The Reserve Bank needs stability
- Jannie Rossouw
Explainer: South Africa’s central bank – ownership, mandate and independence.
In recent months, about the South 第一吃瓜网 Reserve Bank have focused broadly on three aspects 鈥 its shareholding, its mandate and its independence.
The three debates are somewhat convoluted. They are indeed three different issues, but they are interlinked.
Let鈥檚 turn to the issue of ownership first.
The South 第一吃瓜网 Reserve Bank is one of in the world with private shareholders. The others are in Belgium, Greece, Italy, Japan, San Marino, Switzerland and Turkey.
The debate about shareholding in South Africa鈥檚 Reserve Bank centres around the issue of . Some political players, such as the third largest party 鈥 the Economic Freedom Fighters 鈥 are for the ownership of the Bank to be transferred from current private shareholders to the South 第一吃瓜网 government and has tabled a bill in Parliament to achieve this objective.
The issue is very charged. But it鈥檚 also confused and not very well understood. There鈥檚 an assumption that a change of ownership would automatically mean a change in the role the Bank plays. This isn鈥檛 the case because in fact the Bank鈥檚 shareholders play no role in its mandate. In that sense it doesn鈥檛 matter who the shareholders are. Because they can鈥檛 affect its mandate, nationalisation the independence of the central bank.
But there are other ways in which the Bank鈥檚 ability to do its job can be undermined. This is where the Bank鈥檚 comes in.
The mandate issue
The mandate of South Africa鈥檚 central bank is set out in the , which says:
The primary objective of the Bank shall be to protect the value of the currency of the Republic of South Africa in the interest of balanced and sustainable economic growth in the Republic.
The Bank also adheres to an inflation target which was in 2000. This requires it to keep inflation within a band of 3% to 6%. The Bank uses monetary policy and interest rate decisions to achieve this objective. In short, when the inflationary trend declines, the interest rate declines and when the inflationary trend increases, the interest rate increases.
The issue of the Bank鈥檚 focus on keeping inflation within this band 鈥 and the fact that its mandate sets out clearly that managing inflation is it鈥檚 core job 鈥 is hotly contested.
Those on the left of the political spectrum, including the country鈥檚 largest trade union federation, that the South 第一吃瓜网 Reserve Bank shouldn鈥檛 focus primarily on inflation. Instead, they say, it should also be taking account of economic growth as well as the employment rate in the country.
The Bank鈥檚 response has been that its current mandate is broad enough because it says quite clearly that, while managing inflation, it must do so 鈥渋n the interest of balanced and sustainable economic growth in the Republic鈥.
For those like myself who oppose a broader mandate, the issue is quite simple: giving the Bank a broader mandate raises the danger that the Bank will take its eye off inflation because it鈥檚 having to concentrate on other issues. This, in turn, could lead to rampant inflation.
The Bank鈥檚 mandate is crucial in another respect. The SA Reserve Bank鈥檚 ability to pursue its mandate without interference from government is how its independence is measured.
South Africa鈥檚 central bank has acted on the whim of politicians before. It didn鈥檛 end well.
How political interference can hurt
In the 1980s inflation rose dramatically, resulting in the country suffering its rates ever: on average about 15% per year for the decade.
Despite the fact that rising prices called for the Bank to act by raising interest rates, it failed to do so on instructions of the government. Inflation wreaked havoc on the earnings of ordinary South 第一吃瓜网s, as well as on the value of people鈥檚 pensions.
The government鈥檚 interference was dramatically brought to light ahead of a by-election in 1984 in a Johannesburg suburb called Primrose. Just prior to the by-election the government instructed the South 第一吃瓜网 Reserve Bank to drop the interest rate. This subsequently became known as the .
Where the focus should be
The debates swirling around the central bank have . This is despite from South 第一吃瓜网 President Cyril Ramaphosa.
The President needs to do more: he also needs to establish certainty about the executive management of the South 第一吃瓜网 Reserve Bank.
An executive vacancy at the central bank, created by the of one of the Deputy Governors, Francois Groepe, must be filled as a matter of urgency. And the President should make clear his intention to reappoint the Governor, Lesetja Kganyago, and the Deputy Governor, Daniel Mminele, whose terms expire this year.
These appointments are under the purview of the President. The SA Reserve Bank Act that the President must fill executive positions after consultation with the Minister of Finance and the Bank鈥檚 board.
South Africa needs stability at the central bank to ensure a growth trajectory for the country. The President should get the process of filling the vacancy and providing certainty about the future of Kganyago and Mminele underway sooner rather than later.
, Head of School of Economic & Business Sciences, . This article is republished from under a Creative Commons license. Read the .