In 1996 the financial markets, bank economists and noisy neoliberal echo chamber in the commentariat bullied the government into believing that SA had a debt crisis. At the time, SA’s debt to GDP ratio was 49.5%. Foreign debt was 1.9% of GDP.
The idea that there was an apartheid debt crisis in 1996 is propaganda and fiction. But in June 1996 the government implemented the Growth, Employment and Redistribution (Gear) macroeconomic policy, which included slash and burn fiscal policies and sky-high interest rates. It was a disaster. Unemployment almost doubled to 8-million people (a 40.6% unemployment rate) in March 2003 from 4.3-million (33%) in 1996.
Moeletsi Mbeki, publisher of a book that I edited, asked me: “So why did they do it? Did money change hands?” I said I had read his brother Thabo’s paper “State and Transformation”, which provided the justification for the unnecessary neoliberal turn and concluded, after seeing dubious statistics and analysis, that the government did not understand what it was dealing with.
Fast forward to 2021. The noisy neoliberal echo chamber is at it again. SA has a debt crisis. It must implement austerity, it says, even though this would increase the debt burden. Again, SA does not have a debt crisis. The idea that a sovereign currency nation that prints its own currency, borrows in its own currency and does not peg it against another currency can become broke is absurd.
Between December 2019 and June 2021, four big central banks — in the US, the Eurozone, Japan and the UK — printed $10.2-trillion to support their economies. Central balance sheets are now worth: 130% of GDP in Japan, 60% in the eurozone and 40% in the US and the UK. For the first time, 20 emerging market economies implemented quantitative easing (QE). There were no consequences.
There was dololo inflation; dololo currency depreciation. In a Project Syndicate article, Piroska Nagy-Mohacsi says low interest rates and QE in rich countries had huge positive spillover effects on emerging markets as investors searched for yield. The result was a quiet revolution in emerging market central banks, which could mimic rich country policies including quantitative easing (QE) and the monetisation of government deficits without inflation or currency depreciation.
There is no reason that a country should automatically experience a reduction of international demand for its currency when it uses the power to issue its currency to support the domestic economy. People who argue otherwise should specify the transmission mechanism that will make this happen.
The latest IMF Fiscal Monitor publication says SA’s debt to GDP ratio increased 13.1 percentage points to 69.4% of GDP at the end of December 2020. The world average debt ratio increased 15 percentage points to 98.6%. Every country had similar shocks to GDP and tax revenues. In relative terms, SA is where it was before the crisis.
There is no tipping point at which a rising debt ratio results in economic collapse. Selected debt ratios for upper middle-income countries were Angola (136.5%), Argentina (103%), Brazil (98.9%), Egypt (89.8%) and India (89.6%). On what basis is SA’s 69.4% debt ratio high?
Some people say the problem is not the debt but the interest payments. But the solution to both is to grow the economy. SA has a GDP growth problem, not a debt problem. If SA had a real central bank, it could reduce the cost of capital and provide financing to the government at no cost or on favourable terms — a payment holiday until the economy recovers like the IMF loan.
Businesses can only invest if there are customers at the door. You can privatise, liberalise and deregulate, but it will make no difference if there are no customers at the door. There is no way out of the current crisis, except for the government to stimulate the economy. There are many options. Increasing debt is one option that should be on the table.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.