MAMOKETE LIJANE: The Reserve Bank has a tempting pot of money

There has been much debate over fiscal-monetary policy co-ordination and collaboration in SA, amid suggestions that a more activist use of the Reserve Bank’s balance sheet is appropriate to support an economy that for many years has been growing slower than desired.

The debate reached fever pitch during Covid-19, when some would have liked the Bank to use a more “non-conventional” monetary policy to cushion the economy from the shock.

Most recently some, including the Institute for Economic Justice (IEJ), have proposed that that Bank use unrealised gains on gold and foreign exchange holdings, as accounted for in the gold and foreign exchange contingency reserve account (GFECR), to help fund the state.

It would be cheaper for the state to fund itself this way. The repo rate — the cost of funding such a transfer — is 3.4 percentage points lower than the cheapest funding bond. But would this be the right thing to do?

Central banks can use their balance sheets to achieve multiple objectives. At the more “acceptable” end of the spectrum is using security purchases to achieve monetary policy objectives. The US Federal Reserve, European Central Bank (ECB) and Bank of Japan did this when they lost the interest rates tool when rates reached the zero lower bound. It is important that we separate this monetary policy objective from the ones discussed below.

In the non-monetary policy sphere a central bank temporarily buying securities to stabilise markets, as the Reserve Bank and many other central banks did when markets seized up in March 2020, is probably the most innocuous action. In the middle of the road is temporarily using central bank financing to drive investment into sectors that need support. The Fed did this when it bought mortgage securities in 2008, and the ECB did the same with peripheral eurozone debt in 2012. It is important that such interventions be temporary. Long-term intervention is likely to lead to a loss of confidence in the central bank.

Creating money

On the riskier end of the spectrum is funding state expenditure, or monetisation. There can be a justifiable case of this, in which a central bank “temporarily” assists to stabilise fiscal expenditure when a government loses or never had market access. Smaller economies and those with no market access do this at times. However, this might delay necessary fiscal adjustment and pave the way to balance of payment distress, hyperinflation and debt distress.

The transfer of unrealised foreign exchange gains, a practice adopted by some central banks, is another way in which they can support governments. This is monetisation, insofar as central banks have to create money to support such a transfer. However, it is done within set limits, this being the size of the country’s reserves.

In SA’s case, the Bank cannot give the Treasury more than the gold and foreign exchange contingency reserve account balance. The limited nature of the transfer might give authorities room to access this cash without unduly alarming other economic actors and unduly harming central bank credibility.    

The SA Reserve Bank is one of the world’s most credible central banks. It has typically operated at the conservative end of the spectrum, in part because of the legislation that governs it and its relationship with the state. As someone once said, the use of the gold and foreign exchange contingency reserve account, and the implied monetisation, would “pierce the veil” between the Bank and the Treasury, in a manner that implies increased risk going forward. None of us thought we would ever see the day when the central bank printed money to help finance the state.

At the Bank’s biennial conference in August, much of the discussion was on the complexity of monetary-fiscal co-ordination in conditions of fiscal pressure. I asked whether it is possible for a central bank to maintain credibility under conditions of fiscal distress. The temptation to buy fiscal room using monetary policy can only increase as fiscal policy room erodes. As SA navigates through the current fiscal squeeze, this question will be asked more often.

• Lijane is global markets strategist at Standard Bank CIB.