Eskom eclipses Bank’s power to ignite growth
The debate generated by the release of the latest GDP numbers, or rather the methodology used, was more than a little surprising. As it has always done, Stats SA gave out seasonally adjusted and annualised data, which showed a drop of 51%.
While it would be irrational to use this number to extrapolate for the rest of the year — not least because it covered the period when the lockdown was at its most severe and large parts of the economy have since reopened — it generated a considerable amount of noise. So much so it threatened to drown out some of the more interesting observations and the search for solutions to what is potentially an existential threat to SA’s political and social order.
One such came from PwC economists Lullu Krugel and Christie Viljoen. In a note, they looked further ahead towards potential solutions, and top of the list was Eskom and the return of power cuts.
Long before the Covid-19 outbreak, it was widely accepted that Eskom was the single biggest risk to the economy, though the government has never shown that it sufficiently recognised the seriousness of the problem.
When it was announced late in 2019 that there would be yet another “war room”, this one headed by deputy president David Mabuza, expectation levels didn’t explode and there’ll likely be little disappointment when it also fizzles out without achieving much.
In addition to the disruption caused by power cuts, Eskom has also crippled industry with the imposition of what can be described as an extra tax in the form of above-inflation price increases. While it’s reluctant to do what other businesses in distress would be expected to do, such as pay cuts, retrenchments and asset sales, the utility wants more of the same, with individual taxpayers and corporate SA footing the bill for its inefficiency.
CFO Calib Cassim told parliament a couple of weeks ago that to secure its sustainability, prices needed to rise 25% in real terms. Inevitably, it doesn’t seem as if much was said about the sustainability of the businesses that have to source unreliable power from Eskom, which is still responsible for providing 95% of SA’s energy needs.
Back to the PwC note. The startling part was their statement that Eskom power cuts “will completely cancel out the positive impact created by interest rate cuts” and relief payments paid out under the government measures to cushion workers since the Covid-19 outbreak.
This shows the power and limits to what the Reserve Bank can do, despite the impression that’s often been given that SA would be in a great position if only the Bank would be more aggressive. And to think that the effects of a combined three percentage point cut in interest rates in 2020 so far — with another 25 basis points likely to come on Thursday — could be undone by the poor performance of one company.
If nothing else, it shows that the expectations of what monetary policy can do have been misplaced. Without the many government reform papers translating into actual action, governor Lesetja Kganyago can slash rates to less than zero and buy all the bonds he wants, and it would make little difference in the long run, except maybe to debase the rand and create a long period of yet higher inflation and even more poverty.
It’s not only in SA that central banks are burdened with too much expectation. And it’s also not just the “passive” ones that get the criticism.
Gordon Brown, whose lasting legacy from his time in government was the granting of operational independence to the Bank of England when he was chancellor in the late 1990s, was quoted in The Guardian newspaper last week criticising the central bank for not doing enough to make employment a priority. He called for a change to an explicit dual price stability and employment mandate, like the one followed by the US Federal Reserve.
Reading those comments in isolation, one would be surprised to find out he was talking about a central bank that has cut its main interest rate to 0.1%. Just last week, the UK government sold short-term notes at a negative yield, meaning investors have to pay a fee to lend to it.
That happened because traders expect UK interest rates to go negative. The governor of the Bank of England, Andrew Bailey, has told them as much, saying they are in the “toolbox”. In the immediate aftermath of the Covid-19 outbreak, the Bank of England also increased its quantitative easing programme and has now committed close to £745bn (about R16-trillion).
Those don’t look like the actions of a central bank that doesn’t take growth and employment seriously. And they are in keeping with its recent history. Former governor Mervyn King allowed inflation to run at more than twice its target to give the economy room to recover from the global financial crisis a decade ago. So it’s hard to know what it would have done differently if the wording of its responsibilities had been changed.
Kganyago addressed a similar point during a speech to the University of Pretoria in August, arguing against a change in the Bank’s mandate and noting limits to what monetary policy can achieve, such as being unable to “stop electricity load-shedding with interest rates”.
That Eskom can instead nullify the impact of interest rate cuts points to where the country’s priorities should be.
ESKOM POWER CUTS ‘WILL CANCEL OUT THE POSITIVE IMPACT CREATED BY INTEREST RATE CUTS’
JUST LAST WEEK, THE UK GOVERNMENT SOLD SHORT-TERM NOTES AT A NEGATIVE YIELD