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.

Finweek English Edition - - OPINION - Editorial@fin­week.co.za Tu­misho Grater is an eco­nomic strate­gist at No­vare Ac­tu­ar­ies and Con­sul­tants.

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.

Malusi Gi­gaba

Duma Gqubule

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