Inflation-targeting is good for all of us
Higher interest rates won’t create jobs
THE POLITICAL and economic discourse in South Africa over the past few weeks reminds me of the first stanza of the poem Desiderata, which goes as follows: “Go placidly amid the noise and the haste, and remember what peace there may be in silence. As far as possible, without surrender, be on good terms with all persons, speak your truth quietly and clearly, and listen to others, even to the dull and ignorant; they too have their story.”
Many South Africans, including me, were not impressed by Public Protector Busisiwe Mkhwebane’s meddling in the Constitution. She acted ultra vires, going beyond her constitutional and legal mandate and straying into matters that are outside her domain.
On Monday, Mkhwebane recommended that the government amend the Constitution in order to change the mandate of the South African Reserve Bank (Sarb).
She was in the wrong legally and economically. It is therefore not surprising that both Absa and the Reserve Bank have said they are going to challenge her report on the Bankorp bailout.
Her meddling has even been strongly condemned by the African National Congress, with the party’s treasurer-general, Zweli Mkhize, stating that the issues she raised in her report could, correctly, have been placed on the agenda of the ANC’s forthcoming policy conference(s).
The Congress of South African Trade Unions was the only significant member of the Tripartite Alliance to come out strongly in favour of the Public Protector’s meddling.
This article is, however, not about criticising Mkhwebane. That aspect would remain a point, in legal speak, in limine, where people challenge a case purely on technicalities rather than on the merits of the pronouncements themselves.
Let me focus on the merits of Mkhwebane’s pronouncements.
She says Parliament must amend legislation and the Constitution in order to change the Sarb’s mandate from concentrating solely on monetary policy.
As things now stand, the Reserve Bank focuses on the implementation of monetary policy and National Treasury focuses on fiscal policy.
This is not just the outcome of historical arrangements, but is deliberately intended to create a balance in how the country’s economic fundamentals are assessed.
The Public Protector believes the Reserve Bank must not focus only on containing inflation within a band of between 3 percent and 6 percent, but it must also concentrate on reducing the high rate of unemployment.
Decreasing the rate of unemployment – currently 27.7 percent – is indeed a noble goal, and all of us should do everything in our power to attain it. Tackling joblessness is even more important when it is considered that the official unemployment rate excludes “discouraged work-seekers”, which leads many people to assert, justifiably, that the real rate of unemployment is above 38 percent. I can boldly state that, in some rural areas, the real rate of unemployment exceeds 50 percent.
Unfortunately, noble intentions cannot be based on wrong assumptions and/or wrong policies. Mkhwebane’s pronouncements are based on the view held by Cosatu and other “leftists”that, if the mandate of the Reserve Bank was changed, it would stop focusing on inflation-targeting and thus presumably allow the money supply to increase. This politically attractive theory, without necessarily taking the real economic fundamentals into account, is one of the reasons Zimbabwe is a failed state. Zimbabwe does not even have its own reliable currency.
The Sarb focuses on controlling the inflation rate to ensure that people’s money has real value, giving citizens the space to use their disposable incomes effectively.
Perhaps I should not assume that everyone knows what inflation means. Let me explain for the benefit of those
If we allowed our inflation rate to rise to 24 percent, as happened in the late 1990s, people’s buying power would be significantly curtailed.
who may be unsure. If the inflation rate is 6 percent, it means you need 6 percent more money to buy the same basket of goods as you did last year.
If we allowed our inflation rate to rise to 24 percent or thereabout, as happened in the late 1990s, people’s buying power would be significantly curtailed.
Do you remember the number of violent strikes in those years, when employees demanded exorbitant salary increases of over 30 percent? That led to many businesses retrenching staff, and some were forced into liquidation.
The reality of monetary policy and fiscal policy is that countries must continuously engage in trade-offs between austerity and false prosperity. There is no statistical evidence to support the assertion that higher interest rates create more job opportunities.
In my everyday capacity, I have observed how hundreds of thousands of consumers are forced to go to debt counsellors to apply to have their credit agreements re-arranged, because they cannot cope with their debt-repayment obligations. This is precisely why the trade sector figures for the first quarter of this year showed a negative growth rate of over 4.9 percent, which contributed significantly to the country entering a technical recession.
And this is happening in an environment where the inflation rate is within the target range of three to six percent and the repo rate is at 7 percent. Can you imagine how worse the situation would be if interest rates were at 28 percent, as we experienced in the not-too-distant past?
If you were seriously inconvenienced and irritated by the recent taxi blockades, which took place because the industry was protesting against being charged an interest rate of 28 percent, think where we would be if our monetary and fiscal policies did not prescribe maximum interest rates. Professor Dumisa is an independent economic analyst and an advocate of the High Court of South Africa.
Public Protector Advocate Busisiwe Mkhwebane briefs the media.