The David Gleason Column
Now that the euphoric Mandela years of transformation are about to become history, the hard part will begin. The imperative for the next president will be to deliver growth. And that, given the bizarre policy actions adopted by the Reserve Bank, is being made more difficult daily.
Governor Chris Stals is lauded by some as the man who, single-handed, defeated South Africa’s inflation bogey. But the questions have to be at what price and was this journey really necessary?
Over the Stals era which began in August 1989, South Africa’s real prime lending rate has averaged 11%. That compares with the emerging market’s current average of closer to 6%. Small wonder we now eat everyone else’s dust.
Has the policy worked? Has the currency been defended successfully? Well, the rand has fallen 124% since August 1989. Is that success? And there has been no massive inflow of permanent direct foreign investment (though there certainly have been huge, unsettling and unhelpful portfolio flows).
In this day and age, central bankers ought to be sufficiently intelligent to embrace two objectives – to deliver growth while controlling inflation.
Stals and his disciples will claim that inflation was defeated but it can just as easily be argued that it would have happened anyway, that the prime engine of inflation’s demise lay in South Africa’s admission to the world market. When international manufacturer Nabisco can put a packet of biscuits on our shelves at 70% of the home-grown product – as it has – that’s when prices across the board are forced down.
But where is the growth? South Africa has been mired in recession since the third quarter last year, and there’s no sign of an improvement. All the salient statistics for the first quarter of 1999 point to another three months of negative growth. And even before this recession took hold, we had little growth to write home about – real gross domestic product growth has averaged 1% per annum in the Stals era compared with 5,6% per annum in the 60s and 3,5% in the 70s.
In the weeks ahead of the general election, a curious thing has been happening in the money market. The Reserve Bank has energetically been mopping up liquidity. It has taken about R7-billion out of circulation by issuing its 90-day paper and by doing 30-day reverse repos (effectively the rate at which the Reserve Bank lends money to the market) by selling R150 stock into the market as well as dollar swaps.
In fact, stripping out Reserve Bank intervention, the money market has been in surplus for the last two months. The truth is that there is no demand for money and the price of the money on offer is too high.
That means interest rates should fall again and substantially. The fact that they have not begs a hard look at the Reserve Bank’s policy options. Bank officials may argue that interest rates are being held at current levels because the bank wants to avoid any involvement in the pre-election political infighting. But that would be a sophistry because actually the Reserve Bank shouldn’t be holding rates at artificial levels.
In fact, it’s worth noting that the repo system was introduced to deliver flexibility into a market traditionally dominated by a single individual’s decisions. As it turns out though, it is possible to argue persuasively that the Reserve Bank has never really allowed market forces to operate freely -there’s always been a consistent bias against open market dealing.
Some businessmen have long argued that the high interest rate stratagem to kill inflation may have worked elsewhere, but look at the differences in application. Absolutely nowhere else has this regimen been held in place so ruthlessly for a decade. The cost of capital in this country has become so high it is one of the factors which induce our major corporates to flee.
Despite all this evidence the Reserve Bank continues blithely to conclude the market is wrong and to hold the cost of money at completely unrealistic levels.
For example, estimated inflows of capital from the sale by South African holders of Anglo American and Old Mutual equity (it’s thought these stocks will be pursued by the United Kingdom tracker funds because both will be included in the FTSE 100) may be as much as R10-billion. That should make us awash with the cash we need to reinvigorate the economy. But analysts gloomily predict the Reserve Bank will buy the foreign exchange to bolster its reserves instead.
If future president Thabo Mbeki is to deliver the most vital of South Africa’s missing elements – economic growth – he will have to get the Reserve Bank on his side.
The tight, unbending, monetary stance which has held sway for the past decade must be seen off. With that must come a realisation that nominal interest rates simply have to fall to between 12% and 13% (about 6% real) if economic growth is to be restored and with it the opportunity to provide the jobs so many millions of South Africans seek.