Transforming SA’s monetary architecture — recommendations by the National Planning Commission (Part 1)

The presentation of the Medium-Term Budget Policy Statement (MTBPS) by the Minister of Finance last week highlights the need to align South Africa’s financial ecosystem with the long-term goals of the National Development Plan (NDP).

After all, the spending of R2.6-trillion per annum (and rising) that the Minister of Finance authorises in his annual budgets over the next few years is equal to a third of our annual GDP. An estimated R1-trillion is expected to be invested in infrastructure alone. Will this money be spent in ways that address our core economic challenges?

The National Planning Commission (NPC) has voiced concerns in its Ten-Year Review report that if nothing fundamental changes, we will not achieve our 2030 targets. The NPC’s recent National State of Service Delivery report underscored the Ten-Year Review by starkly revealing the extent of our service delivery crisis. In this regard, the MTBPS states: “We are shifting the composition of spending from consumption to investment.”

Capital investments are, indeed, the fastest-growing expenditure item over the medium term. This needs to be welcomed. Recent research by the National Planning Commission estimates that to address our energy challenges, we need R143 billion per annum through to 2050 which is roughly what is currently available from public and private sources over the next five years. To sustainably address our water challenges, we estimate that we need R214 billion per annum which is R75 billion more than current levels of investment. To ensure food security, R123 billion per annum will be required, which is R49 billion more than current levels of investment. In short, the infrastructure gap in these three crucial sectors sectors is at least R124 billion for the next five years.

To fund infrastuctures, the MTBPS continues, “government cannot do it alone. Private participation is essential to address limited public-sector funding and weak state capacity.”

This new emphasis on investing in fixed assets is welcome, but what does it mean in practice? And will this be done in ways that reduce inequality (even though inequality is never mentioned in the MTBPS)? And can it be done in a way that stimulates economic growth?

The NPC recently published a new report that provides recommendations for how capital investments – both public and private – can align with the NDP.

Entitled The Transformation of South Africa’s Monetary Architecture, 1983-2024 (henceforth the NDP finance report), our report provides the first comprehensive systems analysis of the evolution of the architecture of South Africa’s financial ecosystem since the mid-1980s.

We cannot transform a system if we don’t understand how it works. Nor can we implement on our home ground the numerous international calls to reform the global financial system – calls our President has endorsed.

The core finding of the NDP finance report is that there is more than enough funding available within the South African financial ecosystem to address all our major infrastructure development and investment challenges.

This narrative runs contrary to the hyper-cautious narrative that underpins the MTBPS, including the new inflation target of 3%, the insistence on achieving a primary budget surplus, containing spending and reducing debt. The MTBPS recognises this may dampen growth in the short term, but then insists that this recipe will be better for growth over the long term.

Drawing on critical macro-finance theory, our point of departure is that the architecture of a contemporary financial ecosystem can be understood as a web of interlocking balance sheets. In a credit-based system (ie post-1971 when the US dropped the gold standard), everyone’s liability is someone else’s asset, and vice versa.

Because this is true, we were able to map all of South Africa’s balance sheets to reveal how they interlock in ways that direct the flow of capital. Because these balance sheet configurations constantly shift over time on terms that tend to favour the rich, as summarised below from our report, this explains the path-dependent flows of capital that we face today.

Capital flows

Our report addresses two fundamental capital flows, only the first of which was addressed by the MTBPS: the declining levels of investment in Gross Fixed Capital Formation (GFCF), and severe wealth inequalities caused by the upward flow of capital into the accounts of the richest people.

No country has ever successfully developed with declining levels of investment in GFCF and worsening wealth inequalities. The reasons for this are obvious: without expanding infrastructure and fixed productive capacities, a growing society cannot meet its material needs; and, as the World Bank has shown, unequal societies grow more slowly than more equal societies because inequality constrains economic opportunities for the poorer sections of society.

According to the NDP, investment in GFCF as a percentage of GDP should be 30%. GFCF comprises investments in public infrastructure (energy, water, transport, roads, etc), and the productive capacities of the private sector (factories, offices, farming infrastructure, logistics, digital capabilities, etc).

The target set by the NDP aligns with international trends. However, after a significant growth period through to 2010 when we nearly hit 20%, the global financial crisis and State Capture resulted in a rapid drop-off of investments in GFCF from around 2008 to below 15% of GDP today.

Although a turnaround is evident when it comes to public infrastructures (eg Eskom), we must still see an uptick in investments in fixed productive assets by the private sector. This means they need to break from the past by re-investing more of their profits in fixed assets in order to expand operations.

The difference between total GFCF and infrastructure only (right-hand panel) is more or less equal to the private sector’s investment in productive fixed assets. Both rose significantly between 2002 and 2010, with construction, machinery and transport leading the way.

The obvious problem with GFCF formation as an indicator of economic health is that it does not take into account the simultaneous decline in natural capital that is usually correlated with rising GFCF, ie as economies grow, ecosystems degrade and emissions drive warming, thus, in the end, undermining economic development. As I realised when writing up Colombia’s Country Platform, a green GFCF means including investments in ecosystem restoration and decarbonisation in order to align GFCF with the Sustainable Development Goals.

Recent scholarship has advanced our understanding of inequality. Up until recently, the only measurement of inequality was income inequality, ie the Gini Coefficient. Today, researchers have developed methods to quantify the levels of wealth on South Africa’s household balance sheets (ie their assets and liabilities over time).

Rich get richer, poor get poorer

As discussed in more detail below, we now have an increasingly indebted multiracial middle class, a largely white elite that has got richer, and a black underclass of poor and working people who are getting poorer.

The declining flow of capital into GFCF and the upward flow of capital into the accounts of the richest people need to be explained. By focusing on the architecture of our financial ecosystem as a whole rather than just fiscal or monetary policies, it is possible to explain why we face these two challenges. Like all financial systems, ours is an integrated complex adaptive system that can no longer be understood as the sum of public and private finance. It is also possible to recommend possible systemic solutions.

Our report traces the dynamics of financial flows over the decades since the mid-1980s. This is done by taking four historic snapshots of the system: 1983/85, 1994/96, 2014 and 2024.

For each snapshot, the following balance sheets are analysed: households, firms (both large listed non-financial corporations and small businesses), state-owned enterprises (SOEs), banks, development finance institutions, pension funds, shadow banks, South African Reserve Bank (SARB), and the National Treasury (NT).

By tracing the expansion and contraction of these balance sheets over time, and how they interlock with one another at specific historic moments, a clear picture emerges of how the financial system has evolved since the mid-1980s.

The balance sheets of South Africa’s financial institutions by 2024 can be represented as follows:

It is not possible to add these numbers up to arrive at a total because there is overlap (eg, GEPF is included in pensions). However, in a sister study (still unpublished), based on the SARB Quarterly Bulletins and the SARB’s Whom-To-Whom database, it was possible to estimate that the total assets of all balance sheets in 2021 were R49-trillion, up from R20-trillion in 2010.

This represents an increase in total assets from 6.7 times the GDP in 2010 to eight times in 2021 and confirms that at the most fundamental level – despite the triple whammy of the global financial crisis, State Capture and Covid – the assets on South African balance sheets have consistently expanded. Nevertheless, compared with other upper-middle-income countries, our levels of investment in GFCF are the third-lowest. Only Equatorial Guinea and Guatemala invest less. Given our many dvantages, this points to enormous wasted potential.

Unsurprisingly, the assets of the large listed non-financial corporations are nearly double GDP, as one would expect in a middle-developing country. By contrast, and more surprisingly, the assets of the 700,000 unlisted small formal businesses are only a third of the GDP, but they create more jobs and more value add than the large corporations. Imagine what could happen if this credit-starved sector had access to more capital.

It is noteworthy from the above table that the assets of banks and institutional investors were both nearly the size of the GDP by 2024. This is where some of the largest pools of capital for potential new investments can be found. DM

Mark Swilling is Professor of Urban Innovations in the Centre for Sustainability Transitions, Stellenbosch University. He is also a Commissioner on the National Planning Commission, but writes in his academic capacity.