A monetary sovereign government is one that issues its own currency. It taxes its population in the same currency. It issues debt that is denominated in its own currency. The fourth condition is that it does not fix its currency; it has a floating exchange rate, according to Fadhel Kaboub, a modern monetary theory (MMT) economist.
Technically, such a government cannot default on its debt. It has the policy space to achieve its macroeconomic policy objectives, the most important of which is the achievement of full employment. The only limit to state spending is inflation or the availability of real resources that can be purchased.
MMT has gatecrashed into the mainstream of the economic policy debate, partly due to media-friendly Stephanie Kelton, who advised former US presidential candidate Bernie Sanders. MMT scholars deserve credit because it took them a split second to come to the conclusion that quantitative easing, the purchase of government bonds by central banks in the wake of the global financial crisis, would not result in inflation. They have also broken down the artificial separation of monetary and fiscal policy, which has received mainstream support.
William Buiter, a special adviser to financial services group Citi, says: “A first tenet of MMT is that the central government and the central bank is a single entity — and therefore should consolidate their accounts to understand the financial and funding options open to the state. That is correct. From an economic perspective and whatever the formal degree of independence ... the central bank is just the liquid window of Treasury. We should therefore think of a single consolidated budget constraint for the state.”
MMT economists have also in effect demolished arguments that their policies — including monetary financing of state spending — will necessarily result in inflation. A new avenue of attack is the view that MMT does not apply in most developing countries, for a number of reasons, including alleged balance of payment constraints. The great economist John Maynard Keynes also said very little about developing countries.
Most of the examples cited by the critics to prove that MMT does not apply to developing countries do not fit the definition of monetary sovereignty. Kaboub, who grew up in Saudi Arabia and Tunisia, has shown how developing countries can deal with structural constraints in their economies and regain monetary sovereignty. Across the spectrum of monetary sovereignty, SA comes close to meeting Kaboub’s four conditions. About 90% of SA’s debt is denominated in rand. The country has a floating exchange rate.
SA does not have a balance of payments problem. During the first quarter of 2020 there was an outflow of capital worth R100bn from equity and bond markets. As a result, the exchange rate depreciated sharply since the start of the year. The sky did not fall. The country’s foreign exchange reserves are intact. But there is much that can be done to improve monetary sovereignty.
SA’s trade balance has been in surplus since 2016. But financial outflows, mostly dividend payments and repatriation of profits, have resulted in a current account deficit. The JSE has got very little to do with the SA economy. The government can reduce the outflows by curbing the huge domestic inward listings that distort the JSE.
Unlike other developing countries, which have high levels of foreign currency borrowing, SA has deep financial markets. The government can raise all of its financing on the domestic market. It can even boss the bond market, as it has done recently.
SA does not have to play the carry trade game and have high interest rates to attract speculative inflows of hot money — the nyaope of international finance. It can let its currency depreciate or implement capital controls to preserve monetary sovereignty. MMT provides a useful framework for SA to understand its true budget constraints and increase its monetary sovereignty.
• Gqubule is founding director at the Centre for Economic Development and Transformation.
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