SA Reserver Bank Governor Lesetja Kganyago has dismissed calls for the Bank to fund the entire government’s response to the COVID-19 pandemic, saying this would come at a significant cost to the Bank.
In the recent past, there have been calls, notably by African National Congress (ANC) Nelson Mandela Bay councillor Andile Lungisa, for the SARB to fund the government’s R500-billion economic and social response package.
Proponents argue that the SARB would do this through quantitative easing, which involves buying government bonds directly and is colloquially referred to as “printing money.”
Insolvent in a year
Addressing the Wits Business School on Thursday, Kganyago agreed that central banks “create money” as part of quantitative easing programmes. This money is “bank reserves, also called base money.”
However, he said using base money would also necessitate using “sterilisation instruments” to stabilise repo and interest rates to minimise inflation. These instruments are costly, he added.
Kganyago explained, “Were we to implement a large, long-term increase in bank reserves, as would be required for a big quantitative easing programme, we would need to sterilise more aggressively to keep the actual overnight rate close to the repo target.
“If we as the SARB bought R500 billion of government bonds, at par, and then sterilised them at the repo rate, we would be insolvent in about a year.”
This is because sterilisation costs for R500 billion would be around R19 billion a year. At the same time, the SARB’s capital and accumulated reserves were R20 billion as of 2018/19, the Governor added.
Worst economic downturn in a century
Kganyago further said the pandemic will “produce the worst economic downturn in a century” in South Africa.
“We expect that ‘the great lockdown’ will cause output to contract by about 7% this year. The last time a figure of that magnitude appears in our data is 1931, during the Great Depression, when output fell by 6.2%. It had declined by 6.1% in 1930,” he said.
The Governor also spoke out against ideological debates while the economy suffers, adding that South Africa risks following Argentina’s path “where ideological conflicts and unstable macroeconomic policies produced a steady economic decline.”
He added, “In much of the period after 1994, we in South Africa surprised everyone by cooperating despite our differences and delivering robust and sustainable macroeconomic policies.
“But those accomplishments have faded. Instead, we now find ourselves sitting on the highest debt pile in our history, arguing about printing money and waving ideological banners at each other.”
To read the Governor’s speech in full, click here.