Implications of COVID-19 on the South African Economy

by Sunanda R. Marak - 8 July, 2020, 12:00 5463 Views 0 Comment

COVID-19, a biological crisis, has turned upside down every country that is affected globally, resulting in the biggest humanitarian crisis recorded in modern history. IMF identified it as ‘a crisis like no other, an uncertain recovery’ since there is no equivalent comparable in the past. With the magnitude of strikingly high mortality rate, the affected nation-states have responded in a uniform pattern of enforcing both an economically expensive as well as a risky lockdown procedure. With the aim to restrict human movement in order to primarily flatten the curve, contain the spread of infection, and to mitigate the demographic effects. The lockdown has resulted in major disruptions in human activity and has generated an unprecedented crisis across the local, regional, national, and the global traditional order. The global economy has shrunken to 3% in the first quarter of 2020, the lowest recorded since the Great Depression of the 1930s. It is now clear that most developed and medically advanced countries failed miserably in containing the lethal effects of the virus. This raises some pertinent questions, as to how then, will the backward and emerging economies with negligible technological capabilities that are already plagued with a multitude of socio-economic issues will cope up in the immediate future situation.

South Africa, for instance, has the highest number of cases in Africa, exponentially rising. The situation seems to be predictable since the pandemic patterns were uniform in nature globally. The pandemic will likely expose the South African state to the unfortunate and unprecedented overlapping crisis. President Cyril Ramaphosa has rightly stated that COVID-19 is particularly dangerous to South Africa with the high levels of existing poverty, malnutrition, TB, and the HIV epidemic. With the existing state of the fragile and debt-ridden economy, the worst picture can be painted.  The country went for a lockdown from 15th March as a preventative measure. With the numbers rapidly rising, with currently 1,51,209 confirmed cases as of 1st July 2020, the immediate future seems bleak. The health sector which is poorly equipped to deal with the ramifications of the rising curve is already overburdened and will crumble in the coming weeks. The imposition of lockdown domestically as well as internationally across borders has negatively affected the economy in terms of trade, transportation, imports, exports, businesses, production and distribution units etc.

With the global economy witnessing the rare phenomenon of ‘twin supply-demand shock’, due to massive lockdown originating from China, ‘the modern workshop’ of the world, it has resulted in chaos in the pan-African economy. Nevertheless, according to experts, this shock can be termed as a short term disruption, which can be reversed once the virus is brought under control. Since the factories and manufacturing hubs remain closed and workers are homebound in China, it affected international trade negatively due to disruptions in the global supply chains between China and the rest of the world. This shock disproportionately affected Africa, as most of these countries are poor and economically emerging countries, which have a huge dependency on China. Africa as a region is likely to experience ‘double shock’ in three waves from China, OECD (US, EUROPE), and Intra- African trade.  African pulse has projected that the economic growth in Sub-Saharan Africa will decline from 2.4 percent in 2019 to -2.1 to -5.1 percent in 2020, the first recession in the region in 25 years. Reserve Bank of South Africa is projecting the economy of South Africa to contract 0.2% in 2020, 1.0%in 2021, and 1.6% in 2022.

China is the biggest trading partner of South Africa and the shock was felt long before the arrival of the virus in the state, affecting the economy and its major items of the trade like Metals and minerals, IT & telecom, pharmaceutical, Automobile, and food and beverages. The value of total trade in goods and services with China and European countries nearly accounted for 60% of the GDP. The adverse impact of the disruption of the trade globally, and particularly with China on both sides, that is, in terms of demand for local goods abroad, as well as the supply of the necessary imports. To put in the simplest terms, the demand-side shock was the decline in demand for South African or African commodities and natural resources. It was a result of the closure of manufacturing hubs, suspension of industrial activities, manufacturing, and consumer goods in China.  Countries like South Africa have no alternative buyers due to their emerging economic dependence on China in the recent past. On the other hand, supply shock was a result of a decline in imports of manufacturing and finished goods from the outside continent.

According to the statistics, the biggest decline was witnessed in the manufacturing and mining sectors. The mining and quarrying industry was accounted for a decrease of 21.5% contributing 1.7% to the GDP decline. Subsequently, the decrease of demand and production of metals and minerals is contributing to the wealth depletion of raw materials like steel, copper, iron ore, and lithium. Metal prices sharply fell from 11% to 8% that gave a huge blow to the Mining sector. A decline in demands is mainly due to the port closures, travel restrictions, and shutting down of the manufacturing industry in China. It is expected that once china recovers, it is likely to increase in demand for raw materials.  The manufacturing sector has largely contributed to the decrease in GDP contracting 8.5% in the first quarter itself. Petroleum, chemical products, rubber and plastic products, basic iron and steel products suffered a huge set back that crippled the manufacturing industry as it depends on the key components supplied from china and the few affected countries.

Remittances flow to the sub-Saharan countries from the Diaspora community is expected to slow after years of growth. World Bank Group in its report on the ‘COVID-19 Crisis Through a Migration Lens’ projected that global flow is expected to decline by 20%. Being the fastest-growing region for remittances in 2017 and 2018, sub-Saharan flow is expected to decline by 23.1%.  South Africa is the most expensive region to send and receive money with an average transaction fee of 25.1%. It is expected to disrupt the capital flow since it is the main source of foreign exchange revenue for the region. The World Bank forecasted a 4% recovery in 2021 $38b of remittances flow.

No doubt, Covid-19 has generated large scale unemployment, displacement of the migrant population, pushed millions into poverty and destitution. It had a huge impact on both formal and informal sectors. According to the International Labor Organization, the informal sector contributes 41% and South Africa is an estimated contribution of the Informal economy is 30% to GDP. Informal sectors like local markets and local business which deals with the sales of Chinese products like textiles, electronics, and household items are facing huge loss as a result of disruption of supply. Mostly the women and youth are engaged in this sector as a source of livelihood in Africa. The disruption and shortage of supply resulting in lack of business is driving them into joblessness and hence contributing to the rising unemployment trends. According to the National Treasury, the rate of unemployment has increased by up to 40% inclusive of the formal and informal sectors of economic activity. South African Chamber of Commerce has predicted it might rise up to 50% in THE coming weeks. It is estimated that around one million people in South Africa will be pushed into poverty.

Sub-regional trade or Intra-African will be impacted by the closure of regional borders. It will increase transaction costs, welfare loss, and supply shortages. The agricultural economy is already facing problems due to lockdown as it restricted the movement of goods from the farmers to wholesalers and retailers. This has caused food shortages and crises in urban areas. Agricultural production is likely to contract by 2.6% and with trade blockages 7.1%. Food imports in the sub-region have declined from 13% to 25% because of trade blockages and a decline in domestic demand. It is important to note that, African Continental Free Trade Area (AFCFTA) the largest ever trade deal since WTO was anticipated to be operational from 1st July. However, it stands suspended due to the pandemic.

South Africa, struggling with multiple crises, doesn’t have the capacity or resources to recover on its own. It was witnessed that, South African economy has entered the recession in the last quarter of 2019. With the bellying debt, the debt ratio expected to increase by 59.9% to 87.2% in the Covid-19 scenario. Recently the country announced a rescue package of 10% of GDP with an estimated $26.3 billion. They will need debt relief and loans from the World Bank and the IMF to tackle the challenging environment.

In the coming months, the COVID-19 will be old news, but the ability to deal with the present situation will determine the future of the country. The country has to keep running inspite of the pandemic, South Africa as a country should strike a balance between dealing with human resources and economic capacity.

Sunanda R. Marak
Author is currently pursuing a PhD in International Relations from JNU, New Delhi. Her area of study is European studies.

Leave a Reply

Your email address will not be published. Required fields are marked *