The SA Reserve Bank: Not necessarily the next domino to fall
Since the recent Cabinet reshuffle, concerns around the Reserve Bank’s future independence have been raised. However, these may be misdirected.
thestrength of South Africa’s institutions has historically been an important source of support in its creditworthiness. It has helped nurture a policy framework that has generally been viewed by credit rating agencies as effective in containing fiscal and macroeconomic imbalances. Following the most recent Cabinet reshuffle, National Treasury vowed that the institution would stay the course of its fiscal policy trajectory outlined in the 2017 Budget and continue to implement reforms to improve governance in stateowned enterprises.
Implementing radical economic transformation, according to finance minister Malusi Gigaba, includes programmes that are focused on creating jobs‚ addressing poverty and inequality (all of which will require a substantial amount of funding) and this may put pressure on the finance ministry’s target of fiscal consolidation, especially given that the credit rating downgrades have essentially increased the government’s cost of borrowing. In its recent credit review of South Africa, global rating agency Fitch expressed the view that the Cabinet reshuffle may have weakened Treasury’s ability to resist departmental demands for increased spending. The recent political moves have raised a few question marks around the issue of independence and policy continuity of key institutions.
The Constitution proclaims the need for the independence of the South African Reserve Bank (SARB) and shields it from biased interference, however, the monetary authority in the country consists of the SARB and the finance ministry-controlled National Treasury. It has, therefore, come as no surprise that the debate regarding the independence of the SARB has been reawakened. There are concerns that the pursuit of the radical economic transformation agenda may lead to the finance department making demands on the SARB to relook its monetary policy framework. This fear, although valid, may be challenged based on the current structure and legislation that governs the SARB.
The relationship between the SARB and the finance department is of such a nature that the governor holds regular discussions with the minister of finance and meets periodically with members of the parliamentary portfolio and select committees on finance, meaning the SARB is ultimately accountable to Parliament. However, in terms of section 224 of the Constitution, the central bank must perform its mandate independently, even if this may result Minister of finance Centre for Economic Development and Transformation in a disregard of the minister’s requests. The governor has stated in several speeches and public addresses that the SARB will execute its primary objective independently without fear, favour or prejudice.
In recent years, the SARB has been the subject of increasingly forceful and public demands from various institutions leading to perceptions that the SARB’s authority and independence may be under threat. For instance, in 2010, Cosatu called for a reduction in real interest rates as, in its view, this would make South Africa more competitive. More recently, in 2016, the founder of the Centre for Economic Development and Transformation, Duma Gqubule, advocated for the SARB’s mandate to be changed to include growth and unemployment and that the composition of the Monetary Policy Committee (MPC) should include members of civil society. The rationale behind this stance being that effective economic policy requires close coordination of monetary, fiscal and industrial policies.
Perhaps to understand the adoption of this practice by the SARB a look at its merits may be warranted. The Reserve Bank of New Zealand was the earliest adopter of an inflation-targeting regime. Many other central banks have since followed suit, such as the US. New Zealand’s inflation rate, which peaked at nearly 19% in May 1987, is now 2.2%. The US has achieved similar success, driving inflation from a 14.5% peak in May 1980 to a current rate of 2.4% year-on-year (YOY) in March 2017. Even many developing economies now target inflation successfully. For example, Indonesia’s inflation rate was over 82% in late 1998 but is now around 3.6% (YOY in March). However, in today’s world one simply cannot ignore the reality that inflation targeting does have its limitations and, as the SARB also acknowledged, monetary policy cannot contribute directly to economic growth and employment creation in the long run.
Given the heightened political tensions and government pushing for inclusive economic growth through radical economic transformation, it may be tempting to equate any future changes in the SARB’s monetary regime (whether probable or not) to a potential weakening of the institution’s independence. It is important to remind ourselves that over the years, monetary policy regimes have come and gone. Before inflation targeting, there was the gold standard, pegged exchange rates, and then monetary aggregate targets. So, in essence, a policy regime change will be nothing new.
In terms of section 224 of the Constitution, the central bank must perform its mandate independently, even if this may result in a disregard of the minister’s requests.