An intense debate has erupted over Public Protector Advocate Busisiwe Mkhwebane’s recent proposal to change the SA Reserve Bank’s Constitutional mandate. Whether a diversionary tactic, a trial balloon, or populist policy agenda – markets were quick to react.
The value of the Rand dropped by as much as 1.9% the day of the announcement, the following day S&P had released a statement noting the potential for further downgrade of South Africa’s credit rating if the proposal was taken up by government, and the Reserve Bank announced its intention to take the matter to the courts.
To backtrack just a bit, in investigation of the 1980’s bail-out of the now defunct Bankorp and related supervisory actions of the Reserve Bank, the Public Protector commented on the broader matter of the Reserve Bank’s mandate. In doing so, Mkhwebane proposed to do away with the primary object of the Reserve Bank as set out in article 224(1) of the Constitution, being “…to protect the value of the currency in the interest of balance and sustainable economic growth in the Republic”.
In its place, Mkhwebane has proposed that the primary object of the Reserve Bank read “…to promote balanced and sustainable economic growth in the Republic, whilst ensuring that the socio-economic well-being of the citizens is protected”.
In defending her proposal, the Public Protector reportedly offered that the Reserve Bank should act in the interests of empowering South Africans, and that as it currently stands, “it is only focusing on very few commercial interests".
The latter part of that comment is perhaps overly succinct, and the Public Protector might have also added that those “commercial interests” include the:
• formulation of monetary policy – which is primarily implemented by influencing money supply and interest rates;
• prudential oversight and licensing of the banking sector; and
• settlement of interbank claims (i.e. non-cash transactions made in the economy).
These are things that everyday South African’s rely on in going about their daily life – but, other than interest rates, would probably rather not know about. And while perhaps missing a more subtle dynamic possibly at play, commentators have not seen this as an attack on the Reserve Bank’s supervisory roles.
A more expansive role for central bank intervention?
More likely, it is Mkhwebane’s view that the Reserve Bank should take a broader role in stimulating economic growth that has drawn fire, with the proposal seen by commentators as a populist response to the current state of high interest rates and recession.
This may have been on Reserve Bank Governor Lesetja Kganyago’s mind in speaking to a group of educators recently, arguing that: "low inflation is good for all South Africans, but especially the marginalised and poor – those without the information or power to protect themselves from inflation".
The Governor also spoke to the fallacies of inflationary stimulus, noting that: “Through history, some countries have tried to deny these truths, pretending that high inflation somehow begets sustainable growth. This kind of macroeconomic populism is usually a precursor to misery, not least because it impoverishes nearly everyone in society.”
On one level it seems surprising that the myth of inflationary stimulus as concomitant to long term growth survives in South Africa, with staggering high unemployment rates seemingly immune to the comparatively high levels of inflation seen over the last decade.
But it would also be a mistake to think that this debate has played its course. Even though central bankers tend to take a longer-term perspective on issues, as seen in Governor Kganyago's speech, policy makers subject to election cycles more often seem to look for short term fixes, even if making it more difficult to achieve long term solutions.
‘Taylor Rules’ and ‘time consistent policies’ are concepts that economists use in working through these matters. At the risk of oversimplification, it is all about placing constraints on the printing of money, knowing that without such rules, policy makers may become addicted to the elixir of fiat.
A narrow role for monetary policy
With the South African economy under stress, calls for monetary stimulus and relaxation of fiscal restraints will likely increase in frequency. Until last week, the focal point has, for the most part, centred on fiscal policy and National Treasury.
The Public Protector has now shifted some of that focus to South Africa’s Reserve Bank and monetary policy. The first volley may have been aimed at testing the resolve of the Reserve Bank, but it is just as likely that it is the start of a more substantive debate on how to best steer South Africa’s economy.
Either way, this debate is not new to South Africa's institutions or those that serve in them. But with South Africa’s credit rating under constant attack; a controversial mining charter recently enacted; and a technical recession now declared, it only adds to the uncertainty that the economy is suffering under.
At least for the time being, a boring central bank focused on 'a few commercial' issues is exactly what is called for in steering the course of South Africa's monetary policy.
*Dr Stephen Labson is managing director of Trans African Consulting Group and senior research fellow at the University of Johannesburg.Read Fin24's top stories trending on Twitter: Fin24’s top stories