The fiasco over the supply of vaccines reveals the vacuity of SA’s approach to Covid-19. The deposit of R283m to secure a supply of vaccines was not budgeted for because we didn’t have the funds, though money for much else was found in the adjusted budget.
Has anyone in the Treasury or the government attempted to calculate how much additional income will be lost for want of the vaccine, and how much tax revenue the Treasury will not be able to collect? It will be many times the R20bn to be spent on the vaccine, R7bn of which is to be funded by members of medical aids. A tax increase or expropriation by any other name, this is unhelpful given the state of the economy.
Yet a supply of additional money could have been made available by the SA Reserve Bank, in the same way money is being created on a large scale by central banks the world over to fund the extra spending the lockdowns made imperative. Moreover, there is little prospect of more inflation any time soon. If/when it does emerge, the reversion to normal funding arrangements would be called for, but this danger palls into insignificance compared with the current and present danger posed by the pandemic.
SA could not bring itself to think through the problem this way, led by a central bank that was able to resist the call for quantitative easing for its usual fear of inflation, with what appears to be the approval of the leaders of business and banks. The upshot is that SA lacks the essential self-confidence to do what would be right now, for fear that we might become addicted to monetary stimulation in the long run.
The money and financial market statistics are quite telling about how unready the economy is to sustain any recovery of output and employment. The supply of extra money in the form of notes and deposits by banks with the Reserve Bank — what is described as the money base or M0 — rose 8% in 2020. There was a flurry of such extra money in March and July 2020, since reversed. In the US the money base is up 43%.
The SA banking system is hunkering down, not gearing up. Bank deposits have been growing at about 8%, while lending to the private sector is up a mere 3% year on year. The banks are building balance sheet strength and raising deposits, and are cautious about lending more, relying less on repurchase agreements made with the Reserve Bank and other lenders, reserving more against potential bad debts not paying dividends, hence adding to their reserves of equity capital. All of this is growth depressing.
The financial metrics continue to paint a grim picture of the prospects for the SA economy. Long-term interest rates remain above 9% even as inflation is expected to average 5% over the next 10 years, meaning expensive capital for SA businesses, which are less likely to add to their plant and equipment. The difference between borrowing long and short remains extended, implying sharp increases in short-term interest rates to come, which is harmful to growth, and making it expensive for the government (taxpayers) to fund at the long end.
Poorly judged parsimony and monetary conservatism have brought SA great harm in the fight against Covid-19, because they have made the prospects for a recovery in GDP and government revenue appear so bleak. It is not too late to change course.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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