‘The IRR opposes adoption of the South African Reserve Bank Amendment Bill because it is bad for the Reserve Bank and it is bad for South Africa. Let me explain what I mean.’
The following is my presentation to Parliament’s Standing Committee on Finance yesterday.
Good morning chair, the committee and representatives of other stakeholders.
My name is John Endres. I am the Chief of Staff at the Institute of Race Relations.
Thank you for providing my organisation with the opportunity to comment on the Bill.
Before getting to my main argument, I would like to point out that the Bill is unconstitutional as it does not provide for compensation of shareholders who would be deprived of their property by this Bill. It also has not undergone a socio-economic impact assessment, as is required before new laws are adopted. For these two reasons it should be rejected.
But furthermore, the IRR opposes adoption of the South African Reserve Bank Amendment Bill because it is bad for the Reserve Bank and it is bad for South Africa. Let me explain what I mean.
The South African Reserve Bank has been one of the most successful and well-run public entities in South Africa. It shines like a diamond among the dross of most of our other public institutions.
In 2009 the government set the Reserve Bank an inflation target band ranging from 3 to 6 percent. Since 2010, inflation has been kept to that band, only crossing the upper, 6% threshold by a tiny fraction in 2014 and 2016.
Credit for this superb performance belongs to the governor of the Reserve Bank, Mr Lesetja Kganyago, winner of the 2018 Central Banking “Governor of the Year” Award, and his colleagues at the Bank and on the Monetary Policy Committee.
They have worked with dedication, professionalism and integrity on maintaining the value of our currency, and we owe them a debt of gratitude.
This is because failing to maintain monetary stability causes run-away inflation. The effects of inflation are devastating for economies, affecting the poor sooner and in harsher ways than the wealthy – although under high inflation, everybody suffers.
Against this background, our position is that an institution with such a stellar track record as the South African Reserve Bank should not be meddled with lightly. Yet this is precisely what this Bill seeks to do.
The Bill proposes to remove some of the checks and balances that exist, small though they may be, in the form of private shareholders and their limited powers. It proposes instead to give the state untrammelled control over the Bank, with less oversight and greater power in the hands of fewer people.
Such centralisation of power is dangerous, because when those few people get it wrong, the effects are felt by very many people.
I believe we can also say without fear of contradiction that entities owned and controlled by the South African government very often underperform. This is true for government departments as well as state-owned enterprises such as Eskom, SAA, Denel and others. The government’s track record has been far from stellar, with a very few notable exceptions.
So the question really arises whether giving this same government greater control over one of the nation’s most vital institutions is wise.
Examples from around the world and throughout history show the importance of central bank independence. Leaving aside the question of ownership for a moment, where the SARB is indeed an anomaly, I’d like to draw your attention to what happens when a government asserts greater control over its central bank and reduces its autonomy. The example I chose is that of Turkey.
At the beginning of November 2020, Turkish President Erdogan fired the central bank governor and replaced him with a former finance minister, who became the fourth governor in five years. President Erdogan famously is strictly opposed to high interest rates, controversially believing that they fuel inflation.
His high turnover in central bank governors is partly as a result of their not respecting his wishes. “Of course our central bank is independent,” President Erdogan said in 2018. “But the central bank can’t take this independence and set aside the signals given by the president.”
So what have been the effects of the president’s interference in the central bank?
Inflation has been sitting persistently above 10% for the past 3 years. This year alone, the Turkish government has spent $65 billion on managing its currency, according to estimates by Goldman Sachs – including borrowing dollars from domestic banks to prop up the Turkish lira. Its efforts have been in vain, as the Turkish currency has lost 30% of its value against the dollar since the beginning of the year.
What this shows is that managing currency stability is an incredibly critical task that should be kept in the hands of professionals acting independently of politicians. Otherwise the consequences can be dire and very, very expensive. Other examples that show this include Venezuela and, closer to home, Zimbabwe.
This is the scenario that talk of “nationalising the Reserve Bank” will evoke in the minds of investors. It will place in doubt the Bank’s future ability to manage currency stability and evokes nightmare scenarios of hyperinflation. It will make it far more difficult for South Africa to attract the investment it needs to generate the growth it requires to combat poverty and unemployment, and to make South Africa a prosperous and successful nation.
We understand that this is not something the private shareholders of the bank are currently in a position to prevent, but they do act as a small corrective, a warning angel sitting on the metaphorical shoulder of the Reserve Bank and the Monetary Policy Committee as they go about their business. Parliament should heed the warnings of the Reserve Bank governor, of the state legal adviser as well as of prominent economists, and reject this Bill.
- Read the IRR’s full submission here.
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