Finance Minister Tito Mboweni has emerged in good form from a bad week in politics.
Early in the week Mboweni deleted a tweet of outrage at the firing of the Zambian Central Bank Governor. The deletion came after President Cyril Ramaphosa reprimanded him on the matter after a Zambian protest. Later in the week rumours emerged that Mboweni would resign, according to Business Day. But by Sunday these had been quashed and Mboweni tweeted that the rumours were “malicious” and he was ready to “fix our economy.”
Mboweni, a former South African Reserve Bank Governor, has an emotional attachment to the principle of central bank independence. It is with very good reason.
Political interference in monetary policy inevitably leads to long-term economic damage such as hyperinflation, and undermines democracy. His remarks were probably aimed at an audience in South Africa, largely in his own party, from where the threats to independence have mostly come in recent times.
“Presidents in Africa must stop this nonsense of waking up in the morning and fire a Central Bank Governor!” Mboweni tweeted after the Zambian Central Bank Governor, Denny Kalyalya, was fired.
“The President of Zambia must give us the reasons why he dismissed the Governor or else hell is on his way. I will mobilize!”
“Bank independence is key. Not negotiable. Let all central bankers speak out!” he continued.
The reasons for the firing are not clear, but the Zambian Governor had very probably not been doing the bidding of the Zambian President, Edgar Lungu, who might just need help from the central bank in his re-election campaign. Mboweni was not alone in his expression of concern. In a rare statement the IMF also questioned the firing of the Zambian Central Bank Governor.
Back in April, Mboweni took aim at the Bank of England after it succumbed to a UK Treasury demand to directly finance a portion of the government’s spending on a temporary basis to help fight the economic fallout from Covid-19.
After the Bank of England’s action, Mboweni posted this on his Facebook page: “When central banks get dictated to by the Chancellors of the Exchequer, goodbye central bank independence. The UK Treasury has done a great historical disservice and harm to independent central banking in my view. The notion that the Bank of England is independent has now been blown away. Their genie is out of the bottle for many years to come. Pity.”
Again, Mboweni was correct.
Importance of Central Bank independence
Central bank independence has over the years been key to keeping politics out of decision-making on monetary policy. Without central bank independence it is all too easy for politicians to resort to monetary policy to boost the economy and their election chances, and do longer term economic damage.
Many central banks also have the role of bank supervision and ensuring the operation of national payments systems. With the collapse of banks, there is a choice of winners and losers. It is best that bank bailout decisions are left to a body that solely looks into the technical merits of each case.
A glaring and tragic example of the consequences of lack of central bank independence is Zimbabwe, where the country’s Reserve Bank has repeatedly monetized the deficit, ie., printed money to finance the government. The consequences are years of hyperinflation and the virtual collapse of the banking system as well as the currency.
While central bank independence is now established as best practice, it is a relatively new idea. In 1694 when the Bank of England was established it was tasked with promoting the public good, but it was only more than 300 years later that it was given operational independence. Around the world the idea has only gained traction since the high inflation of the 1970s.
This independence is also key to the strengthening of democratic governance through ensuring a separation of powers. It also forces central banks to justify their role and that means greater public accountability.
Threats to the SARB
In South Africa central bank independence has been on the line for some time. If Ramaphosa had not survived the ANC’s weekend national executive committee meeting and had lost to the Magashule-Zuma radical economic transformation faction, it is highly likely that Mboweni would have been out of a job. As Reserve Bank Governor, Lesetja Kganyago has now left the debate on independence up to the politicians, Mboweni is now the point man on the issue.
Such a victory of the economic populists would almost certainly have paved the way for the fast-track nationalisation of the Reserve Bank and probably a Constitutional amendment to throw out the clause on Reserve Bank independence. In his open letter to the ANC National Executive Committee meeting at the weekend, Zuma accused Ramaphosa of betraying the ANC’s founding fathers by failing to implement the party’s 2017 conference resolutions, including the nationalisation of the Reserve Bank.
Under the 1996 Constitution, the Reserve Bank has a large degree of autonomy in how it carries out its mandate of price stability. Section 224 of the Constitution requires that the Bank “must perform its functions independently and without fear, favour or prejudice…”
The inflation target is specified by the government, and the Governor is appointed by the President and is ultimately answerable to Parliament. Therefore, should it so wish, the government could appoint a Governor that accedes to its whims.
Last week the EFF introduced a bill that would allow the expropriation without compensation of the Reserve Bank. There have been ANC assurances that nationalisation would not mean an end to the Bank’s independence and its price stability mandate would continue.
Nationalisation does not on its own pose a risk to Reserve Bank independence but does raise the risk that this would be compromised. The discipline of a central bank having to adhere to Johannesburg Stock Exchange listing requirements and having to issue timely financial statements does raise its accountability and is a bar to certain sorts of outside interference.
Nationalisation would pose a definite risk of the state grabbing the Bank’s gold and foreign exchange reserves, which at the end of June stood at nearly R907 billion: the equivalent of about half of planned government spending in the latest budget.
In the event of nationalisation, all Reserve Bank assets would be owned by the state and the government could then use reserves as it pleased. There have also been suggestions from the ANC that the Bank should be a source of subsidised credit for development projects.
With what is likely to emerge as a prolonged Covid-19 recession, central banks around the world will be under mounting pressure to do more. The IMF has taken a tough line on defending central bank independence. It recently threatened Ukraine that if this is not maintained, the country would get no loan.
Our Reserve Bank’s independence will be increasingly on the line. That is why Mboweni’s tweets were so well timed.
The views of the writer are not necessarily the views of the Daily Friend or the IRR