulus package, at about 0.2 percent of GDP, is minute compared to that of the US, which will spend about 10 percent of GDP, according to statista.com. The promised support from some of the country’s richest families, and the big corporates, will help, but might be miniscule in comparison with needs. Government is now considering help for the informal sector, but this might be hard to deliver to entities and individuals that are not registered.

Many smaller companies cannot survive if they do not trade for extended periods. Larger companies with cash on their balance sheets are better off, but already some mining companies have declared force majeure, which gets them out of contracts to supply their customers. It also means they no longer have a contractual obligation to buy supplies. Hence the very severe knock-on effects from the crisis.

Parts of the informal sector, particularly home-based Spaza shops and larger outlets in townships, should be fairly resilient in the crisis, according to GG Alcock, author of Kasinomics. Their customer base will have been paid until lockdown, will save on transport costs, and be spending less, allowing them to stretch out their cash until late April. It is the inner-city hawkers and traders, and those who rely on the formal sector workforce, who will be hit hard.

No food parcels

And spare a thought for the Zimbabweans, many of whom work in formal businesses, such as the restaurant trade, which are now closed. A large number of Zimbabweans must support family members in South Africa as well as those across the border. The border is closed and hence no food parcels are going north. And, when borders are opened, there will be little money left to send parcels.

Toward the end of April is when desperation may take hold. A large number of people will not have been paid since a week after lockdown, and they will be running really short. The social grant system and UIF payments are unlikely to provide substantial relief in such an emergency.

To avoid such desperation, South Africa cannot follow other countries in imposing long lockdowns. Hubei – the province in which Wuhan, the city where the pandemic started, is located – will have been under lockdown for 11 weeks when it is lifted on 8 April. Italy has extended the initial three-week lockdown that began on 9 March.

As it is, legally imposed and voluntary social distancing and other measures might be in place for months around the world. In the UK, a senior medical official suggested that there might be some form of measures in place for the next six months.

Open question

In South Africa, there is still an open question about the extent to which the lockdown will have an impact. Crowded and multi-generational low-income homes make it difficult for lockdowns to have the desired effect.

In place of a renewal of the lockdown, government should aim at targeting those who are in need of greatest protection from the virus – those with pre-existing conditions and the old. With small and crowded houses, it will be difficult to protect the old and those with compromised immune systems, but the lockdown might provide little extra protection for many in crowded conditions.

Wearing masks could offer great help. A shift in expert opinion on the use of masks is under way. Evidence from the Czech Republic, where the infection rate has been relatively low, suggests the compulsory use of masks has been key.

This video and this article in Science, the magazine of the American Association for the Advancement of Science, with George Gao, director-general of the Chinese Center for Disease Control and Prevention (CDC), gives support to the use of masks in public.

Local manufacture

‘Droplets play a very important role—you’ve got to wear a mask, because when you speak, there are always droplets coming out of your mouth,’ says Gao.

In preparation for an upsurge in serious cases, government might consider local manufacture of respirators. Open-source ventilator plans are becoming available, and light engineering firms could possibly do much of the work.

And to reduce more economic damage, government should consider the urgent auction of additional spectrum for greater bandwidth. It has simply not happened, despite years of talk.

The views of the writer are not necessarily the views of the Daily Friend or the IRR

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