A key institution -- but Zuma has the keys

FIRST, the bad news. And then the really bad news. The monetary policy committee of the Reserve Bank has raised the repo rate by 50 basis points.

In English, that means it is going to cost your commercial bank half of one percent more to borrow money from the central bank. It means the loan repayments on your car, house, university studies or whatever are going to go up.

It means you are a little poorer today than on Thursday morning.

You would have some relief if you owned shares on the JSE, which generally rose on the interest rate announcement, or if you are an importer, because the rand also strengthened on the news.

But raising interest rates in a declining economy is not good. A day after our rates went up, the Japanese cut theirs to below zero, would you believe, to try and persuade people there to borrow and spend more.

We are not Japan, though. We don’t save, and savings are the only thing that finance investment. But whose savings? Ours or someone else’s?

We tend to use other people’s savings to invest, which is why we have to tighten our belts and persuade the Singaporean doctors, California farmers and German coal miners (or, more accurately, the fund managers who take care of their savings and pensions) that we borrow from to carry on lending us their money.

To do that, we issue bonds into the market and these fund managers buy them. It’s expensive, because they are under pressure to make good returns for their customers. But it’s the only path we have unless we are one day obliged to go cap in hand to the International Monetary Fund for an official rescue.

And if the state’s bonds are downgraded any more, they will be regarded as junk by many of these managers and, by law, they will simply be forbidden to buy them.

We will then have to borrow from the international equivalent of loan sharks, and they are really expensive.

And if you go to the IMF, the interest rates they charge may not be bad, but the conditions they impose could be so harsh as to deprive South Africans of their sovereignty.

This is what happens to governments that don’t pay attention to their economies.

President Jacob Zuma has been especially negligent. A lot of the money we borrow goes straight into the wage packets of people in the employ of an unproductive and bloated public service or, worse, to pay back older loans.

Zuma’s destructive removal of Nhlanhla Nene as finance minister last month has played a huge role in forcing our interest rates up (because it weakened the rand and made the things we import to consume more expensive, which increases the speed of price increases, which is a fancy way of describing inflation) and also in making the interest rate we have to pay to borrow foreign savings much worse.

But that’s not the really bad news. That comes now.

The Reserve Bank is able to raise interest rates because it is independent of the state, or at least of the government.

So it can act without having to pay heed to the political consequences of higher interest rates. This makes the Reserve Bank one of our key institutions, if not the key institution. Its independence is beyond doubt. That, at least, is the theory. The late Karl Otto Pöhl, president of the powerful West German central bank, the Bundesbank, was forced to resign in 1991 after losing a struggle with chancellor Helmut Kohl. Kohl wanted to rush reunification with East Germany for his own political popularity.

To do that he wanted to merge the West and East German currencies at par, one for one, even though the West German mark was much the stronger. Pöhl tried in vain to resist. Similarly, the recently departed Argentinian president, Cristina Kirchner, a few years ago simply fired her central bank governor when he declined to obey an instruction to hand over to the government all the bank’s foreign exchange reserves.

The ugly point being that central bank independence is really nothing of the kind if the politician running the country finds it inconvenient.

Zuma has already told us he doesn’t think he did any damage by firing Nene the way he did.

What might he be capable of if the Reserve Bank’s rising interest rates begin to damage his or the ANC’s election prospects?