09 April 2020 | Story Prof Phillippe Burger | Photo Sonia Small
Prof Phillippe
Prof Phillippe Burger.

The Covid-19 crisis is in the first instance a health crisis that threatens the health and life of thousands of South Africans. South Africa’s public health system is much weaker and less comprehensive than health systems in Europe and the US (even when adding private health capacity) – and the crisis is overwhelming the health systems in many of these countries. Thus, the pressure that the health budget places on the fiscus is set to increase fast (we are talking days and weeks, not months). Indeed, Finance Minister Tito Mboweni has even mooted the possibility of borrowing money from the World Bank and International Monetary Fund to finance health-related expenditure. 

An economic crisis 
In the second instance, the Covid-19 crisis will be an economic crisis, potentially causing a surge both in business bankruptcies and the unemployment rate. In the 2008/09 crisis South Africa’s gross domestic product contracted by 1.5%. Though very difficult to predict, a contraction of 5% in 2020 due to the Covid-19 crisis would not be surprising. Both aggregate supply and demand are shrinking as a result of the control measures to contain the pandemic. Lockdown measures prevent companies from making sales, but they still need to make payroll and cover their other financial commitments. The crisis threatens a severe deterioration in company balance sheets. Large and small companies alike will take a knock, though the impact on SMMEs will likely be more severe. In an effort to contain costs and remain solvent, businesses will start laying off employees, causing a large increase in the unemployment rate. 

Rising unemployment rate 
A three-week standstill in production will deprive many companies of almost a month’s income. Although some of the production can be caught up later, the production of others will cease as they go out of business. Moreover, there is the real possibility of continued lower production if the national lockdown is extended beyond the initial three-week lockdown. 

In the 2008/09 global financial crisis almost a million South African workers lost their jobs. Importantly, that impact was not temporary: the increase in the unemployment rate proved to be lasting. We never again saw the 21% unemployment rate that existed prior to the global financial crisis. The impact of the Covid-19 crisis on South Africa promises to exceed that of the global financial crisis by far – while the unemployment rate stood at 29% before the crisis. 

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Prof Philippe Burger is Pro Vice-Chancellor: Poverty, Inequality and Economic development, and Vice Dean: Faculty of Economic and Management Sciences at the University of the Free State.

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