Why QE is the best way to fund stimulus needed to get SA through Covid-19 crisis
A change in the 'scale and purpose' of the SA Reserve Bank's government bond-buying programme is needed, according to former Treasury official Owen Willcox
An explicit programme of quantitative easing (QE), which would see the SA Reserve Bank buy up to R30bn of government bonds a week, is the best way to finance the stimulus needed to support the economy through the Covid-19 crisis, says a former Treasury official.
Though there are concerns that the outright monetising of government debt could prompt inflation, QE was the “cheapest, quickest and easiest” method of financing the stimulus at the scale it is needed, according to Owen Willcox, a former Treasury official and principal consultant at Oxford Policy Management.
SA was unlikely to see an inflationary effect because the economy is facing two disinflationary shocks — the lockdown, which has had “a huge effect on demand”, and the decline in the oil price, Willcox said. He was speaking at a webinar hosted by research organisation Trade & Industrial Policy Strategies (TIPS) on Thursday.
The local debate about the use of QE — which has been ramped up by numerous central banks globally to aid their economies during the crisis — has heated up as SA authorities grapple with how to support households and businesses as the state’s finances are severely stressed.
But the Bank has maintained that SA does not need QE, in part because SA’s interest rates have not yet reached zero — unlike other countries where QE has been employed — and SA is not yet facing no inflation, or deflation, in the economy.
Last week, Reserve Bank governor Lesetja Kganyago argued in a webinar that there is still space to deploy its existing monetary policy tools, which have not “ceased to be effective”.
“QE is not appropriate for SA at this stage. It is a tool we have, should we be faced with a situation where we think SA is facing deflationary conditions and we would have to deploy it to reinflate the economy,” Kganyago said.
Along with the government's R500bn stimulus package, the Bank has taken several steps to inject money into the economy and ease liquidity pressure. These include lowering interest rates to record lows of 3.75% and buying government bonds from banks and asset managers to smooth the functioning of the market.
The state’s fiscal stimulus package was unlikely to be enough to offset the crisis, argued Willcox. The space to borrow domestically to fund the stimulus was limited and the costs would be high — further affecting fiscal sustainability, he said.
The Treasury has said it would apply for about R95bn in funding from international agencies including the International Monetary Fund. Though this funding would be cheaper, and the state has indicated it will come without the conditionalities attached a full structural adjustment programme, conditionatlties remained “something we should worry about”, said Willcox.
QE was the cheapest way to fund the stimulus, he argued, and had a positive effect on the rest of government’s debt portfolio as it pushes bond yields down, helping improve fiscal sustainability.
Willcox told Business Day that the difference between the Bank’s current bond buying programme would be a question of “scale and purpose”.
The Bank would need to explicitly state its intention to monetise government debt and ramp up its bond buying programme — which it has stated is aimed only at smoothing the functioning of the market.
Other arguments against QE — such as concerns that it would impinge on the Bank’s independence — must be weighed against the devastating effects of the crisis, including rising unemployment and weaker growth