SARB RULES OUT FUNDING RUNAWAY BUDGET DEFICIT

THE SA Reserve Bank (SARB) has ruled out helping the government fund its runaway budget deficit by paying for its spending through loans, as the ANC debates using the institution to fund infrastructure and development. “We do not think it is prudent to finance government directly,” Kuben Naidoo (pictured), a SARB deputy governor, said on a conference call hosted by money manager Ninety One. “It would increase inflation risks. It would blur the lines between an independent central bank and publicly elected office bearers. If we were to finance government directly, there would be no pressure on government to manage their costs in any way.” The idea of monetary financing, where the central bank buys debt directly from government, has been touted by Willem Buiter, a former Bank of England policymaker and Citigroup chief economist, as a potential solution for developed economies pouring money into the Covid-19 fight. But Naidoo said that doing this would remove the central bank’s role in ensuring the government remains disciplined in its spending and could mean the “entire system crumbles”. Finance Minister Tito Mboweni, who has forecast the Budget deficit could swell to more than 10 percent of gross domestic product, said in a tweet on Tuesday that he stands by the central bank’s independence. The comments come after Enoch Godongwana, the ANC’S head of economic transformation, suggested that the bank help finance development through the creation of a R500 billion fund, while Deputy Finance Minister David Masondo has said he would support direct central bank purchases of government debt. The SARB in March started buying government bonds in the secondary market as the pandemic and plunging oil prices sent stocks, bonds and other asset prices into turmoil. The SARB is insisting that the aim of that intervention was to reduce dysfunctionality in the market caused by concerns over Covid-19, rather than an attempt at quantitative easing. “There is a limit to central bank purchases, especially if you are an emerging market,” SARB governor Lesetja Kganyago said in an SA Chamber of Commerce webinar in London. The likes of the US, UK and Japan can embark on quantitative easing “with the knowledge that their currencies are reserve currencies and because they are reserve currencies, people will continue to hold them”. The central bank more than doubled its holdings of government securities to R20.64bn in April. | Bloomberg