Part Two: An idling SARB is a recipe for fiscal cliff and sovereign debt crisis
JOHANNESBURG – The 24th June Adjusted Budget did not live up to reality that deficit spending by the Treasury is inevitable and the SA Reserve Bank (SARB) must "escape" out of the neo-liberal dogma to help fund this budget (deficit).
Fistly, the fiscal stimulus of R500 billion as unveiled by President Ramaphosa and the Reserve Bank's reserve requirement relaxation of R540bn as announced by Governor Lesetja Kganyago remain "awfully" inadequate for the magnitude of both the needed social relief and economic recovery measures.
We need more resources to not only fund the R500bn stimulus but to also fund the compelling infrastructure rollout and industrialisation programme if we are to go down in history as having grabbed an "Covid-provided opportunity", than dereliction of sovereign and patriotic responsibilities, to rescue the economy from collapse and to save many citizens from destitution.
Over and above the above stimuli we need SARB funded and state-led infrastructure rollout and industrialisation programme to a tune of about R1 trillion and R500bn, respectively.
As said before, questions such as "where will the money come from?" or "can we afford such stimuli?" will be asked sincerely by some and "sinisterly" by others to dissuade SARB from financing deficit-spending.
Secondly, and in answering these questions, the role of SARB becomes critical in invoking other monetary tools in the kit.
One, the combined 3.75 percent repo rate cut since March is commendable, but there is another room for a further 100 (1percent ) to 150 basis points repo cut and for a review and reduction of the 3.5 percent r repo-prime spread as a practice, if not policy, that has obtained for over two decades.
A 1 percent to 1.5 percent r reduction of this spread can unleash a massive additional disposable income for those with mortgage bonds, vehicle finance and personal and business loans in addition to a repo rate cut of the same magnitudes.
Two, and there is no reason for the contrary, SARB should directly fund the fiscus, for the currently estimated revenue shortfall of R300bnand for an expected increase in the size of the deficit noting infrastructure rollout and industrialization programme as well as the rescue state-owned enterprises (SOEs) from going under.
SARB can also do this by directly purchasing SOEs bonds and treasury bills than approaching secondary markets for such transactions.
Three, related to the above, this quantitative easing (QE) by SARB has proven possible, even if denied as QE by the SARB Governor, and prudent policy tool to invoke and could be pursued at weekly purchase of R10bn bonds as argued by several economists, including former SARB and Treasury officials.
In conclusion, Finance Minister Tito Mboweni can rely on monetary policy tools from SARB to fund infrastructure rollout and industrialization programme.
In addition, SARB can fund the increased fiscal deficit and can afford the rising debt-to-gross domestic product ratio than approach by foreign markets or International Monetary Fund, World Bank or other multilateral institutions or bilateral agencies.
Noting our currency fluctuations, especially a trend in rand depreciation, it remains risky in borrowing in US dollars or other foreign denominated currencies even if the loans were said to be at zero-interest.
With this risk there is a danger that our balance of payments would be under a strain we could avoid if we were to rely on SARB funding.
Many economists and policy practitioners; such as Redge Nkosi, Buddy Wells and Chris Malikane; have argued for an active role by SARB and for the use of other monetary policy tools, such as direct funding of the Treasury and SOEs, than remain idling.
Mboweni and his administration missed an opportunity to be on the right side of history than be praised by neo-liberal ideologues in the immediate and judged harshly by history in the short run and long term.
Katishi Masemola is a trade unionist and writes in his personal capacity.