AN INFLATED ISSUE
The Reserve Bank’s function has become a matter of debate recently, but the constitution clearly says what its role is and the law stipulates what its shareholding structure should be
Calls for nationalisation of the Reserve Bank have become louder since the release of public protector Busisiwe Mkhwebane’s report on the apartheid-era Absa/bankorp rescue, which recommends that Absa pay back over R1bn in assistance received from the Bank.
Mkhwebane also recommended that the Bank’s constitutional mandate be changed to focus on the “socioeconomic wellbeing” of all citizens.
In a paragraph that appears to contradict itself, Mkhwebane reopens the nationalisation debate, saying: “Leading authors advocating and pointing to the ideology of state banks and nationalisation of monetary currency believe that the notion of the lender of last resort’s status that is inherent to central banks internationally would cease to exist if governments take sole power in creating money through the establishment of state banks.”
It adds to years-long calls from trade unions and, lately, from finance minister Malusi Gigaba’s adviser, Chris Malikane, to nationalise the Bank, which has shareholders who may not hold more than 10,000 shares individually or in tandem with associates.
Bank governor Lesetja Kganyago says Mkhwebane’s recommendation is unlawful and exceeds her powers. He has applied to the high court in Pretoria to have it set aside.
“We do not believe the Bank’s mandate will actually be amended in accordance with the public protector’s recommendation. Section 224 of 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.’ ”
After the adoption of the constitution in 1996, inflation — which erodes the value of the currency — was at 6.9%, but it dropped steadily until there was a spike in 2002. The Bank officially adopted an inflation-targeting framework in 2000, aiming to keep the number within a 3%-6% range.
The inflation rate has inched out of its target range six times since then.
“Average inflation has been lower than in the decade before the introduction of inflation targeting, and interest rates, both nominal and real, have been lower,” says Kganyago. “The volatility of inflation and real interest rates has also been much lower.”
This has affected government’s cost of financing the budget deficit, as long bond yields are also lower, giving the state more buying power.
The Bank has kept its ownership structure unchanged since its formation in 1921, when most central banks around the world had private shareholders. Some governments were compelled to take over when monetary shortages occurred during the Great Depression of the 1930s and after World War 2.
The Bank of England is one of these. Nationalised in 1946, it is a lender of last resort, but it has held a monopoly on issuing currency since its founding in 1694. Today, it is wholly owned by the UK treasury.
Says a spokesman: “The Bank of England has operational independence from government. It gives us our target – 2% inflation – but we have the duty to decide how to fulfil
“The Bank’s independence is, in part, overseen by parliament in the form of a cross-party group of MPS. Members of the policy committees have an explicit duty to demonstrate their independence.”
Other banks’ shareholders vehemently opposed nationalisation. In Switzerland, for example, most of the Swiss National Bank’s shares are held by government, with the rest split between private individuals, subdivisions of the country and banks based in those divisions. Its transfer to state hands has been fiercely opposed, mainly in the Swiss Chamber of Commerce & Industry.
It was the chamber that proposed the ownership model, which does not “allow for state socialism or public control of credit policy”, says bank archivist Evelyn Ingold.
“The Bank’s status as a special-statute joint-stock company, with a significant proportion of shares held by private shareholders, was a broadly accepted compromise.”
Ingold says private shareholders play a subordinate role, with their voting powers restricted by law. “The general meeting of shareholders has no power to influence central bank policy, and the supervisory and controlling bodies have no authority to intervene in the Swiss National Bank’s management.”
So it is in SA, too, where the Bank’s shareholding structure is dictated by the SA Reserve Bank Act, says Kganyago.
“It is said that shareholding in central banks at least provides some transparency, general public participation [and] understanding of central bank business, and plays an important role in strengthening corporate governance over the central bank,” he says.
Shareholders are allowed to appoint seven of the 15 directors on the Bank’s board, with candidates nominated by the public, serving directors and shareholders themselves. Government appoints the remaining directors.
“Shareholders . . . have very limited powers and are unable to set or influence monetary policy or the management of the Bank,” says Kganyago. “The [board’s] powers, which relate to corporate governance only, are set out in the Reserve Bank Act.” it.