SA Reserve Bank’s independence must remain untouchable

In The Herald a few weeks ago, Adriaan Pask wrote under the heading: “SA in reasonable position from debt-to-GDP perspective”.

Your correspondent confines himself to the government’s debt excluding government’s contingent liabilities as guarantor of portions of the debt of some state-owned corporations.

I wish to quote only one statement from the article and then briefly comment on it.

Pask wrote: “Things get particularly complicated from a government’s perspective as modern monetary theory dictates you can take on debt as you like if you ultimately grow yourself out of your situation and repay your debt”.

In this statement thee are two catchphrases.

First the commonsense truth in the condition “if you grow yourself out of your situation and repay your debt”.

The truth in this statement hinges on the question: what does the borrower do with the borrowed funds?

Classical economists from the late 18th century until the middle of the 19th century believed governments should only borrow to deal with an emergency — Covid-19 and the contemporary electricity crisis would probably have passed their test.

In 1856, the German economist Carl Dietzel proposed a new reason for allowing the government to borrow — to establish something of lasting utility.

In today’s language lasting utility means productive infrastructure such as airports, public roads, functional clinics in rural areas and research laboratories, not Bryntirion Estate homes, outdated ideas like a national airline, a state mine or a bloated cabinet of ministers paid with borrowed money.

The phase “modern monetary theory” is the second catchphrase as quoted from Pask.

This theory does in fact propose that a country can take on as much debt as is preferred, but under specific conditions — I am convinced SA does not comply with one and should not entertain complylatter ing with the other, the one about the central bank.

The proponents of this theory are clear on the point that it is a theory applicable to developed economies, also referred to as high-income countries.

SA is not yet there. Second, it assumes a monetary system in which “the central bank is assumed to print ...what Treasury asks it to print” (Chohan, 2020).

The central bank is no longer independent from the government of the day.

There are economic commentators who argue that the governors of several central banks have already sacrificed their independence during the Great Recession of 2007/2008, and again during Covid-19 by providing additional liquidity through the purchase of government bonds on the secondary market, a process labelled quantitative easing.

The difference between quantitative easing and “to print what Treasury asks” is that in the former case the governor of the central bank could use personal discretion; in the case that discretion disappeared.

Independence from political pressure is in the case of the SA Reserve Bank enshrined in the Constitution and in the Act on the SA Reserve Bank.

The longer that independence remains untouchable the better.

The status of a country’s debt-to-GDP ratio, whether far below or way above 100%, is caused by factors that ought to be well-known to the National Treasury and have consequences for that country’s fiscal stability.

A statement by JM Keynes (1936), quoted in these columns before, remains true: “...the probable interactions of the factors amongst themselves” must be considered — no easy task, so much more difficult when the balance in the trade-off among factors must be found.

Then not even sweeping transgressions of the Public Finance Management Act under the carpet, sweeping with whatever broom, brings lasting solutions.