Breaking cover: The South African Reserve Bank building in Pretoria. The central bank and the treasury have revealed a bank deposit insurance proposal.
Both the finance minister and the ANC have told delegates at the ruling party’s policy conference they believe the public protector has overreached in seeking to change the Reserve Bank’s mandate.
The bank is seeking an interdict against the public protector’s recommendation and court proceedings are expected to get underway in August.
The public protector, Busisiwe Mkhwebane, in a recent report recommended that the Constitution be changed to broaden the bank’s mandate from protecting the value of the currency, and so keeping inflation in check, to also ensuring that the socioeconomic well-being of citizens is protected.
She argues the bank currently serves commercial interests and not those of ordinary citizens. Her report suggests that money creation should rest with the state.
The bank, in its court papers, argues its mandate to keep inflation in check is good for all South Africans, but particularly for the poor.
Speaking at a breakfast briefing at the policy conference on Friday, Finance Minister Malusi Gigaba and ANC treasurer general Zweli Mkhize both said the public protector appeared to have overreached in making her recommendation. Both however indicated this did not mean there should be no debate on the bank’s existing mandate.
In his opening address at the ruling party’s fifth policy conference, President Jacob Zuma, said the event took place during a difficult time for the economy, which was hit by an “unfavourable global economic environment”.
He noted that while all ANC programmes are important, the economy remains its apex priority. Zuma said delegates must be prepared “to discuss the South African political economy as the overall context under which our electoral support has declined”.
Zuma said the instruments government must use to advance radical economic transformation have been identified and include the Constitution, legislation and regulation, licencing, broad-based black economic empowerment, the transformation charter, the national budget and procurement.
Emerging markets analyst at Nomura, Peter Attard Montalto, said the Reserve Bank was at risk of becoming a scapegoat for low growth in 2019.
“The ANC is currently struggling to gain traction with the narrative that the country’s low growth is the fault of the global economy or the domestic private sector.
“As the 2019 elections approach, we expect the Reserve Bank to be set up to take the blame, facing criticism for keeping monetary policy too tight since 2008, being too inflation-focused and not targeting growth or job creation enough.”
Attard Montalto said the challenge to the bank’s mandate has happened within a specific context: the Zuma faction in the ANC sees the bank as a blockage to more radical transformation within the financial services sector, restricting credit to black business and not applying enough pressure to banks on black ownership and black management criteria.
“We [will] watch the policy conference for further signs of this agenda being pushed and some language about the ANC instructing the government to look at the Reserve Bank’s operations and role,” he said.
Mkhwebane’s recommendation has been widely seen as an attempt to have the Reserve Bank move away from prioritising inflation targeting.
Most central banks are targeting inflation as one of their primary objectives. In cases where governments over enthusiastically take control of money creation the effect can be a devalued currency and high inflation — as seen starkly in Zimbabwe and Venezuela.
Asked by the Mail & Guardian for examples of where a broader monetary policy mandate had been successful, Mkhwebane’s office said: “There are countries which have control over their central banks and set rules in terms of monetary policy in order to enhance their democracies. These countries are Australia, Canada, New Zealand and Norway.”
These are all inflation-targeting nations and Australia joins South Africa in being one of the few nations in the world to have an explicit inflation-target band.
Russell Lamberti, founder and strategist at ETM Analytics, argues the Reserve Bank’s mandate should be narrowed not widened. “Broadening the mandate of the central bank never yields good long-term results and generally begets more broadening — mission creep if you will — which raises financial risks and can lead in the worst case to a currency collapse and hyperinflation.”
Lamberti argued that the inflation target band of 3% and 6% offered the Reserve Bank too much discretion to set exchange controls, print money, and to bail out errant banks.
“Central banks are like weapons of mass destruction — they can’t do a lot of good but they can do a lot of bad, and if you have one, best you make sure not just anyone can get the keys and it needs to be institutionally and politically very difficult to press certain buttons.”
If the Reserve Bank can be a force for limiting inflation, avoiding boom-bust cycles, and enabling South African’s to get out of, not into, debt, it will be serving South Africans as best it can, Lamberti said.
“At the end of the day, the central bank can foster higher prices and more indebtedness, or cheaper prices and less indebtedness. Now tell me which you’d prefer?”