By Kalu Ojah
In the past couple of weeks, discordant voices about management of the economic ramifications of the Covid-19 pandemic have emanated from two of the most important macroeconomic policy quarters of the South African (SA) government – the central bank (SARB) and Treasury.
SARB’s governor declared that the bank has moved fast and sufficiently to help manage the economic consequences of Covid-19, and that the private sector could now do the rest by bringing back foreign investment, among other private sector-based interventions.
The minister of finance, on his part, warned that should SA fail to heed his advice to adopt an austerity posture, it would be staring a “sovereign debt problem in the face by 2024”.
In the same breadth he acknowledged government’s successful borrowing of $1 billion (R16.4bn) loan from the BRICS Development Bank, and on-going arrangements to also borrow from one of the developing worlds most notoriously one-sided and stifling creditor organisations – International Monetary Fund (IMF), and their likes.
Most worryingly, the same austerity advocating ministry, informed us of the staggering but unsurprising shrinkage of the SA economy by as much as 7-plus percent, which is unprecedented in the past 90 years of the country.
Herein lies what should worry us about the likelihood of government handling the financing and deployment of Covid-19 recovery funds effectively: First, we know that an unprecedented shrinkage of the economy is afoot, yet we advocate austerity posturing – a policy model which has been summarily and empirically shown to be no antidote for output growth problems.
Second, in the face of the fear of a potentially-impending “sovereign debt problem”, the same “petrified” government agent seeks to borrow from sources that are highly likely to lead to unsustainable indebtedness in the future – a point that is explained below.
Thirdly, SARB’s belief that provisioning liquidity to financial markets, by lowering interest rates, would address the more severe solvency/bankruptcy consequences of Covid-19’s demand- and supply-side shocks is a nonstarter.
Talk less of the rather very tepid interest rate policy being able to stabilize a prostrate South African economy enough to attract scarce foreign investment from off-shore.
It seems to me that three important matters here require a closer attention and a truly robust discussion – grasping the enormity and unprecedented nature of the Covid-19’s economic consequences; how best to fund the economy’s recovery from such a deep precipice; and how to utilize the funds in order to ensure recovery and an emergent robust economy. I take these matters up, in order, in the following paragraphs.
One, the magnitude and requisite resolution of the enormous macroeconomic consequences of Covid-19 in SA appear to be ill-advisedly, being viewed by government via an ideological lens – neoliberalism and/or market orthodoxy.
Against evidence to the contrary, neoliberalism, insists that markets are capable of almost independently resuscitating a comatose/destroyed economy, or even growing it, with the state only playing an enabling role.
Actions of strong proponents of this world view – UK and US, particularly via Congress – are demonstrating a rethink via the government’s response to the Covid-19’s staggering economic consequences.
Interestingly, there are several incontrovertible facts about macroeconomic management that this Covid-19 pandemic has laid bare: markets are incapable of providing all vital products in the quantity and varieties in which they are needed, and as when needed – eg, sufficient healthcare infrastructure, personal protection equipment and the likes needed for handling systemic and/or global emergencies with tail risks; government is primarily the one that provides the necessary production base – often termed public goods – upon which the private sector via markets are enabled to utilize scarce resources for production; markets, due to their characteristic self-interest pivot, can and do destroy production and employment.
For instance, the International Labour Organization reports that Covid-19’s effects destroyed about 60 percent of the world’s informal sector workers’ incomes in just the first month of the pandemic. And SA’s own Nids-Cram’s recently released survey estimates that 3 million jobs have been lost in SA, alongside 1.5 million furloughed workers – sadly, a majority of these may never get those jobs back, because their employers are likely to disappear permanently.
And it is only government, on account of its responsibility of ensuring its people’s wellbeing that is capable of, and is proactively oriented to rebuilding such macroeconomic devastation. Thus, resolution of the pandemic-related economic problems unequivocally, and without pretences, rests with governments.
Importantly, there must never be any thought of austerity here; talk less of advocating it as a policy option. Otherwise, it would betray government’s lack of understanding of the enormity of the task of the macroeconomic management on its hands.
Two, how do governments, particularly SA’s government, effectively fund such obligatory rebuilding intervention? In line with the Treasury Department’s championed funding path mentioned at the start of this piece, let us suppose foreign borrowing were to yield the necessary huge funds for addressing Covid-19’s consequences, foreign borrowing is unarguably more likely to lead to the sovereign debt problem that the finance ministry worries about, than domestic currency denominated debt.
Hence, I have advocated for what I dubbed “deferred borrowing”, where SARB takes on new issues of Treasury bonds from the federal government now, with the intent to unload it to the domestic capital market post-pandemic, when the economy would have recovered.
There are several advantages of this approach.
Unlike foreign borrowing, there will be no additional cost of borrowing due to exchange rate uncertainty, which is often responsible for making foreign indebtedness unsustainable, with attendant economic depressing effects.
Unlike quantitative easing or interest rate reduction expansion policies, which leave the discretion of deploying increased liquidity to production activity, to banks, the “deferred borrowing” primarily puts new funds in the hands of government to directly and strategically put them into investments and production that would resuscitate and keep economic activity upward bound.
The debt via the “deferred borrowing” approach will unavoidably remain tied to the Federal government, and failure to service or roll it over dutifully, will have repercussions that governments universally abhor – e.g., inability to deficit finance (often with political costs) or being held responsible for pushing borrowing costs to unaffordable heights – and consequentially stifling investment.
Three, and importantly, after government would have secured the recovery spending funds cost effectively, how does it ensure that the resultant debt does not become unsustainable or yield other negative unintended consequences? Fundamentally, how well the recovery spending is deployed, determines the likelihood of: averting unsustainability of the debt used to finance it, hastening the speed of economic recovery, and ensuring the emergence, or not, of a more robust economy.
To push for positive outcomes of the recovery/stimulus spending, the funds deployment must be guided by the following cardinal principles. It must be geared towards rebuilding and expanding the economy’s production base. It must endeavour to shrink the informal sector of the economy. And it must strive to increase the economy’s competitiveness.
Like most countries, both developed and developing countries, SA’s healthcare infrastructure has been shown to be grossly ill-prepared to handle health emergencies such as the Covid-19 pandemic. And now is the time to revamp it robustly. In the same vein, another complementary social infrastructure needing serious consideration in this reset opportunity, by way of the recovery fiscal intervention, is education.
For instance, the higher the literacy rate of a nation, the higher would be the effectiveness of using awareness campaigns to mitigate, if not, decisively handle the menace of contagious biological problems like Covid-19.
Just recall how difficult it was to enforce lockdown in townships and the current continued rampaging of the virus following easing of lockdown.
Similarly, a highly and more appropriately educated populace, would permit a country to respond effectively to a changing world in which the skill sets necessary for an evolving work-place requiring adaptation of existing skill sets or a total retooling anew. In respect of requisite physical infrastructure for productively expanding the economy’s production base, electricity, water, ICT and maintenance of current transportation systems, are necessary in the case of SA.
The provisioning of these social and physical infrastructures is particularly important for facilitating the outcome of the second cardinal principle – the shrinking of the informal sector of the economy. Globally, people employed in the informal sector, or in hourly-wage type jobs, have borne the biggest brunt of this pandemic.
They either lost their jobs or also had no social safety net succour from the government – with the latter being the case in most developing economies.
Therefore, SA must use this reset opportunity to redress the apartheid regime’s legacy of a bifurcated economy – where a majority of the population subsists in the informal sector. Thus, regarding spending on enabling businesses to get back to producing and expanding production, small to medium size businesses (SMEs) must be the exclusive focus (not established/well-healed businesses nor banks).
This focus is where the bridge from informality to formality of production is needed, should the government really desire to effectively change the production structure of the economy to mostly being formal sector based, along with more employment accompanied by sustainable sources of living wage.
Not only should the disbursement of this SMEs support – and in fact all recovery spending – be transparent and with auditable accounts, non-banks should serve as the dispensing channels. The conservative credit provisioning model of SA banks is evidently unsuited for this fiscal policy task.
To enable eventual strengthening of the competitiveness of SA’s economy – via this reset opportunity – not only should the stimulus support to existing and new SMEs be tied to employment targets, the industries (i.e., types of businesses) to be considered, must be ones in shovel-ready businesses – that would absorb lots of low skilled labour – and those that will be deployed in production areas where SA already has or can cultivate comparative advantages – relative firstly to the African context and, further, in terms of the wider world economy.
Should the sourcing and deployment of the recovery funds be done along the lines (or in the spirit) advocated in this piece, the economy is likely to be productively restructured, recover markedly and become more robust.
And not only would there be little difficulty in servicing and retiring the debts incurred to fund the recovery, but the economy will also become sustainably inclusive, as to reduce SA’s double-digit unemployment rate and the perennially-huge income inequality.
Kalu Ojah is a Professor of Finance at Wits Business School, Johannesburg, South Africa
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