Yet again, the ANC has put the Reserve Bank into political play. At its recent National Conference, the party agreed that the central bank’s mandate should be broadened from a focus on inflation to include boosting growth and jobs.
This might seem innocuous as there are other central banks with such mandates. What is of concern is that the proposals are part of a continuing attempt by the party to erode the constitutionally guaranteed independence of the Bank.
Back in 2017 there was a ruckus in the ruling party over the Bank’s ownership and mandate, but things quietened down. Now it is an issue again, perhaps because we are on the eve of an election and the party feels it has to show the electorate it has plans, however ill-founded, to boost growth.
In South Africa, changing the mandate and nationalising the Bank, despite constitutional guarantees, would make the Bank a political football. There is insufficient good will, trust, and institutional precedent to currently protect the bank’s independence. Independence of the central bank adds to the credibility of its fight against inflation, particularly in emerging markets, where the markets are often sceptical about trusting institutions.
In South Africa in 2023, with the Expropriation Bill having been passed last year, with the talk of a Basic Income Grant, and with lack of reform of the state enterprises, these proposals for the future of the central bank are dangerous. Government has not created an environment for growth and now wants to blame the central bank for its own failures and use the fire power of monetary policy to push for growth.
Threats to the central bank are a perennial feature of ANC politics. At some stage the ruling party knows it may need to boost growth, even if the cost is greater inflation. The ANC has for years also pushed for the Bank to be nationalised. By themselves these moves need not necessarily challenge Bank independence, but under the present ruling party it is highly likely that the result would be political control over monetary policy.
Moneyweb reported over the weekend that Gwede Mantashe, the ANCs National Chairperson, said, “The mandate of the Reserve Bank has to be expanded to meet the needs of the economy.”
Mmamoloko Kubayi, the chair of the ANC’s transformation committee, is quoted by Bloomberg as saying that various options needed to be explored for the Bank to boost job creation. But, she added, this was not to challenge the independence of the Bank
Earlier this week, President Cyril Ramaphosa also downplayed the matter of a change of mandate, saying that it was not something that would immediately happen as it would require constitutional amendment. Ramaphosa said. “It’s not something that’s about to happen, it’s something that’s being debated.”
The ANC only has a 58 percent share of seats in the National Assembly and not the two thirds required to change the Constitution. So a change in the Bank’s mandate is not an immediate prospect. But what is of concern is that the President did not reject the very idea of a change in its mandate.
Another avenue to compromising Reserve Bank independence would be to buy out the shareholders. In the more than 100 years since its founding, this has not impeded its role. On its own a buyout by the state would not infringe on the Bank’s independence. But having government as the owner might mean the shareholder would be able, for example, to distribute the Bank’s foreign exchange holdings to the government, unless specifically prevented by legislation.
Nationalising the central Bank would require a change in the Reserve Bank Act, something the ANC could do with a simple parliamentary majority.
Section 224 of the Constitution states that, “The primary object of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic.”
It goes on to state that, in pursuit of this, the Bank “must perform its functions independently and without fear, favour or prejudice.”
While the Bank does not have a growth mandate, the Constitution does recognise that curbing inflation and ensuring financial stability is in the interests of growth. Under the system of inflation targeting used by the bank, the target range, presently between three and six percent, is set in consultation with the National Treasury. There is no need to change the mandate. If the government wanted greater growth it could set the inflation target range higher. That would mean higher inflation and, of course, a higher real growth rate is not guaranteed.
Since November 2021 the Bank has raised its policy three times, so the timing of the threat to broaden the mandate might be a message to the Bank to reduce rates in the run-up to the election. The “or else” part of the message is that if it fails to do so, it will broaden its mandate and possibly buy out the private shareholders.
Would a state-owned central bank fall under the Department of Public Enterprises and be mismanaged into financial distress along with the other state-owned enterprises? Or would it fall under the National Treasury, with the potential that a finance minister would tell it how to meet the inflation target.
The US and Australian central banks mandate curbing inflation and ensuring growth. The US central bank has had a “dual mandate” since 1977 to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates”. As the Fed has raised interest rates to fight inflation, its role of ensuring stable prices has come under conflict with those of maximum employment. The dual mandate has been made easier by the decades of loose monetary policy that has been pursued to avoid severe recessions and deal with banking crises.
But in South Africa, a dual mandate would risk political pressure on the central bank. The ANC has shown that it is intent on widening economic control rather than allowing institutions and markets greater independence. If the mandate were changed, we could expect the Governor of the Reserve Bank to be fired with a frequency in excess of that of Eskom bosses.
A change in mandate or ownership of the Bank would be playing with fire. The Reserve Bank and the Treasury have become the bastions of good economic governance.
There are examples where central banks have performed in an exemplary manner, although they are not independent. But there are many examples where governments in desperate need of funding to bolster support have forced central banks to monetise their deficits, the equivalent of printing money, to save them. The result in Zimbabwe and Venezuela has been hyper-inflation, mounting desperation for the poor, and shortages.