ANC to discuss Reserve Bank’s mandate
Deputy finance minister, Sfiso Buthelezi, recently questioned the relevance of inflation targeting in the local economy.
deputyminister of finance Sfiso Buthelezi has called for a debate on the merits of inflation targeting in South Africa, saying that while the policy may have been appropriate when it was introduced 17 years ago, it may not be helpful at a time when the economy has tipped into a recession.
His remarks during a panel discussion at the Gordon Institute of Business Science (GIBS) will add to concern over possible changes to monetary policy after Public Protector Busisiwe Mkhwebane spooked financial markets on 20 June by suggesting that the country’s Constitution be altered to change the Reserve Bank’s inflation targeting mandate.
“We arrived at this 3% to 6% inflation band under different economic conditions […] do you think that perhaps under these trying economic conditions we need to revisit that? Is this relevant for all seasons?” Buthelezi said.
“There are issues which we must discuss, then let’s allow a superior argument to win […] economic policy is not gospel truth, it changes, it’s dynamic and it gets affected by a number of factors.”
Buthelezi pointed out that other central banks around the world had dual mandates, which also targeted growth and unemployment. But he did not mention the fact that all of these issues had been discussed and extensively researched ahead of the introduction of the inflation targeting framework, which is a policy set by the National Treasury.
The Reserve Bank has said that the Public Protector’s prescribed remedial action for its mandate would have a negative impact on its independence, and that its legal team had advised that the step fell outside her powers and was unlawful. It has since brought an urgent application before the North Gauteng High Court to have the action set aside.
Disparate views on inflation targeting
Deputy minister of finance Buthelezi insisted that Treasury believed in the independence of the Reserve Bank but that neither it nor the Public Protector had acted outside of their mandates. Although he maintained that he did not have a view on whether inflation targeting should be scrapped, his comments suggested otherwise.
“There’s a school of thought that says inflation targeting might be good for developed markets which don’t have the challenges we have but are very bad for an emerging economy like ours,” he said. The higher interest rates, used to keep inflation low, raised the cost of financing for both small business and government, and there was an inverse relationship between interest rates and investment, he stated.
“The list goes on and on […] it chokes aggregate demand and chokes economic growth.”
Argon Asset Management economist Thabi Leoka, who was part of the GIBS panel, said there was a need for more understanding of the role of the Reserve Bank and the value of low inflation, which she pointed out is strongly linked to economic growth and has been adopted by most emerging markets.
Policy conference to address mandate, land reform
Buthelezi said Treasury had not taken a view on changing the Reserve Bank’s mandate, but the issue would be one of those discussed at the policy conference of the ANC, which started on Friday 30 June. He emphasised that economic policy was not decided by any individual, and slated credit rating agencies for citing President Jacob Zuma’s Cabinet reshuffle at the end of March as a reason to expect change. Standard & Poor’s, which downgraded SA’s sovereign rating to junk after the reshuffle, warned late in June that any significant changes to the Reserve Bank’s mandate that weakened its policy flexibility and independence would be likely to lead to rating action. Buthelezi said another controversial topic, the issue of land expropriation without compensation, would also be discussed at the conference. “The fact of the matter is that ‘willing buyer, willing seller’ doesn’t work […] the question is what do we do about it.” There is mounting concern in the business and investment community that Zuma and his backers are pursuing populist policies that will ultimately hurt the economy and its poor majority in a bid to boost voter support and win the leadership contest at the ANC’s elective conference in December. Mampho Modise, chief director of policy and risk management at Treasury – who was also on the GIBS panel – said that the economy’s slow pace of growth would make it difficult for Treasury to collect the tax revenues needed to continue with its policy of consolidating debt. “We will hope that things turn around and we will continue to do what we can do as government to make sure that we don’t misbalance the growth and the fiscal consolidation,” she said.