/ 5 June 2023

Reserve Bank says South Africans must bungee jump out of a crashing helicopter

South African Reserve Bank Agm
Lesetja Kganyago, governor of South Africa's central bank. (Waldo Swiegers/Bloomberg via Getty Images)

In the article Government to blame for high interest rates – Reserve Bank‘ in the Daily Investor (29 May 2023), Shaun Jacobs says the South African Reserve Bank, in its Monetary Policy Review, has consistently raised prices for administered services at a rate significantly exceeding inflation over the past decade. This, combined with a lack of delivery, has resulted in increased inflationary pressures, compelling the central bank to raise interest rates.

These claims by the Reserve Bank raise concerns about the sincerity of its analysis. By attributing the blame for exorbitant interest rates and inflation primarily to the government’s administered price increases, it fails to acknowledge its own role in controlling the monetary policy space to the benefit of South Africans. 

On 25 May, the Reserve Bank’s monetary policy committee (MPC) hiked the repo rate for the tenth time in a row, this time by 50 basis points. The repo rate is now at 8.25% and the prime lending rate is at 11.75%. The rand not only plummeted to its weakest point on record at R19.74 to the dollar, but also the decision drew ire from many sections of society.

Before this announcement, Investec had published an interesting opinion where it argued that the central bank had nearly exhausted its capacity to combat inflation, with the May rate the final. It further suggested that the focus could then turn to how long monetary policy could stay in the more restrictive territory. The Reserve Bank’s inflation target range is currently at 3% to 6%. 

Essentially, this is what the Reserve Bank should be responding to instead of playing dangerous political tackles on the government. While addressing the Peterson Institute for International Economics in Washington DC in April, governor Lesetja Kganyago called for a lower inflation target and tighter policy. Thus, it comes as a surprise that the Reserve Bank blames the government for raising prices for administered services and is mum on its dogmatic stance.

Nonetheless, the Reserve Bank’s decision to raise interest rates for the umpteenth time reflects the commitment to its orthodoxy that has placed an undue burden on the livelihoods of South Africans. Instead of admitting the limitations of its inflation targeting as a sole policy tool, the Reserve Bank conveniently participates  in a blame-shifting exercise. 

With this diversionary tactic, Kganyago and the MPC are effectively trying to force the ANC out of office. They must thank their gods because they are not in a country where the ruling party could have taken them to task. For the ANC, at least, chickens are coming home to roost since it has avoided the discussions concerning curtailing the Reserve Bank’s autonomy. 

In 2021, Turkish President Tayyip Erdogan sacked central bank head Naci Agbal and other senior officials for failing to toe the line. In the case of the Bank of England, experts have called for the restoration of democracy, accountability, and objectivity of its bank advice.

While the Reserve Bank partly attributes high inflation to government-administered price increases, this explanation fails to encompass the entirety of the problem. It is true that increases in administered prices may serve revenue-collection purposes, contributing to excessive salaries and rentals, without sufficient focus on service delivery for households and consumers. But this only scratches the surface of a much deeper issue.

A weak industrial and productive base, coupled with a reliance on credit to drive demand for externally produced goods, creates an imbalance that perpetuates the need for price increases and compounds economic instability. Comprehensive strategies are therefore necessary to deal with these endemic problems.

As an illustration, the lack of coordination between the monetary policy and fiscal policy arms of the government is a significant hindrance to achieving economic stability. Discrepancies between regulatory bodies such as hikes in energy prices by the National Energy Regulator of South Africa and increases in rates and taxes by municipalities contribute to escalations that far exceed inflation targets. 

To address the problems faced by South Africa, it is essential to build strong linkages in the macroeconomic policy framework. In his book Kicking Away the Ladder: Development Strategy in Historical Perspective, renowned heterodox economist Ha-Joon Chang argues that in the past “the scope for monetary policy was also very limited”. Some economies, particularly those that have achieved rapid industrialisation and development, have relied on a combination of industrial policies, fiscal policies, and trade policies. 

This is lacking in our context judging from the Reserve Bank’s blame. Not that one defends mismanagement and fiscal recklessness, but the central bank has taken its inscrutable independence way too far.  In recent years, central banks around the world have taken on additional functions and objectives to address evolving economic challenges and contribute to overall economic stability. 

Therefore, the role of the central bank should extend beyond solely targeting inflation. Spanish economist Jaime Caruana argues that “the increased responsibilities of central banks are not without risks”, but it is necessary for the Reserve Bank to recognise the interconnectedness of various aspects of the economy and the need for it to play a more active role in achieving broader economic objectives. 

With all chips down, there is a need for a rethink on how to improve the country’s approach to economic management. The marauding load-shedding is occurring at the same time as poor economic performance and disappointing employment levels. Fiscal spending is spiralling and it is a matter of time before the state, the biggest employer, starts to shed jobs in earnest. 

The recurring high unemployment rate, low growth and unmanageable inflation also require tough political choices. These issues not only impact individuals and households but also have broader implications for the overall economy and social stability. 

The overall goal of fiscal and monetary policies should prioritise job creation, stabilise prices and promote economic growth. But the truant central bank continues to run its “independent’ show, without anyone calling to line.

The country faces a serious political and social meltdown in the near future while the Reserve Bank plays blame games. Perhaps it is time for the recipient of the African Finance Minister of the Year Award 2023, Enoch Godongwana, to show courage and see his role as critical in guiding the Reserve Bank towards national goals. 

South Africans can barely breathe. The Reserve Bank cannot ask them to bungee jump out of a crashing helicopter without a rope.

Kganyago’s obsession with imaginary “barbarians at the gate’, the central bank is quickly losing credibility in the eyes of the public. It must be more accountable and responsive to societal needs and interests, as well as promoting transparency and public participation in their decision-making processes. 

Siya yi banga le economy!

Siyabonga Hadebe is an independent commentator on socioeconomic, political and global matters based in Geneva, Switzerland.

The views expressed are those of the author and do not necessarily reflect the official policy or position of the Mail & Guardian.