Public Protector takes aim at Reserve Bank
Busisiwe Mkhwebane’s call for changes in the Reserve Bank’s mandate would undermine its indepedence and trigger more credit ratings downgrades.
public Protector Busisiwe Mkhwebane’s shock proposal to change the mandate of the South African Reserve Bank (SARB) amounts to an attack on the independence of an institution seen as the last remaining bulwark against state capture and a volley of credit ratings downgrades, which would wreak havoc on the country’s fragile economy. Her call to scrap the SARB’s inflation targeting framework – which protects the value of the rand – knocked the currency more than 1.5% weaker against the dollar, taking it back through the key R13/dollar level as financial markets digested the threat to one of the main cornerstones of South Africa’s global financial credibility.
Coming on the heels of a new Mining Charter seen as unworkable by investors, the wording of Mkhwebane’s proposed changes to the SARB’s mandate bears the hallmark of the radical economic transformation being touted by the government and the ANC as the main solution to the country’s problems. (Also see page 14.)
It has also added to the policy uncertainty weighing on SA’s credit ratings and dealt yet another blow to dismal business confidence, which has stifled investment and tipped the country into a technical recession that could last for the entire year.
ANC secretary general Gwede Mantashe added his voice to criticism that the Public Protector had overstepped her authority and was not legally entitled to ask the portfolio committee on justice and correctional services to introduce a motion in Parliament to change the wording of the SARB’s mandate in the manner she suggested.
Mkhwebane wants to remove the clause in the Constitution which says that the SARB must maintain price stability to achieve balanced and sustainable economic growth, replacing it with one saying it must promote balanced and sustainable growth “while ensuring that the socio-economic well-being of the citizens are protected”.
This overlooks the fact that keeping inflation low benefits the poor the most, and would open the door to interest rate cuts which would fan inflation while at best only providing a short-term boost to growth.
“For me it’s quite strange that those comments were made,” said FNB chief economist Sizwe Nxedlana. “You should fix things that are broken, not things which are not broken. Monetary policy is working – that’s not where the issues are.”
The change could also allow the SARB to monetise government debt – which in basic terms means print money to meet those obligations. That would be convenient for the government at a time when the country looks set to miss its fiscal targets, but it would also be inflationary and have devastating long-term economic consequences. Unfortunately, that appears to be exactly what Mkhwebane has in mind. In one of the sentences leading up to the proposed mandate change, she says that the status of central banks as a “lender of last resort” would cease to exist if governments took sole power of creating money through the establishment of state banks. Once this happens, “numerous benefits aimed at alleviating economic ills of ordinary economically disadvantaged people may be achieved, unlike our current purely commercial transaction system, which only seeks to improve a particular financial sector”. She followed up by saying in a radio interview the next day that the SARB “should be benefitting everyone and making sure that South Africans are enjoying the benefits of democracy” but that “in this particular instance it’s only […] serving a few commercial interests”. The SARB has responded to the proposed change in its mandate by saying the step would have a negative impact on its independence, and that it would bring “urgent review proceedings” to have the action set aside in court. It also said it would address the “factual inaccuracies” in her report at the appropriate time. Analysts see little chance that the SARB’s mandate will change anytime soon as ultimately it would have to be passed by an overwhelming two-thirds majority in Parliament. Nomura emerging-market economist Peter Attard Montalto believes that minister of finance Malusi Gigaba could achieve that result simply be sending a letter to the SARB – but he sees that outcome as unlikely. Nonetheless he adds: “The very fact that this issue has been raised and the SARB dragged into the debate is negative.” Moody’s warned on 19 June that news from the Bureau of Economic Research showing that business confidence was at its lowest level since the 2009 financial crisis was a “credit negative” and reflected ongoing uncertainty about future political leadership in the ANC and the policy priorities of the new leader. Moody’s is the only top global rating agency that has kept SA’s sovereign credit rating at investment grade, albeit on the lowest level and with a negative outlook. When it downgraded the country earlier this month it warned that it would take the step again if there was further evidence that the “strength and the independence of the country’s institutions” was being undermined, or that the policy framework had become even less predictable or shifted in a way that would undermine economic or fiscal strength.
Busisiwe Mkhwebane Public Protector