South Africa’s central bank has ruled out the possibility of helping the government fund its runaway budget deficit by paying for its spending through loans.
“We do not think it is prudent to finance government directly,” Kuben Naidoo, a Reserve Bank 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 the government — has been touted by Willem Buiter, a former Bank of England policy maker and Citigroup Inc. chief economist, as a potential solution for developed economies pouring money into the Covid-19 fight. Doing this, though, said Naidoo, removes 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% of gross domestic product, said in a tweet on Tuesday that he stands by the central bank’s independence.
The comments come after the central bank 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 Reserve Bank 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,” Governor Lesetja Kganyago said in a webinar organised by the South African Chamber of Commerce 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 has more than doubled its holdings of government securities to 20.64 billion rand ($1.2 billion) in April, helping to reduce borrowing costs in the domestic bond market. It has also cut its benchmark repurchase rate and relaxed accounting and capital rules to release additional money for lending as it seeks to shore up an economy expected to contract the most in at least four decades due to shocks caused by the virus and a lockdown to curb its spread.
Even so, the Reserve Bank’s critics accuse it of not doing enough to support the economy and have called for its nationalisation. South Africa’s central bank is one of a handful, including Switzerland and Japan, still owned by private individuals. However, shareholders are limited to 10,000 shares each and have no say over monetary policy.
The ruling African National Congress wanted to nationalise the central bank in order to address its ownership structure and assert the nation’s sovereignty before the virus struck.
While Kganyago has in the past warned that changing the ownership would be protracted and expensive and could be used as a “Trojan horse” to reopen the debate about the institution’s role, he said Tuesday the central bank has “walked away” from the debate and will instead focus on executing its mandate. The Reserve Bank’s mandate, according to the constitution, is to maintain price stability and it therefore targets inflation in band of 3% to 6%.
Another policy mooted by the ANC, that of forcing pension funds and money managers to invest in government securities, also didn’t find resonance with Naidoo, who serves as the chief executive officer of the Prudential Authority, which oversees banks and life insurers.
“Prescribed assets doesn’t work,” Naidoo said, adding that it his personal view and not that of the central bank. “If you force someone to buy something, then they won’t buy it. They will find every way of not buying it.”
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