SA must rediscover dangers of government borrowing


South Africa must rediscover the dangers of government borrowing because responsible policymakers never forget that fiscal debt is risky, although the nature of policy discussions is that while many claims are valid, some points are emphasised more than others.

One of these points over the past decade was that fiscal consolidation hurts growth and is therefore self-defeating, Reserve Bank governor, Lesetja Kganyago, said in Washington where he delivered the 2023 Michel Camdessus lecture at the International Monetary Fund (IMF).

Camdessus was a French economist who was director of the IMF from 1987 until 2000.

Kganyago on capital flows and government debt levels

Kganyago spoke about the contribution of capital flows to sustainable growth in emerging markets. Capital flows refer to the movement of money for the purpose of investment, trade, or business operations, according to Investopedia.

Kganyago said another point was that higher government debt levels were safer than previously thought.

“I have personally observed these claims justify sustained fiscal slippage in South Africa. If we had felt the urgency of debt sustainability more keenly, we would have had a wiser conversation.”

He said one of the strongest lessons he learnt as a policymaker was that poor countries are poor not simply because they do not have money, but because they do not use money effectively.

“Too often, there is a tendency to look at a problem, cost out a solution and focus on raising the cash. Implementation is just a black box.”

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Policymaking and implementation

However, he pointed out, good policymaking starts with implementation and the financing need should reflect what can be used efficiently.

“Capital flows provide spending power and can radically shift the budget envelope, but implementation capacity is stickier and budgets can easily overshoot capacity.” 

This point is also relevant in the global dialogue about climate change justice and the financing rich countries should direct at poor countries, he said.

“There is a strong focus on costing the climate change impact for poor countries and using those estimates to lobby for massive inflows.

“But we have seen many times that the sum of money is secondary to the quality of policies, the incentives they create and the capacity of the institutions available to invest funds. The capital flow sceptics and the climate justice activists should exchange notes.”

Kganyago said as governor, he regularly meets with global investors to discuss economic conditions and policy settings in South Africa.

“The fundamental goal of these engagements is to encourage investment. Then I return from these meetings and we have policy sessions where staff want to talk about the dangers of capital flows but the investors I just met are the people who are responsible for the capital flowing. So, I wonder – which part of my time am I wasting? Do we want these capital flows or not?”  

He emphasised that this is a global discussion that has evolved significantly over his time working in macroeconomic policy.

“Twenty or thirty years ago, the mainstream view was that financial globalisation was good. Global markets could provide more financing, at lower rates, than countries could achieve by relying on their own resources.

“They would allow for better risk sharing and they would create better incentives to get policy right. The standard policy recommendation was that controls on capital flows should therefore be liberalised and where they were applied, this was probably to cover for some other policy error.”

However, the mainstream view has shifted.

“The IMF encourages policymakers to keep capital flow measures in their toolkits, both for pre-emptive purposes and to address capital flow surges. The guidance is nuanced and there is still appreciation for the benefits of capital flows – but as Christine Lagarde put it a few years back, “[This] is not your grandmother’s IMF” and there has clearly been a big shift in the policy advice.”

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Critical attitudes to capital flows – Kganyago

He said outside the IMF attitudes to capital flows have been more bluntly critical.

“One part of this is unhappiness with spillovers from United States monetary policy, sometimes when the stance is loose, as in the ‘currency wars’ era after the global financial crisis and sometimes when financial conditions tighten, as they did in the 2013 taper tantrum and as they have been doing during the current period.”

Despite these attitudes, Kganyago said he remains impressed by the power of global capital flows to support investment, reduce financing costs and accelerate convergence in developing economies, especially where domestic savings are below investment needs.

However, he warns that it is a force that is dangerous as well as useful and powerful. “The South African case shows both sides of the coin: intelligent use of capital flows in one period and abuse in the second.

“For countries where investment opportunities exceed local savings rates, doing without capital flows means giving up on significant growth. It is not an attractive strategy. A better one is to welcome capital flows, control risks and nurture institutions that can deliver productive investment choices. That applies to climate finance, too.”

Kganyago said we must remain optimistic about capital flows and vigilant about the risks, rather than pessimistic about the flows and allergic to the risks, or naïve about the flows and blind to the risks.

“My hope is that when the next boom comes, we will have learnt lessons that make that boom as safe, as long and as large as possible.”

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