The SA government will double its fiscal deficit in response to the coronavirus crisis and its effect on output and incomes, which may be of the order of R1-trillion, the equivalent of 25% of GDP in 2019. We can only hope the extra spending is effective and well directed to minimise the damage.
Spending will help close the output gap — the difference between much lower realised GDP and what it might have been without the lockdown. Encouraging more demand for goods and services will helpfully also increase their supply and boost incomes accordingly.
But it should be made clear that whatever relief is offered is temporary, an urgent response to a grave emergency. Policies for the long term remain to be determined in the usual considered way, subject to due process. We are hostage to a crisis — not to the future.
The government should therefore hope to raise the emergency funds it intends to spend as cheaply as possible. This means borrowing at the short end of the bond market at low rates of interest — as close to zero as possible. The quickest and cheapest way to fund the surge in spending is to create money for the purpose, which is what every central bank in the developed world is doing — enthusiastically and without shame.
Developed countries face far lower long-term interest rates than we do. They can issue long-term debt without paying much interest at all. Their borrowing costs are as low as they are because of the willingness of their central banks to buy vast amounts of government bonds in the market.
This process, now known as quantitative easing (QE), is money creation by another name. Developed world central banks are doing vastly more bond buying and additional lending to banks and businesses in response to the economic threat posed by the coronavirus. They are therefore creating far more money and holding down the interest their governments must pay to borrow.
Additional central bank money comes mostly in the form of bank deposits held with a central bank. The supply of money in SA increases every time the Reserve Bank makes a loan to a bank or buys foreign exchange or government securities in the market.
Money in the form of additional bank deposits (cash) would also increase should the Treasury draw on its own considerable deposits to make payments. It has over R160bn in its deposit account with the Bank, and presumably does not need Bank permission to draw on it. If so, government can in effect perform its own money creation.
The high cost of long-term borrowing in SA — 10% per annum to borrow rands for 10 years — is yet more reason for us to rely on the central bank to assist in a sensible funding plan for Covid-19 relief. It means bringing down short rates further and sharply, and making enough extra cash available to the banks and other eligible borrowers on favourable terms so that they can fully support the market in issues of short-dated, low-interest paying treasury bills and bonds.
Issues of short-term debt should be growing rapidly to fund the extra spending. We should eschew long-term borrowing for now and replace maturing long-term debt with short.
All the world, including SA, will be set for a post-coronavirus battle over the future scope of government spending. The left will want more government intervention — more spending, regulation and taxation of the wealthy — and will fudge the dangers of relying on central banks to cover ever larger fiscal deficits.
Monetising government is likely to be inflationary if done permanently on a large scale. But it will not be inflationary in SA for now — not until after the crisis when we can get back to a new normal that includes sensible monetary and fiscal policy.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity
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