South African economy facing worst contraction in 90 years: Finance minister

Last Updated 25 June 2020, 04:54 IST

Due to the ongoing COVID-19 crisis, the South African economy is expected to contract by 7.2 per cent this year, the worst in over nine decades, Finance Minister Tito Mboweni told the country’s parliament as he presented a special budget.

“This is the largest contraction in nearly 90 years. Commodity price increases and a weaker oil price have softened the blow, but as a small open economy reliant on exports, we have been hit hard by both the collapse in global demand and the restrictions to economic activity,” Mboweni said on Wednesday.

The minister said debt was South Africa’s weakness.

“We have accumulated far too much debt; this downturn will add more. This year, out of every rand that we pay in tax, 21 cents goes to paying the interest on our past debts. This indebtedness condemns us to ever-higher interest rates. If we reduce debt, we will reduce interest rates for everyone and we will unleash investment and growth,” he said.

Mboweni lauded the initiatives in the country that saw unprecedented public-private partnerships to fight the pandemic amid soaring unemployment and hunger during three months of lockdown that is still continuing in a less severe form.

“Never before has the government worked together so closely with the private sector, labour, community and the central bank. The government’s COVID-19 economic support package directs R500 billion straight at the problem. This is one of the largest economic response packages in the developing world,” he said.

“More than two million customers have received around 30 billion rand in relief from their commercial banks. Insurers and medical aid schemes have provided premium holidays. Landlords have provided rental relief. All in 100 days. This is indeed a remarkable achievement,” Mboweni said.

But this state relief has resulted in reduced revenue, with tax targets expected to be more than 300 billion rand below target.

“Without external support, these borrowings will almost entirely consume all of our annual domestic saving, leaving no scope for investment or borrowing by anyone else. For this reason, we need to access new sources of funding.

“Government intends to borrow about USD 7 billion from international finance institutions to support the pandemic response. We must make no mistake, these are still borrowings. They are not a source of revenue. They must be paid back,” Mboweni said.

The minister cautioned that everyone needed to play their part in the recovery amid expected additional expenditure to combat the pandemic to avoid South Africa facing bankruptcy.

“A sovereign debt crisis is when a country can no longer pay back the interest or principal on its borrowings. We are still some way from that. But if we do not act now, we will shortly get there,” he said.

“The results are devastating. Interest rates sky‐rocket. Spending has to stop. Inflation takes hold and people grow much poorer. This is what happened to Germany in the 1920s, to Argentina and to Zimbabwe in the early 2000s, and to Greece in the past few years,” Mboweni said.

(Published 25 June 2020, 04:54 IST)

Follow us on