Call a halt to suicidal policies
The government must invest in its people and infrastructure to stimulate the economy
In 1996, financial markets and the bourgeois media bullied the government into believing South Africa had a debt crisis. The country’s debt to gross domestic product (GDP) ratio was 49.5%. The foreign debt ratio was 1.9%. There was no apartheid debt crisis. But the government implemented the Growth, Employment and Redistribution (Gear) programme, which included slash-and-burn fiscal policies and sky-high interest rates.
Gear was a disaster. The number of unemployed people almost doubled to eight-million people in March 2003 from 4.6-million in 1996.
The treasury’s propaganda said Gear had created macroeconomic stability. But there was no macroeconomic instability in the first place.
Fast-forward to this year and the public debt fear-mongering is in overdrive.
The government has reloaded Gear with a disastrous combination of power blackouts, austerity and rising interest rates that will result in low GDP growth and rising unemployment. Ahead of the mediumterm budget policy statement on 26 October, there is a macroeconomic policy stalemate.
According to Keynesian economics 101, the private sector cannot invest if the economy is not growing. And the government is refusing to provide the fiscal stimulus — investment in its people and infrastructure — the economy needs because it again believes there is a public debt crisis. But a national budget does not operate like a household budget. The sustainable way to contain public debt is to spend more to grow the economy.
South Africa is a monetarily sovereign country that cannot fail to meet its obligations in its own currency or default on its domestic debt unless it chooses to do so.
Austerity is a political choice. According to modern monetary theory, a monetarily sovereign country is one that prints its own currency, borrows only in its own currency and does not promise to convert its currency into something it can run out of, such as another currency. In other words, it does not accumulate foreign currency loans or peg its currency.
Modern monetary theory is a new school of economics within the Keynesian tradition. A country does not need a reserve currency to harness the power of its public money.
South Africa’s debt ratio is not high by international standards, even when benchmarked against uppermiddle-income countries.
Most countries spent their way out of the pandemic-induced recession of 2020. The International Monetary Fund says the world average debt ratio increased by 15.6 percentage points to 99.2% of GDP in December 2020 from 83.6% in December 2019.
Every country had similar shocks to GDP and tax revenues. South Africa’s debt ratio increased by 13.1 percentage points to 69.4% in 2020 from 56.3% in 2019. In relative terms, South Africa is where it was before the crisis.
At the end of December, the world average debt ratio was 97%. For advanced economies it was 117.9%.
The average debt ratio for emerging market economies was 64.1%. Asia and Latin America had average debt ratios of 71.2% and 72.2%, respectively.
Selected debt ratios for other upper-middle-income countries were Brazil (93%), Egypt (89.2%), Angola (86.4%) and India (84.2%).
The sustainable way to contain the interest burden is to grow the economy. But the cost of government debt is a policy variable that the Reserve Bank can control if it implements a yield curve control strategy, as practised by countries such as Japan and Australia. The central bank sets a target for the cost of capital and buys as much debt on the bond market as is required to maintain the target.
The government can also bypass the bond market and borrow from within the family — the Reserve Bank and the Public Investment Corporation (PIC) — at no cost or on favourable terms that reduce the average cost capital. The International Monetary Fund and New Development Bank loans have payment holidays until the economy recovers.
Finally, SA Inc is not broke. At the end of March, South Africa had a gross loan debt of R4.3-trillion, which was equivalent to 69.5% of GDP. The other side of the national balance sheet included assets worth R4.1-trillion. This comprised assets of the PIC, foreign exchange reserves, state-owned companies, development finance institutions and government cash balances.
At the end of June, the PIC — the asset manager of the Government Employees Pension Fund (GEPF) and the Unemployment Insurance Fund (UIF) — had assets of R2.4-trillion. This included public sector debt (government and stateowned companies) of R803.9-billion.
Private sector pension funds are fully funded because a company can go bust and have to pay out all employee pensions on the same day.
But there is no scenario in which the government can close shop and have to pay all 1.3-million public sector employees their pensions on the same day. For this reason, in other countries, most government employee pension funds operate on a pay-as-you-go basis or are partially funded. There is no need for the GEPF to be fully funded.
At the end of June, the Reserve Bank had gross foreign exchange reserves of R963-billion. With import cover of 8.4 months, this was well above the international benchmark of three months of imports.
In June, the country needed foreign exchange reserves of R345-billion to cover imports of three months. Therefore, it had excess foreign exchange reserves of R618-billion. At the end of March, the government also had cash balances of R289-billion.
The GEPF and the UIF accumulate annual surpluses of about R50-billion and R17-billion a year, respectively. There is no need for such obscene surpluses. A one-off restructuring of the SA Inc balance sheet could release 50% of the R3.4-trillion assets of the PIC and the foreign exchange reserves into the economy.
This would include writing off government debt of R803.9-billion. After releasing half its assets, the GEPF would still have an annual surplus of more than R10-billion.
South Africa must take bold measures to reverse its suicidal macroeconomic policies that will result in an inevitable slide towards creating an economic wasteland by 2030.
The government is refusing to provide fiscal stimulus ... because it again believes there is a public debt crisis