The Unprecedented Storm: Assessing the Macroeconomic Impact of COVID 19 on the South African Economy.

It was the year 2020 when the world saw the emergence of the infamous virus which crippled the global economy to a great extent impacting almost every aspect of human life. South Africa was no exception to this. To the rainbow nation, which was already grappling with several structural changes, the arrival of the COVID-19 Pandemic unleashed an unprecedented economic crisis on the country, impacting almost every aspect of its economy. The impact of the pandemic can be analyzed with a recent report by the SSA (Statistics South Africa) which says that the country’s economy returned to its pre-pandemic levels only during the first quarter of 2022. The analysis in this article will be done through a macroeconomic perspective, focusing on the unemployment crisis, inflation volatility, trade disruptions, and exchange rate pressures on the economy. Further, prospects for the economy will also be analyzed keeping in mind the effects of these macroeconomic shocks on the overall development of the nation. 

1. GDP CONTRACTION

Looking into the GDP rates of the nation can give us a broad view of the impact of the pandemic on the nation’s economy as a whole. Table 1 shows the annual change in the growth of various industries in the economy along with the overall percentage change in GDP.  For this study, the year 2015 is taken as the base year as it is considered as the most recent normal year for the country’s economy. The data was collected from Statistics South Africa (https://www.statssa.gov.za/?m=2022/)

Table 1 (Annual Overall percentage change in GDP)

% change year on year	2018	2019	2020	2021
Agriculture, forestry, and fishing	0.5	-6.4	14.9	8.8
Mining and quarrying	-0.8	-0.6	-11.8	12
Manufacturing	1.6	-1	-12.5	6.5
Electricity, gas, and water.	0.9	-3.3	-5.9	2.2
Construction	-1.4	-3.4	-18.5	-2.2
Trade, catering, and accommodation	1	-0.7	-12.4	6.4
Transport, storage, and communication	2.8	-0.7	-15.4	4.7
Finance, real estate, and business services	3.3	2.5	0.7	3.3
General government services	1.9	1.4	0.7	0.1
Personal services	0.5	1.4	-2	5.5
Total value added at basic prices	1.6	0.2	-5.9	4.7
GDP PERCENT CHANGE	1.5	0.3	-6.3	4.9

The table shows a massive contraction of 6.3 % in the GDP rates of the nation in the year 2020. The nationwide lockdown implemented to curb further outbreaks of the virus ultimately resulted in a lot of industries coming to a standstill. Looking at the table, we can see that the worst-hit sectors include Construction with a steep 18.5% fall followed by Transport, storage, and communication which experienced a fall of 15.4%. On the other hand, the pandemic was an angel in devil’s attire for the agricultural sector of the nation. Surprisingly, the Agriculture, forestry, and fishing sectors of the nation experienced a positive growth of 15% in 2020.

Towards the last quarter of 2020, the government of South Africa eased lockdown restrictions which helped the economy to move towards its recovery with the industrial sectors picking up growth rates. Looking through a year-on-year perspective, South Africa saw one of the highest growth rates in over a decade with a recovery GDP growth rate of 4.9%. But out of this, the construction sector still experienced a negative growth rate. The figures in the table show us the non-uniform recovery within various sectors of the country

Such extreme fluctuations in the economy of the nation called for immediate actions from the policymakers. In the case of South Africa, one of the most crucial measures taken by the government to protect the industries of the nation was the Unemployment Insurance Fund (UIF) which assisted the small-scale companies and workers facing distress because of the pandemic. Further, the Department of Trade and Industries also introduced regulations to tackle price gouging on essential goods in favour of the consumer market. 

2. THE UNEMPLOYMENT CRISIS DEEPENED 

The rainbow nation, which was already facing the challenges of an unequal employment system, found the pandemic wave to be a poke in the wound of its labour market. According to the National Income Dynamic Study – CRAM, the employment-to-population ratio fell sharply from 56.6% to 48.3% for the working-age population (which is considered 18 – 64 years in South Africa). Another report by the Statistics South Africa (SSA) showed that the largest fall in the employment-to-population ratio occurred between the first and second quarters of 2020. A report by Casale and Shephard (2022) puts the spotlight on the disproportionate gender gaps in the unemployment scenario after the first wave of the pandemic. It was recorded that women’s employment fell by 22.5% while that of men fell by 9.8%. Further, the report also says there was gender bias in terms of employability in the recovery phase where women’s employment was still down by 8.4%. In the same report, the key reason for uneven effect in employment was identified as how women are often employed in those sectors of the economy which require face-to-face contact (Retail, Personal care, hospitality, childcare). -.

In this national-wide unemployment crisis, the most effective fiscal policy was the ‘Unemployment Insurance Fund – Temporary Employer/Employee Relief Scheme (UIF – TERS). This programme assisted millions of skilled workers to protect themselves from the severe economic impact of the pandemic. This indeed was a very successful initiative by the South African policymakers which cushioned the impact of unemployability on the economy. 

3. INFLATION VOLATILITY

The pandemic resulted in the global prices of goods and services fluctuating dangerously ultimately causing supply chain disruption and bringing down the production capacity of industries across the world. South Africa also faced a similar situation with Inflation volatility being one of the major challenges for the policymakers. Tracing the reasons for such an inflationary situation in the country, we observe that supply chain disruptions top the list. The lockdown measures across the nation disrupted the domestic supply chains which will ultimately lead to a shortage in essential goods and raw materials. In such a scenario, abiding the law of demand, the prices of essentials goods and services shot up leading to an inflationary situation in the nation.

Further looking through a psychological perspective, the shifts in consumer behaviour can also be considered as a reason for the many shifts in the demand curve. During the pandemic, within the consumer crowd, there was a scenario of stockpiling essential goods which led to surge in demand of essential goods and ultimately, price fluctuations. Because of all these domestic factors along with higher import costs brought down the value of the South African Rand (ZAR).

As published by Statista Research Department, South Africa recorded an inflation rate of 5.2% in mid-2020. The fluctuations in the prices of consumer goods however, was reduced to a significant extent in 2021. This is because of the various policy responses bought in by the South African government.

The South African Reserve Bank (SARB) adopted a proactive stance to manage inflation volatility by implementing multiple rounds of repo rate cuts. The cumulative repo rate reduction amounted to 300 base points. Such a rate cut was aimed at lowering the borrowing costs and stimulating the spending mentality in the economy.

Apart from these monetary policies, the South African government also implemented fiscal measures including financial assistance to struggling businesses and supportive healthcare systems which mitigated the impact of inflation volatility on the relatively vulnerable sections of the society. 

4. TRADE DISRUPTIONS AND EXCHANGE RATE PROGRAMME

With restrictions on international trade, the rich mining sector of South Africa was severely affected. The rich diamond ores faced several disruptions with the lockdown in place. Further, the manufacturing and agriculture products were also affected as lockdown measures disrupted both imports and exports of services. This ultimately led to huge revenue losses and thus, disrupting the supply chains.

Such trade disruptions can also be seen as one of the factors why the South African Rand (ZAR) experienced high volatility against major currencies. 

5. REOPENING THE ECONOMY POST COVID 19

Signs of economic recovery in South Africa started in September 2021. Easing the lockdown in the economy and further vaccination efforts provided some sort of relief to the industries of the nation. It was only in the second quarter of 2022 that the country’s economy was able to achieve pre-pandemic levels. This was because of the various carefully calibrated fiscal and monetary policies undertaken by the policymakers.

The most prominent fiscal policies include the economic stimulus package announced by the government of South Africa which was worth 500 billion South African Rand. Further, the government also recognized the significance of infrastructure development as a catalyst for economic growth and invested in infrastructure across various sectors opening up new job opportunities for the people of South Africa.

Monetary policies were also implemented to drive the economy towards a faster recovery, these included cutting down the repo rates to almost 3.50% which reduced the borrowing costs for consumers and businesses. Further, to support liquidity in the financial markets and ultimately stimulate the provision for credit, the South African Reserve Bank (SARB) initiated a bond-buying program known as quantitative easing. The coordinated effects of these fiscal and monetary policies stimulated economic growth and rise in employment rates within the economy driving the nation to a recovery from the pandemic. 

6. THE PANDEMIC AS A LESSON

The pandemic sure was an unprecedented event that crippled the economy of the nation. But despite all this, the pandemic was a learning experience for the nation, as it pointed out various loopholes within the system. South Africa as a nation can thus learn from this economic crisis and develop a better approach to future shocks in the economy. One of the major criticisms received by the South African government is how it failed to act fast enough during the initial phases of the Pandemic. Economists Adam, Caduff, and Manzo were quick to point out the dangers of quick responding based on epidemiological information. The International Science Council (ISC 2022) recommended policy recommendations that cover global equity. South African policymakers should consider these policy suggestions and take advantage of the lessons emerging from the crisis. 

CONCLUSION

The Covid 19 pandemic was indeed an unprecedented blow to the South African economy which revealed its vulnerabilities and opportunities. The impact of the pandemic was uneven across the economy, ranging from GDP contraction to rising unemployment and inflation volatility. Thinking from a brighter perspective, it allowed South Africa to reimagine its future and pursue a more inclusive and resilient economic model. Addressing these loopholes can drive the country towards a stronger, more sustainable, and prosperous future for its economy and its people. 

REFERENCES

African Development Bank & African Development Bank Group. (2021, December 4). Southern Africa set for economic rebound, but impact of Covid-19. African Development Bank Group - Making a Difference. https://www.afdb.org/en/news-and-events/press-releases/southern-africa-set-economic-rebound-impact-covid-19-lingers-47281

Daniels, R. C., & Casale, D. (2022). The impact of COVID-19 in South Africa during the first year of the crisis: Evidence from the NIDS-CRAM survey. Development Southern Africa, 39(5), 605–622. https://doi.org/10.1080/0376835x.2022.2116408

 

National Income Dynamics Study – Coronavirus Rapid Mobile Survey (NIDS-CRAM), 2020. Wave 1 [dataset]. Version 3.0.0. Cape Town: Allan Gray Orbis Foundation [funding agency]. Cape Town: Southern Africa Labour and Development Research Unit [implementer], 2020. Cape Town: DataFirst [distributor], 2020

 

CGET, 2022. Addressing COVID-19 in Africa: Challenges and leadership in a context of global economic Transformation. Institute for New Economic Thinking (INET): Special CGET Report. https://www.ineteconomics.org/uploads/papers/CGET-Africa-Report-rev.pdf [Accessed: 07 June, 2022]. 

 

Long-Term Socio-Economic Impacts of COVID-19 in African contexts | United Nations Development Programme. (n.d.). UNDP. https://www.undp.org/africa/long-term-socio-economic-impacts-covid-19-african-contexts