How law restricts Masondo’s proposal for Bank purchases

The Reserve Bank exists in terms of legislation. It was originally established in for terms the of existence the Currency’and of SA s Banking Act of 1920, and now exists in terms of the SA Reserve Bank Act of 1989.

This legislative provision central bank is confirmed in the constitution, which states in section 223 that the “SA Reserve Bank is the central bank of the republic and is regulated in terms of an act of parliament”.

In section 224 the constitution says the “primary object of the SA Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth ...”

This constitutional provision is embodied in an inflation target of 3%-6% per annum, which was agreed between the government and the Bank. The implication is clear: the Bank must use the monetary policy instruments at its disposal to achieve the inflation target.

It cannot decide to adopt another policy objective, for instance the stabilisation of the exchange rate or any other random policy objectives as the environment changes over time. Any change to the policy objective must be agreed between the government and the Bank.

The SA Reserve Bank Act sets out the policy instruments at the Bank’s disposal and deals with matters such as its governance and financial accounting. The act empowers the central bank to discharge monetary policy and allocates certain unique powers to it — for instance, the power to make, issue and destroy banknotes and coins.

Despite the wide-ranging powers the Bank derives from the act, there are certain limitations to its powers. As the Bank exists in terms of legislation, the central bank can only operate within these confines. Of particular importance is section 13 of the act, which not only limits its powers but explicitly prohibits certain actions.

One of these (section 13f) states that the Bank may not “hold in stocks of the government of the republic which have been acquired directly from the Treasury by subscription to new issues, the conversion of existing issues or otherwise, a sum exceeding its paid-up capital and reserve fund plus onethird of its liabilities to the public in the republic”.

This is a clear limitation on the powers of the central bank to purchase stock (which means in this context bonds or other securities) directly from the government in the primary market. The value of securities purchased directly is limited to the total value of the three aspects highlighted above.

This legal limitation is important in view of the recent support promised by deputy finance minister David Masondo for any initiative by the Bank to buy securities directly from the government. This objective can only be attained within the limitations of section 13f.

Any amendment to section 13f requires a parliamentary process. The requirements of this section cannot be amended simply based on an agreement between the relevant parties. In the parliamentary process, it will also be necessary to ensure that any changed wording in the SA Reserve Bank Act is aligned with the provisions of the constitution.

However, the legal provision in respect of the primary market does not impede in any way the operations of the Bank, and Masondo’s stated objective can be achieved in a different way. The central bank can buy any amount of government securities in the secondary market from other financial institutions.

WIDE DISCRETION IN THE LEGISLATION HAS ENABLED THE BANK TO MAKE BIG CONTRIBUTIONS TO MITIGATING THE COVID-19 EFFECTS

There is no limit on the value of government securities the central bank can hold, merely a limitation on its ability to acquire directly from the government. The wide discretion within the legislation has enabled the Bank to make a major contribution to mitigating the effects of Covid-19 on the economy. This includes a reduction in the repo rate to 4.25%; daily rather than weekly repo auctions to ensure further liquidity in the financial system, especially the banking sector; and large purchases of government bonds in the secondary market.

This is confirmed by the Reserve Bank’s most recent published statement of assets and liabilities (dated March 31 and issued on April 7). It shows that the Bank’s holdings of SA government securities increased by more than R1bn between February 29 and March 31, an early major injection of liquidity to financial markets. The policy is likely to be rigorously implemented until the economy begins to recover from the effects of Covid-19.

Rossouw, a former Reserve Bank deputy GM responsible for currency management, is interim head of the Wits Business School.