Nationalise Bank and target development

SA must nationalise the Reserve Bank. But there is no point doing so if the government does not also scrap inflation targeting and change the mandate of the Bank to include growth as well as employment.

The composition of the monetary policy committee must also be changed to include members of civil society and create a developmental central bank that serves the people of SA. There are only eight countries in the world, including SA, that have not nationalised their central banks, according to a paper by Wits academic Jannie Rossouw.

SA’s Bank has two million issued shares that trade at about R10 each. The shares are worth only R20m. Since the shareholders only get a dividend yield of 1%, it is clear that making money is not their major motive.

If the government offered them a large premium, say R50 a share — which would still value the Bank at only R100m — the majority would sell their shares. The lunatic fringe who believe they have a right to the Bank’s gold and foreign exchange reserves could take their matter to court.

Over the past three decades, the Bank has mismanaged monetary policy and caused recessions. During the late 1980s, it increased the former bank rate by 850 basis points to 18% and plunged the economy into its deepest recession since the Great Depression of 1929.

GDP per capita declined for four consecutive years between 1990 and 1993.

Between May and August 1998, in the wake of an emerging markets crisis, the Bank hiked the repo rate to 21.85% from 15% in a futile attempt to defend the rand. GDP per capita plunged by 1.6% during the following year.

Between June 2006 and June 2008, the Bank increased interest rates by 500 basis points to 12%.

While almost every central bank in the world cut rates after the start of the global financial crisis in June 2007, the SA Bank continued to raise its rates. GDP declined by 1.5% during the following year, while 153 emerging and developing countries grew by 2.9%.

Between 1994 and 2008, SA had an average real interest rate of 9%.

The time has come to develop a new monetary policy framework and stop the Bank’s obsession with controlling inflation in the midst of the country’s worst post-apartheid economic crisis. By definition, there are no demand-side inflationary pressures in an economy that is in a recession.

In the fast-growing Asian Tiger countries and China, central banks used multiple monetary policy tools to achieve multiple targets and objectives. The wider range of policy tools went far beyond the Keynesian approach of using interest rates to control aggregate demand and inflation. Interest rates were used as a last resort.

The policy tools included reserve requirements, capital controls, credit quotas and differential interest rates. The macroeconomic policy targets included economic growth, employment, the exchange rate and inflation.

Therefore, inflation targeting with one policy tool and one target is not appropriate for a developing country that seeks to catch up with developed countries. There is a need for close co-ordination of monetary, fiscal and industrial policies. This has implications for the mandates and independence of central banks.

In New Zealand, which was the first country to implement inflation targeting in 1989, the new labour government has added an employment mandate to its monetary policy objectives.

A developmental central bank can get involved in financing government debt or directing capital to different sectors of the economy. It can become the most important institution for economic development in the country.