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Business incentives dwindle amid pandemic

Published: 5 February 2021

To facilitate the management of the COVID-19 pandemic in 2020, governmentintroduced temporary, targeted relief measures as an immediate response to try and preserve the economy. To fund this, the government used surplus funds from the Unemployment Insurance Fund as well as shifted funds from existing programmes; with the Department of Trade, Industry and Competition - the leading department for supporting private sector development - losing 21% of funds previously allocated to support private enterprises to make new investments and create jobs. The intended second phase of this COVID response plan was to focus on economic recovery, through stimulating investment and employment creation. However, the COVID-19 second wave and the associated constrained economic activity is likely to lead to an even greater shrinkage in the tax base than was anticipated at the time of the Supplementary Budget delivered in June 2020. The necessary COVID-19 health and social spending, the choice to prioritise support for state owned enterprises, and increased cost of debt funding, will mean the country is unlikely to emerge from the first phase of managing the pandemic, that is, preserving the economy.

The elusive economic recovery and the requisite allocation of government budgets to programmes that support sustained investment and job creation are likely to mean, at best, protecting funding for public infrastructure investment and what are considered to be the more employment intensive sectors – tourism and agriculture, as well as creating social employment opportunities. In terms of enabling private sector capital investment, the manufacturing sector, which traditionally ,from our view, has taken the lion’s share of financial incentives available for private enterprises, has had direct funding reduced bymore than a third since 2017. However, given the country’s Economic Reconstruction and Recovery Plan’s focus on driving industrialisation throughlocalisation, it is expected that allocations to programmes in the manufacturing sector will remain flat, although there may be pressure to revise these programmes in order to increase their impact and better support the inclusion of small and medium enterprises (SMEs) in various supply chains. Some of this funding for industrialisation programmes is most likely to be directed at Development Finance Institutions such as the Industrial Development Corporation to support loan guarantees, loans and equity injections in theindustrial sector.

The disruptive nature of COVID-19 has shone the spotlight on the potential of the information and communications technology sector. Notwithstanding this, post the National Budget, we will likely continue to lament the lack of support for start-ups and SMEs to drive the digital economy, although support for key institutions that drive innovation, such as the Council for Scientific and Industrial Research, will continue. The economic plan also promises green economy interventions, but we will have to wait for the Budget Vote to see what this means in real terms.

In an economy where the tax base cannot afford to give a real economic stimulus to kick-start private sector investment across different sectors in the economy, the international donor agencies may be a sensible door for government to knock on for private sector support programmes to complement government’s drive to invest in public goods and social employment. 

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