Beware the ‘invisible hand’ – Stals
Market may drive Reserve Bank ‘back to basics’
CHRIS Stals, the man at the centre of South Africa's deepest political and economic crisis in modern history, has warned of the “invisible hand” that could force an errant government back to basic economic market principles.
Stals steered the country's monetary policy through stifling exchange controls and crippling economic sanctions and ushered the Reserve Bank through the dying years of apartheid and into the dawn of a democratic South Africa.
As the Reserve Bank celebrates its 96th year, the oldest central bank in Africa faces rising political pressure from a very fractured governing party.
It also faces an economy in its second recession in less than a decade and foreign currency bonds downgraded to junk status.
Even in the face of these pressures, it is meeting its core mandate of keeping inflation within the bank’s 3% to 6% target band. Interest rates are nowhere near the stifling highs of the late 90s. Despite this, the public protector joined calls by detractors to remove its requirement to protect the value of the currency in favour of stimulating economic growth.
It’s a canvas that is all too familiar to Stals, who was director-general of the department of finance when PW Botha delivered his infamous Rubicon speech on August 15 1985, and sent the rand plunging. Stals was appointed Reserve Bank governor in 1989.
“In those days we didn’t have a mandate … just about all central banks in the world had one major objective: that was to get rid of the worldwide inflation problem,” Stals said in an interview with Business Times.
“But [growth] was never a function.”
Botha’s reluctance to implement reforms attracted harsh economic sanctions, a 1985 debt crisis, sustained foreign capital outflows and caused the government to curtail shortterm borrowing.
South Africa has experienced similar volatility in exchangerate levels and confidence since President Jacob Zuma’s abrupt firing of former finance minister Nhlanhla Nene in December 2015. The political tensions of recent months – including revelations about corruption in the public sector – have only made the situation worse.
Economic prospects are cloudy, much like the economic uncertainty following Botha’s speech and the longest recession since World War 2, which lasted from 1989 to 1993.
But Stals said conditions were markedly different, giving him hope that there is light at the end of the tunnel.
At the time he was appointed, capital had drained out of the economy and foreign reserves were scarce. Inflation skyrocketed to double digits. The Reserve Bank had attempted to quash this by raising the prime lending rate to more than 20% for the first time in 1981 and to 25% in 1985.
“Monetary policy objectives were very much directed towards getting inflation down,” Stals said.
In 1985, the declining value of the rand pushed debt to 50% of GDP, similar to current levels.
Today, Stals said, the central bank can afford to be “sympathetic” to the need for growth as it is not faced with the same inflationary pressures.
But he cautioned that “it must not be your first and only main objective that you are going to promote economic growth by creating money [to finance economic growth] … that is a disaster. It can only end in uncontrollable inflation.
Whenever the stimulation created inflationary pressures, the bank had to be free to withdraw immediately and switch to its primary objective of protecting the value of the currency, he said.
Stals said he appreciated the need for the current government to intervene in the economy and market system but “even with very substantial interventions for good political and social reasons, never forget the principles of a market economy … the invisible hand is going to work. If you apply restrictive measures in the economy, it's going to affect demand and supply.” — TMG