If the economic populists in the ANC want a lesson in how ruinous foot-off-the-brake monetary policy can be, here’s a timely lesson from Sri Lanka.
The island is suffering its worst economic crisis since independence in 1948, marked by food shortages, power blackouts of 10 hours a day, and a 60% drop in the value of the rupee in the past month. Last week, its state oil company hiked fuel prices by a third, as its inflation rate rocketed past 21%.
It’s a dystopian, but entirely foreseeable, reality.
What happened is that after President Gotabaya Rajapaksa was elected in 2019, he implemented popular, if short-sighted measures, including tax cuts. The next year, central bank governor Weligamage Don Lakshman unveiled an outlandish plan to deal with the country’s debt: hike the proportion of domestic debt, by simply printing more cash.
“Domestic currency debt — if I may use the term — in a country with sovereign powers of money printing, as the modern monetary theorists would argue, is not a huge problem,” he said.
So, as Bloomberg put it, the central bank “began to run the printing presses day and night”, and money supply grew 42% in less than two years.
Inevitably, the rupee began to lose value. Inflation spiked as the price of imports — such as oil and food — soared. And, big surprise, nobody wanted to buy any of the local bonds issued as part of the new debt plan.
Last September, Rajapaksa declared an “economic emergency”. Today, the country is rationing staples including rice, sugar and milk.
This is the result of Sri Lanka implementing what many in the ANC’s radical economic transformation fringe have advocated: “Modern Monetary Theory” (MMT), in which a state doesn’t raise taxes or borrow to pay its bills, but funds itself by simply printing more cash.
MMT advocates argue, reasonably, that the practice has worked well for the US, which has minted acres of new money since the global financial crisis to “stimulate” the economy.
But the difference is, the US is not a junk-rated developing country battling endemic corruption. The dollar is also the world’s reserve currency; the rand isn’t.
Were SA’s Reserve Bank to try it, the rand would crash, inflation would rocket, and bond investors would head for the hills. Think Venezuela and Zimbabwe.
Yet some in the ANC still tout printing money as the miracle alternative to cutting our coat to suit our cloth. It really is the Magical Money Tree, as far as they’re concerned.
In 2019, (now suspended) ANC secretary-general Ace Magashule suggested SA “explore quantity easing measures to address intergovernmental debts, to make funds available for developmental purposes”. (He meant “quantitative easing”.)
Labour unions too have called for it, as Cosatu did when it asked the FM: “Why borrow, when we can print money?”
But MMT wouldn’t work in SA. The country already carries a high degree of fiscal risk; were it to dabble in quixotic policies, bond investors would lose confidence and the markets would take fright. You’d trigger a chain reaction unlikely to end anywhere pretty.
Sri Lanka has now provided us with a case study of what happens when a modern emerging economy hitches its fortunes to half-baked economic theories. We’d do well to heed the lesson.
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