Kganyago critics call for deeper response to worst crisis in a century

While the Reserve Bank may be reaching the end of its rate cutting cycle, there are calls for Governor Lesetja Kganyago to consider more aggressive action to support the economy.
While the Reserve Bank may be reaching the end of its rate cutting cycle, there are calls for Governor Lesetja Kganyago to consider more aggressive action to support the economy.
Gallo Images/Business Day/Freddy Mavunda
  • The Reserve Bank Monetary Policy Committee is to make a decision on the repo rate this week.
  • Economists have pencilled in a cut of 25 bps, but there are calls for more aggressive cuts and quantitative easing.
  • Quantitative easing should be accompanied by structural reforms to be effective, or it risks being destructive.

Reserve Bank Governor Lesetja Kganyago is due to announce the latest repo rate decision by the Monetary Policy Committee on Thursday. The decision would be an indication of the bank's commitment to support the economy in what is considered the worse crisis South Africa has faced in a century.

The tenth governor, as Finance Minister Tito Mboweni is often quick to remind everyone whenever the two share a podium at a press briefing, has consistently held firm that the central bank is not responsible for stimulating economic growth. Since taking the reins from Gill Marcus in 2014, Kganyago has on numerous occasions defended the bank's constitutional mandate to protect the currency.

But his "prudent" governorship that has never wavered from the bank's core function to achieve price stability has seen Kganyago come under fire for his rigidity. Over and above criticism of the bank's role in the economy that is yet again in recession, it has found itself dragged into political contestations within the governing party.

In 2017, Kganyago led the bank's successful court bid against Public Protector Busisiwe Mkhwebane - this after the incumbent issued a remedial action to have the bank's mandate changed to be more supportive of achieving socio-economic transformation.  

The court had set aside the remedial action.

But a new battle arose in June 2019 when ANC secretary-general Ace Magashule said the party's National Executive Committee decided to have the bank's mandate expanded beyond price stability and for it to play an active role in economic transformation and job creation. At the time, Kganyago said the bank would be prepared to lodge court proceedings to maintain its independence.

The Covid-19 pandemic has resurfaced these debates on the bank's role in the economy.

Earlier this year Deputy Finance Minister David Masondo said he was not opposed to the central bank buying government bonds from the primary market - in effect financing government debt - to help buoy the economy. Kganyago said the idea was "interesting" and that asking the Reserve Bank to fund government was tantamount to a client instructing their banker to do the same.

But based on its international counterparts who have been stepping up their game to support their economies during the crisis, pressure is mounting for the Reserve Bank to do the same.

During his time at the Reserve Bank, Kganyago has successfully been able to bring down inflation to the mid-point of the target range of 3% to 6%. It has since fell to 2.1%, its lowest level in 15 years because of a lack of activity in the economy caused by Covid-19.

Prior to 2014, real interest rates were negative - in that inflation was higher than the repo - noted Old Mutual chief Economist Johann Els. "So his [Kganyago] legacy was to go back to an era of positive real interest rates," Els said.

However, the decline in inflation is also attributed to weak economic growth, Els said. SA's economy is set to contract anywhere between 6% and 13% this year- the worst performance in 90 years. Although the bank is not responsible for stimulating the economy, it is focused on inflation and the signs are there for it to respond to the disinflation currently, Els explained.

There is a risk of deflation - and the bank needs to act on that. The Reserve Bank, which usually makes forward-looking decisions, might have to change its approach and make a decision based on current inflation rates, Els suggested. "That would allow them to be a lot more aggressive in interest rate moves. It is a big success to get inflation lower, but there is a risk in these circumstances that inflation can be too low."

Deflation would risk a decline in demand with consumers delaying purchases with the expectation that prices will continue falling. This will translate in lower production, lower employment and even less economic growth, Els explained. Japan has been struggling to lift its inflation since the 1990s, which has had consequences for its growth levels.

Quantitative easing

The Reserve Bank could essentially be the fourth partner in the social compact between government, business and labour in supporting economic recovery, Els suggested. Quantitative easing implemented in the short term could help, combined with policy proposals to ensure growth in the medium term, he explained.

Quantitative easing is a monetary policy tool, in which the central bank injects liquidity into the economy by buying government bonds and other securities.

The central bank has been buying government bonds but has not called it quantitative easing. Kganyago has said these efforts have been to correct the bond market. The bond purchases have seen yields ease.

Investec chief economist Annabel Bishop is of the view that quantitative easing is not needed in SA, especially as the necessary structural reforms have not been implemented. Quantitative easing would prove "destructive" in the absence of reforms, she explained.

Duma Gqubule, an economist and founding director at the Centre for Economic Development and Transformation, said the bank's response to the crisis so far has not been adequate. "This is the biggest crisis we have had in a century."

Gqubule similarly believes we are heading towards a "deflationary danger zone". With inflation at 2.1%, Gqubule said there was no excuse for the bank not to cut interest rates more aggressively. "They are completely disconnected from the pain of people... There is no threat of inflation."

National Treasury at worst expects 1.8 million job losses due to the impact of Covid-19.

With SA's budget deficit estimated at 14.6% of GDP, Gqubule said the Reserve Bank should be on "standby" to purchase government bonds from the primary market to finance the deficit. He pointed out that other inflation-targeting banks were also making an effort to support their economies. "The fiscal stimulus announced by Treasury is inadequate and the Reserve Bank has to come to the party," he said.

In response to the economic collapse triggered by the pandemic, Treasury announced a R500 billion stimulus plan that has been criticised by some economists

At this point, if the Reserve Bank won't budge, Gqubele said "politicians" should intervene, possibly with President Cyril Ramaphosa ordering the bank to suspend inflation targeting temporarily to respond to the crisis.

The consensus is for the MPC to introduce a rate cut between 25 bps and 50 bps this week. But Gqubule believes anything less than 100 bps would be unacceptable.

Chief economist at IQ Business Sifiso Skenjana noted that the MPC has reached the end of the rate cutting cycle, and is probably "nearer to the bottom" of what it can do to provide relief. "It’s important to take into account Monetary Policy alone can't drive economic growth. There is a limit to which they can use the lever to bring relief."

The bank tends to take a conservative stance and may keep rates on hold, however there is pressure for a cut, he explained.

In terms of suggestions that the bank take on government debt, Skenjana pointed out that monetary policy can't be used to solve "fiscal problems". Even though global counterparts are following "modern" monetary policy, he said it is important to consider its applicability of these measures to the SA context. SA has structural constraints in the economy, no monetary policy could correct that, he explained.

"Printing your way to growth won't work in the SA context," he reiterated.

Skenjana said the question shouldn't be about what the Reserve Bank should do to stimulate growth, but rather what financial institutions should be doing to support development in the economy. The recent government guaranteed R100 billion credit guarantee scheme has only had a take up of 10%.

Skenjana said there needs to be more investigation into why small firms and individuals have such low access to credit.

"Financial intermediaries should be playing a better role in the development in the country." 

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