Opinionista Tshilidzi Marwala 1 May 2020

To print or not to print money, that is the billion rand question

Last week, President Cyril Ramaphosa announced a R500-billion Covid-19 stimulus package, saying some of the funding would come from external sources such as the International Monetary Fund and World Bank. Some wondered why the president would go to the IMF to borrow money if we have paper to print the money.

There is an intriguing story that I was told in high school by my science teacher, Mr Kigosi, about the former Ugandan President Idi Amin Dada demanding that the Governor of the Reserve Bank, Joseph Mubiru, should print more money. Knowing Amin’s reputation as a fearsome man, Mubiru fearfully told him that there was no more money left in the Reserve Bank. Unimpressed, Amin demanded to know whether Mubiru could not print money because he had run short of paper.

A few years later, like many people in Uganda at the time, Mubiru disappeared. After all, Amin had designated himself the title “Lord of All the Beasts of the Earth and Fishes of the Seas and Conqueror of the British Empire in Africa in General and Uganda in Particular”. Nobody disobeyed Amin and lived. As he told those who wanted freedom of speech, “there is freedom of speech, but I cannot guarantee freedom after speech”. What Amin did not understand is that money is not a piece of paper, but the paper represents the underlying value of the economy.

Last week, President Cyril Ramaphosa announced the R500-billion stimulus package aimed at dealing with the economic fallout resulting from Covid-19. In his announcement, he mentioned that South Africa would get some of the funding from external sources such as the International Monetary Fund (IMF) and the World Bank. Some wondered why the president would go to the IMF to borrow money if we have paper to print the money.  

The argument seemed simple enough. During the times of the Gold Standard, countries used to print and mint money, following the stored gold reserved in the Reserve Bank. This way, Reserve Banks used to print as much money as they had gold reserves. There had been many efforts to retreat from the Gold Standard, beginning in the United Kingdom in the 1920s. 

Nevertheless, the first successful move away from the Gold Standard was in the 1970s during the Nixon administration. At that time, the United States government ran out of gold and abandoned the Gold Standard, and moved to the floated US dollar. In the floated currency, the laws of demand and supply determine the exchange rates, and the value of the currency is related to the economic productivity of a country. In the Gold Standard, you could not just print money because it had to be accompanied by the equivalent amount of gold reserves.

In a country such as South Africa, printing money is not a wise option. There are several reasons why this is the case. Firstly, South Africa’s foreign reserves, which is the foreign currency that South Africa holds, was $45.2-billion in February 2020, which is relatively low for an economy of our size. Secondly, the first two months of 2020, South African imports amounted to R95-billion while exports amounted to R110-billion. 

Given our significant dependency on imports, which are priced in dollars, printing money without the corresponding increase in production will result in considerable inflation. This is because printing money without the corresponding increase in production leads to more money chasing the same amount of goods, and this is inflation. Uncontrollable inflation leads to currency devaluation. This means that South Africans would need more currency to purchase the same amount of imports.

As the price of imports increase, prices of locally manufactured goods will also increase, leading to a vicious cycle of currency devaluation and hyperinflation. This would be disastrous given the huge knock the currency has already taken. This would likely trigger a massive and prolonged recession that would affect the poor the most, and from which South Africa would struggle to emerge. There is a counter-argument that states that demand in this time of Covid-19 is low and, therefore, printing money will not have inflationary pressures. Given the size of our economy and the economic quagmire in which South Africa finds itself, printing money will have inflationary consequences.  

The South African context is worsened by the precarious position the country finds itself in, following downgrades from Moody’s Investors Service and Fitch Ratings this year. South Africa is now rated at sub-investment grade, or junk status, by all three of the major credit rating agencies. Reserve Bank Governor Lesetja Kganyago has walked a tightrope in recent years to keep inflation anchored to the midpoint of the inflation target band. Without these systems in place, ballooning inflation can erode savings, stem growth, discourage investment and result in capital flight.

We have already seen the danger of this in countries such as Zimbabwe and Venezuela, which have both printed money to bolster economic growth. Both these countries fell prey to hyperinflation. Simply put, printing more money without more production makes prices rise and thins out the currency. 

Of course, some countries can get away with this. The US, in particular, has an advantage because gold and oil, for instance, are priced in dollars, and its economy of $21-trillion is by far the largest in the world. Furthermore, international trade is conducted in dollars and reserves of all countries always include the American dollar. As a result, every country has a stake in the American economy. However, there is still the risk that printing too many dollars could also result in inflation.

As these debates crop up, one of the central problems is that there is a distinct lack of understanding of economics. Part of the solution needs to be a focus on education and identifying the key concepts needed to understand economics. 

There are various routes to achieving this. Economics should be integrated into the school and university curriculum. We should ensure that multiple forms of media are used to make information available and easily understood. For instance, radio could be used to explain economic concepts. Similarly, articles written about economics need to be targeted at the layperson. This, of course, needs to take into account multilingualism. We should identify community and student leaders as well as NGOs to take this role.

Importantly, in this debate, we must be mindful of South Africa’s economic context. The economy has struggled to grow in the last few years. The National Development Plan, which serves as the country’s economic blueprint, calls for growth of 5% a year to make a dent in South Africa’s burgeoning unemployment rate, which now sits at 29.1%. Yet, South Africa has fallen short of this since 2011. With low growth already forecast based on slow economic activity and the return of load shedding, the economy has been dealt a further blow by Covid-19, which necessitated the lockdown in recent weeks.

The Reserve Bank forecasts that the economy could contract by as much as 6.1% this year. It also anticipates that the country’s budget deficit could exceed 10%. This is a far cry from the 0.9% National Treasury had anticipated in the February 2020 Budget. Against this fraught context, there is no justifiable argument for printing money. We should rather be thinking about how we can use technologies such as 3D printing to ramp up production and get the South African economy working for the majority of the people. DM

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