Prof Johan Willemse, an independent agricultural economist, says the supplementary budget delivered by the minister of finance on 24 June was a real shocker. According to him, the government is spending an extra R145 billion on the COVID-19 issue. However, the real issue is a record budget shortfall due to the economic meltdown, with the wrong policy choices and corruption on the cards.
Finance minister Tito Mboweni said the economy will shrink by 7,2% during 2020. The IMF is currently estimating a decline of more than 8% for South Africa, which is the largest economic contraction in more than 90 years. However, other economic models suggest a much larger decline of up to 16%. According to Willemse, this will be a massive shock to consumer spending as unemployment also increased to above 30% in the first quarter of 2020. Market analysts expect unemployment to move close to 40% before it stabilises.
A strong decline in disposable income
According to minister Mboweni, the world economy is also in very bad shape and will shrink by more than 5% this year, resulting in the largest per capita income drop in more than 100 years. Willemse says the main problem is that South Africa’s exports have been curbed and earning extra income in the international market has thus become more problematic since the world is getting poorer and the behaviour of populations and businesses are changing.
Willemse explains that this will result in a strong decline in disposable income and that it would be very naive to think that the South African and world food market, as well as consumer behaviour, will not be affected.
The question is, given this new economic outlook and the fact that many consumers in South Africa and the rest of the world are becoming poorer by the day, how will spending on meat change? How will it affect our business environment?
Government spending breaks a new record
Willemse says the current reality is higher government spending of just above R2 trillion, compared to a meagre expected income (tax) of R1,12 trillion for the 2020/21 tax year. Spending increased to a record level, while income (tax) dropped significantly due to the economic meltdown being experienced.
“This will leave a record shortfall of R761,7 billion that will be funded by the issuing of government bonds and borrowing of some $7 billion internationally. No detail was given on the source of this funding, but experts suggest a large part will come from the IMF. This will take government debt to just below 81,8% of GDP from an anticipated 65,6% in the February 2020 budget. The so-called debt trap is looming,” he warns.
The minister acknowledged that the shortfall is so large that it cannot be financed out of the domestic savings pool. The alternative would be for the Reserve Bank to print money (like Zimbabwe and other countries) and destroy the value of the currency. This will result in run-away inflation, Willemse notes.
“There was very little on policy reform although promises of a very large infrastructure investment programme were made. The medium-term budget framework in October this year will be done on a zero-based approach, to restructure and reduce government spending for the years to come. There was no mention of extra money for all the state-owned enterprises (SOEs) that are basically bankrupt, except the Land Bank that got R3 billion to keep going,” he concludes.
South Africa is heading for an economic collapse
According to the Southern African Agri Initiative (Saai), Mboweni’s interim budget speech makes it clear that there is no more money left since South Africa borrowed too much money already. However, Saai points out that the availability of more money is irrelevant because failure in adjusting the policy environment (fixing the bucket) will inevitably result in South Africa’s economic collapse.
This is exactly what happened in Zimbabwe.
Saai says the South African economy has been robbed blind, and almost two years after the start of the Zondo commission – which heard damning evidence about state capture and looting – not a single person has been sent to prison. The organisation is adamant that as long as fraud and looting is allowed in the civil service, the size of the budget will make no difference.
Saai comments that the R3 billion lifeline that was extended to the Land Bank was essential, as South Africa has never needed the Land Bank more than it does now. Unlike commercial banks, the Land Bank does not have clients in the tourism, manufacturing, retail, mining or transport industries and the fact that the bank focuses solely on the agricultural sector makes it entirely dependent on land as surety. Expropriation without compensation erodes the bank’s collateral.
Job creation is essential but requires police certainty
Saai says that Mboweni is correct in saying that job creation is very important at this stage, and especially in the rural areas where it is needed the most. Job creation, however, requires investment and financing that are heavily reliant on policy certainty.
Agriculture can create more sustainable job opportunities over a wider area and in a shorter time than any other sector of the economy. This is not happening, though, as labour laws and administration are too stringent. According to Saai, no farmer is willing to employ extra workers only to realise later that they do not comply with the farm’s business ethos – knowing that labour laws make it extremely difficult to let them go. Even if it is possible to dismiss an employee after an extensive and expensive process, tenure law makes it difficult to get such a person to leave a farm. Policies in this regard will first have to change.
On a positive note, Saai comments that despite a hostile business environment, South African farmers are still competitive in world markets and managed to maintain South Africa’s food security under very difficult circumstances during the COVID-19 lockdown – while still being able to produce and export large surpluses.
Saai notes, however, that commercial farmers, who supply food to the majority of the urban population, received no emergency relief – not during the lockdown, not for the drought and not for the recent massive surge in theft. If agriculture’s potential can be released in a more policy-friendly environment, it can create the type of wealth needed to eradicate hunger and poverty, create jobs and bring in foreign currency.
Action needed to avoid a sovereign debt crisis
According to Agri SA, Mboweni’s special adjustment budget highlighted the need for action to avoid an impending sovereign debt crisis.
With higher government spending and lower tax revenue, the tax target for this year is likely to be missed by over R300 billion. Early projections show that gross national debt will likely be close to R4 trillion, or 81,8% of GDP by the end of this fiscal year, compared to the February 2020 estimate of R3,56 trillion or 65,6% of GDP.
Effective implementation of cost containment measures
The October medium-term budget policy statement (MTBPS) and the February 2021 budget are likely to give more details on tax measures to make up for the lost tax revenue. Agri SA comments, however, that effective implementation of cost containment measures, for example the public sector wage bill and limiting bailouts for SOEs, will be crucial.
The focus on infrastructure can help to improve competitiveness and support growth. Nevertheless, Agri SA highlights that the effective use of such funds towards the timely and cost-effective completion of projects, along with the maintenance of existing infrastructure such as key roads servicing agriculture, will be needed to make a real difference.
Plans for National Treasury to monitor the spending of municipalities through monthly and quarterly reports are a start to manage the poor performance of municipalities, but detailed interventions and support will be necessary to achieve meaningful change.
Agri SA welcomes the recapitalisation of the Lank Bank
Agri SA welcomes the allocation of R3 billion to recapitalise the Land Bank, along with National Treasury’s support to develop a long‐term restructuring plan.
Finally, a focus on effective and efficient government expenditure, which could help to support an economic recovery, along with fiscal discipline is crucial to prevent a sovereign debt crisis and further economic decline. This must be accompanied with the speedy implementations of policy reforms as outlined in the National Treasury’s document: Towards an Economic Strategy for South Africa.
Agri SA hopes to see more action towards this end as South Africa moves towards the MTBPS and the February 2021 budget. – Compiled by Claudi Nortjé, AgriOrbit