South Africa’s finances, Kganyago says QE would hurt
South Africa’s finances, Kganyago says QE would hurt

The South African Reserve Bank will resist calls to finance. The government’s growing budget deficit with aggressive quantitative easing. That could add even more strain on the National Treasury, Governor Lesetja Kganyago said. South Africa’s finances. QE would hurt.

If the central bank were to buy R500 billion of government bonds. Then mop up the excess liquidity by issuing bonds at the current repurchase rate of 3.75%. It would be insolvent in about a year, Kganyago said in an online lecture Thursday. South Africa’s finances.

“A big quantitative-easing operation wouldn’t lift the budget constraint,” he said. “Instead, it would end up saddling Treasury with yet another bankrupt government enterprise asking for a bailout.”


The Reserve Bank has been adamant that it is buying of government debt in the secondary. Market since March is aim at reducing market dysfunction and is not quantitative easing. It held state securities worth R30.8 billion. The ends of May, with total purchases since the start of the program amounting to around R25 billion, Kganyago said. Critics of the central bank have said it could do more to shore up public finances. That was already under strain before the pandemic hit. QE would hurt

“Sometimes I think that if we just told people. Our asset purchases were quantitative easing. They might stop complaining that ‘the Sarb is conservative. Kganyago said in the lecture, organise by the Johannesburg-base University of the Witwatersrand. “We should not, however, simply assume that our conditions require full-blown quantitative easing. That we can pull it off without creating unintend and damaging consequences down the road.”

Large-scale quantitative easing with a positive inflation rate means. That the central bank would have to either allow the benchmark interest rate fall to zero. Sterilise the asset purchases by absorbing rands back onto its balance sheet, Kganyago said. An interest rate that is too low could drive inflation, while sterilisation would be costly, he said.

“Quantitative-easing proponents in South Africa have not appreciated the inescapability of this choice,” he said.

Budget constraints

The country’s public finances have deteriorated rapidly over the past decade. Partly due to a series of bailouts for loss-making state-own companies including Eskom Holdings SOC Ltd. and South African Airways. In February, the government predicts that the budget deficit would swell. A 28-year high of 6.8% of gross domestic product. Some forecasts are now at double that due to a lockdown. meant to limit the spread of the virus that’s weighing on output and government revenue. QE would hurt.

The shortfall could exceed 10% of GDP in the fiscal year through March 2021, according to the Reserve Bank. The largest gap on record was 11.6% of GDP in 1914, followed by 10.4% in 1940. The economy could contract by 7% this year, the most since the Great Depression. When output fell by 6.2% in 1931, according to central bank data. The bank is closely monitoring data and is “ready to act as appropriate” in accordance with its mandate, Kganyago said.

In addition to bond purchases, the bank cut the repurchase rate by 275 basis points. This year to the lowest level since it was introduce in 1998. It also relaxed accounting and capital rules to release additional money for lending.


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