No, this time will not be different if SA prints money
Financing the revised budget puts Cyril Ramaphosa and Tito Mboweni in a bind
President Cyril Ramaphosa and finance minister Tito Mboweni are in a bind. In a few days Mboweni will have to deliver amended estimates of national expenditure, a revised division of revenue bill and a new appropriation bill. He will do so in the context of a horrific market and ghastly macroeconomic backdrop.
Business confidence is lower than it was after PW Botha’s Rubicon speech in 1985, official unemployment will likely breach 40% this year, there is a R230bn hole in revenue collections, risk-off sentiment makes hard currency issuances unfavourable, wages are under pressure and there is an expectant yet restless and divided nation.
Ramaphosa and Mboweni know that these are indicators of crisis, verifiable through data and statistics. Less measurable, but no less profound, is a sapping of confidence across the land — a resigned feeling that our best days are behind us and that the next generation must accept that they will be poorer than their parents — a dream in ruins.
Mboweni’s job is not made any easier by the noisy political backdrop. In recent weeks mainstream media has been awash with analysis of the ANC’s post-Covid economic recovery discussion document, as well as the normal faction-inspired posturing about it. In addition, as one of the more balanced members of the national executive, Mboweni knows that one side-effect of the lockdown is a deep and widening trust deficit between the government and the governed.
When a government forces its central bank to buy its bonds or spends the foreign exchange reserves, we should be wary of inflation and the balance of payments
The two central focal points of the debate thus far seem to be the state’s role in the recovery and the financing strategy that should be adopted to enable this role. The first point has many local and international supporters. It is trite that the government has a crucial and indispensable role in leading an economic recovery and nursing our stricken economy back to good health.
The debate about the latter point has been interesting, if not amusing, to observe. Some say that extraordinary times call for extraordinary measures and that the only way in which the state can access cheap funding should in effect be through a Reserve Bank subsidy. But this argument fails to properly explain how exactly we will avoid the trap into which many other emerging economies have fallen. When populists tell you “this time will be different”, we should ask why.
What we know, not only from economic textbooks but also from the experience of other countries, is that when a government forces its central bank to buy its bonds or spends the foreign exchange reserves, we should be wary of inflation and the balance of payments.
Populists will tell you what inflation is, but I would be surprised if any know what balance of payments refers to. And while inflation is widely known, its causes are not well understood. As a way to stimulate demand, the government will want lower interest rates. One way to achieve that is to artificially depress yields by demanding that the central bank buy its bonds. When the government starts spending this money, it boosts aggregate demand in the economic system.
The exchange rate also depreciates, and because firms and workers see that the government is printing money, they start spending time trying to figure out where inflation is headed and raising their prices to stay ahead. Before long it starts to get out of hand, but not before the populists can gloat. What tends to happen is that in the first year you get a lot of growth and a little bit more inflation. In the second year you get some growth and more inflation. A few years in, growth disappears and inflation is the runaway winner.
The second phenomenon is balance of payments constraints, which are driven by two self-reinforcing factors. The government can and probably will increase domestic aggregate demand, but it cannot increase demand for the country’s goods and services abroad. Increased demand typically also results in increased imports, because no country produces all the goods it uses. This is known in economics as the import intensity of demand.
The problem is clear: as exports cannot be increased to cover the costs of increased imports, foreign exchange reserves must be used or dollars must be borrowed. When those two wells run dry there is only one institution that can help: the International Monetary Fund (IMF).
As a former central banker Mboweni no doubt knows the perils of economic populism. The question is, will his boss give him the political cover he needs to take the country down an irreversible path of structural reform?
Ramaphosa knows he faces a Hobson’s choice, and history will judge him harshly if he commits a historic mistake.
• Khoza as an investment banker based in Johannesburg.