'You are almost making policy in the dark': SARB governor Kganyago on managing Covid-19

South Africa's economy is unlikely to go back to normal in the next two to three years – and the meaning of "normal" is also up for interpretation, Reserve Bank Governor Lesetja Kganyago has said.

In an interview on Fin24 Speaks on Friday morning, Kganyago said that the Covid-19 pandemic had produced a "tricky" environment where policymaking had become very complex.

"You are almost making policy in the dark," he said. "The world economy will not be the same again. The South African economy will not be either… What used to be normal is not going to be the normality we return to."

It is still unclear how many years it will take to return to a "post-Covid economy", he added. Rather, it will be more useful to learn to manage the changing circumstances.

SA - which has had its sovereign credit rating downgraded to junk by all three major credit rating agencies - is facing its deepest crisis since the 1930s as a result of the economic shock of the coronavirus pandemic, which struck as the country was already in recession. The Reserve Bank has already warned that SA's financial system must brace for further "extraordinary shocks".

The JSE All-Share Index lost 12% in the first four months of 2020, while the JSE Financials Index, in which banks, insurance and investment firms fall, dropped 32% by the end of April, according to data released by the central bank this week.

Treasury, meanwhile, has forecast that the economy could, at worst, contract by as much as 16% this year, while the SA Revenue Service has warned that the stalled economy could mean tax loss of up to R285 billion.

"As we stand now, we have got to learn how to manage this economy in the context that we are faced with the Covid challenge. After they find a vaccine or cure, we are going to have to live with this Covid," Kganyago said.

Recovery will require both fiscal policy and monetary policy to work together, he said, adding that he and Finance Minister Tito Mboweni frequently speak several times per day. 

But, he stressed, the Reserve Bank remains independent.

"[Minister] Tito [Mboweni] is the fiercest defender of central bank independence," he said. "If you thought I am, you must check Tito Mboweni.

"In the interactions that I would have with him, he will say, 'Remember you are a central banker. You must stay in your lane.' That counter from a minister of finance … is exactly what you need to have an effective coordination of fiscal and monetary policy."

For his part, he added, he "will not pronounce about fiscal policy, as tempting as it is."

So far, nearly R1 trillion in Covid-19 interventions have been proposed by National Treasury and the Reserve Bank, including a R200 billion loan guarantee scheme and R70 billion in tax relief.

But Kganyago was quick to note that the coronavirus crisis is primarily a health crisis, and the response must be health-driven. In this respect, South Africa's government took "absolutely the correct route", in his view.

However, he also said it was a "false dichotomy" to argue that there was a choice between human life or the economy.

"The economy is about people. It is about their needs, wants and desires," he said.

"Every crisis changes the way we live, the way we see life, the economy and so forth."

Explaining the secondary aspect of the pandemic – namely the economic crisis – Kganyago said there were several key elements.

"This health crisis led to an economic shock," he said. The economic shock was of both a supply and demand nature. Firstly, global supply chains were disrupted and, secondly as lockdown kicked in, this induced domestic supply shocks. Declines in income then introduced a demand shock.

Then there was also a financial portfolio shock. Global financing conditions tightened, and capital started flowing out of emerging markets to the US dollar safehaven.

"The manner in which you are going to respond – you have to respond to all these shocks at the same time," Kganyago said. "From where I am sitting as a central banker, it is very clear. When you are facing a demand shock, monetary policy has got a lot of space to deal with a demand shock. You provide relief to businesses and firms…

"If there is a supply shock, you need fiscal policy to respond on the other hand, you have to take other economic measures."

He stressed that SA cannot simply mimic the response of developed nations. "We must say, 'What are the circumstances they [the US] are facing and what are the circumstances we are facing?' We purchase government bonds, which means we are injecting rands into the economy… the Fed [Federal Reserve] is doing the same thing, buying bonds and putting dollars into the market.

"Guess what? As they put dollars into the market, everyone in the world is buying dollars. But everyone is not buying rands. There are limits to what we can do in terms of injecting liquidity into the system," he said.

"The steps we have taken, have been taken prudently and not recklessly."

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