In a recent note a Russian economist, quoted in the Financial Times, said of her country’s Covid-19 stimulus package that the Kremlin “intends to spend as little as possible while being able to officially refer to a substantial rescue package”.
The newspaper noted that officials had added Russia’s deficit spending (3.7% of GDP) to the stimulus (2.8%) to arrive at a figure of 6.5% of GDP. But most of the stimulus had come from tax holidays and loan guarantees. The direct state contribution was only 0.3% of GDP, the economist said.
Russia is probably the only country that adds deficit and stimulus spending when calculating the scale of the national effort to boost the economy in the wake of Covid-19. If that was the norm, President Cyril Ramaphosa could have reported a stimulus of 16.5% of GDP during his recent address. But the two countries have one thing in common: Russia’s oligarchs have also been making large cash contributions towards the stimulus package. However, SA also has its own odd stimulus accounting practices.
During his media briefing on Friday, finance minister Tito Mboweni said Ramaphosa had announced fiscal policy measures of R500bn. And the Reserve Bank had unveiled monetary policy measures worth R500bn. “Our combined package is worth more than R800bn.” If one assumes the figure of R800bn was an arithmetical mistake, the SA response of more than $1-trillion is worth 20% of GDP, according to the minister. Mboweni said: “We must be careful not to choose a path that seems too easy or too good to be true. If something seems too good to be true, as the old saying goes, it probably usually is.”
The details of the Reserve Bank’s response were contained in a briefing on March 14. It refers to regulatory changes, steps taken by the Prudential Authority to reduce countercyclical capital buffers and liquidity coverage ratios (LCRs) of banks, which were expected to release lending of up to R550bn. If one adds the R550bn from the Bank’s regulatory changes to the R200bn loan guarantee scheme, which was part of the fiscal policy response, more than R700bn of the R1-trillion package will be due to increases in bank credit.
This is definitely too good to be true. How can banks, which will suffer huge loan defaults and impairments as thousands of SA businesses go under in the wake of a pandemic-induced depression, lend so much money into an economy that is collapsing?
The above macroprudential regulations were introduced in the wake of the global financial crisis. The buffer is an extra layer of capital a bank must have during the good times so it can absorb losses during bad times. The LCR refers to the ratio of high-quality liquid assets a bank must hold to cover its short-term obligations. The Prudential Authority reduced the capital buffer to zero from 1% and the LCR to 80% from 100%. More than 50 countries have implemented such measures, according to the Brookings Institution think-tank.
But the accepted practice, as contained in the IMF policy tracker of international responses to Covid-19, is not to take into account the potential effect of such changes when calculating the value of global stimulus packages. The Bank for International Settlements says the capital buffer is not meant to be an instrument to manage economic cycles. It is a stretch to count the Bank’s regulatory changes as part of the stimulus package.
Last week, a Business Day editorial on the R200bn loan scheme said: “There’s no guarantee that this is the amount that will eventually flow into businesses.” On fiscal policy, some measures, such as the R130bn reprioritisation of government spending, should not be counted as part of the stimulus package. Like Russia, the SA government’s direct contribution to the package is small.
• Gqubule is founding director at the Centre for Economic Development and Transformation.
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