500 Billion rand Stimulus Package: Is this Helicopter Money?
South Africa’s President Cyril Ramaphosa announced a 500 billion rand stimulus package to help the economy during the economic crisis caused by corona virus. Every other country is doing it. Where does this government get this money from. Is it helicopter money?
Think of this. What if a helicopter could fly around your neighborhood dropping cash? You would pick it up and spend it right? Because , you obviously think its a once off thing that will never happen again. Sounds like a fairy tale. Well, not in the 2020 world hit by corona virus.
Lately, the term helicopter money has been thrown around in serious monetary policy discussions. Financial analysts are worried. You know these okes, they are douche-backs who are against the idea of free money. They are pointing out that this magnitude of fiscal and monetary activity might be inflationary using the argument that too much money chasing too few goods only results in price increases. They point to the fact that the economy is under lockdown with very little economic activity taking place. Giving people free money to spend is not really going to boost economic output because are not working. They want the economy to be opened up as soon as yesterday so that people can go to workplaces and “work” for their money.
On the other hand, monetary economists are romanticizing the idea of helicopter money. Instead of scaremongering , they are beaming a message of hope that says helicopter money is actually good for the economy because it carries us out of a deep slump.
What is helicopter money?
Helicopter money , is a term used to refer to unconventional polices of monetary expansion. Milton Friedman used the term in parable that explained how monetary expansion can act as a shock that can pull a struggling economy out of depression. Helicopter money involves printing money and distributing it directly to the public.
Lets look at the numbers for SA stimulus package:
- ZAR 500 billion historic stimulus package
- Approximately USD26 billion
- 10% of GDP
- 40% of annual tax revenue
- 130 billion to come from the existing budget (i.e budget reallocation)
- 370 billion to be raised from World Bank, New Development Bank, IMF , AfDB
So is this Helicopter Money
For the stimulus package to be called helicopter money it has to have these attributes:
- Use of Funds — Freely given to people
- Source of Funds — Money printed by the central bank
South Africa’s stimulus package will be spent in this manner:
- 200 billion in loans to companies
- 300 billion in public expenditure on social welfare, municipalities, healthcare efforts to fight COVID, grants, etc.
200 billion in loans to companies is not exactly free money. Its just a loan facility that companies can apply for. Even though its new money being pumped into the economy , and thus potentially inflationary, it does not fit into the proper description of Helicopter Money because it is not free. Companies will eventually have to repay the loans. When you take a loan , you are apparently borrowing from someone but effectively borrowing from your future. Its not free money. Defaults will obviously be massive under this scheme as some companies might not make it even after getting these loans. The government takes the ultimate loss, not the banks. The Loss Given Default (LGD) is essentially free money. If the LGD is 30%, then 60 billion of the loan facility is helicopter money.
300 billion earmarked for social welfare is by and large the textbook definition of free money. Most of it will be given directly to citizens who are suffering from the lockdowns. Its free money. You don’t have to work for it. This is helicopter money, the slight difference is it will not be dropped by a helicopter but will be dropped into your bank account, or will come through your phone as a voucher or any other electronic form.
The second qualifying criterion is that it has to be “printed” by the central bank. “Printed” in this context takes the meaning of new money being created out of thin air by the government. It is a direct increase in money supply.
The SA government says 130 billion rands is not new money, its tax collections for the year that was budgeted for other things (e.g road construction) and will now be reallocated towards the stimulus package. Okay, we accept what they are saying even though the actual tax collections for this year will obviously be way lower than forecasted per the original budget because there is very little economic activity taking place. If tax revenues are way lower than expected, this budget deficit could be monetized through SARB. If you don’t know what Monetization of a Budget deficit means ,ask Zimbabweans.
The remaining balance of 370 billion rands will be sourced from international financial institutions in the form of loans. At this point, it is not being “printed” by the central bank. However, when the country struggles to make repayments (remember dollar-loans are repaid in dollars), the central government might be forced to approach the central bank which will have to “print” rands in order to buy dollars in the market. This eventual “printing” will fulfill the criterion for helicopter money.
Whether the stimulus package is helicopter money or not is really a matter of time horizon. In the long run,most factors point towards helicopter money and in the short run only 130 billion appears to be helicopter money.
To summarize without sanitizing the process of government getting loans and giving loan facilities to business, the stimulus package is helicopter money. Whether helicopter money is good or bad is food for thought.
Enter, enter, space bar, space bar.Shift the focus.
Helicopter money could be the beginning of Universal Basic Income.
Ciao!
