It's no time to dress the South African Reserve Bank in Emperor's New Clothes
By Greg Morris, CEO, Sebata Group Holdings.
In 2017/18, the ANC and EFF called for the nationalisation of the SA Reserve Bank (SARB). Pundits are asking: Is this a good call? Should a change of mandate be considered; ie, from inflation targeting to employment targeting? In this article, I give my point of view on this contentious issue, says Greg Morris, CEO, Sebata Group Holdings.
It is important that, in all countries, the central bank is viewed as reliable, consistent and disciplined in the execution of its mandate. This helps to anchor inflation expectations, which in turn keeps inflation down. As such, any perceived lack of independence is massively problematic.
Moreover, the governor of the SARB, its key board members and all of its executives are appointed by the president, in consultation with the minister of finance and a government-appointed panel.
No Monetary Policy (MP) decisions are made by private shareholders, so nationalisation would have little real impact in terms of influence over MP.
To put it plainly, it's not nationalisation itself that frightens the markets, it is rather that the nationalisation of the SARB is seen as possible stepping-stone to changing its mandate down the line.
Our country now has an inflation target band (of 3%-6%), instead of a point target like countries like the UK and US. This allows the SARB to consider other economic factors when attempting to meet its mandate and to ensure that inflation expectations remain anchored, alongside some monetary flexibility to address the historical issues that plague SA's economy.
To my mind, inflation expectations can be a bit of a self-fulfilling prophecy.
They're actually one of the main drivers of current inflation, because expected inflation influences current wage negotiations, price setting, and financial contracting for investment. That's why the 'flexible MP regime' suggested by the ANC would not be a good strategy for us.
So, why has the SARB debate come to the fore in recent months? (There have been calls to nationalise the SARB for many years, but a recent report by the Public Protector breathed new life into the issue.) Let's explore it.
The element that excites South Africans is that an expansionary MP could allow for economic growth, which will result in lower levels of unemployment.
In terms of shifting from inflation targeting to employment targeting, again, this would be a 'no' from me, largely because MP and inflation remain extremely complex issues, with many moving parts.
There is a principle, the Phillips Curve, which demonstrates the correlation between inflation and unemployment; namely, that higher rates of inflation (beyond the target band) occur when unemployment decreases.
Moving the target would destroy the confidence that the SARB has built up and allow expectations to be less anchored than is optimal. Once trust is broken, it is hard to regain, with people anticipating increase after increase. In economics, this is known as the 'slippery slope argument'.
The SARB's target band already allows for a degree of flexibility when making MP decisions. If the SARB's mandate changed, it would be easy to over-emphasise economic growth at the cost of severe and rapid inflation.
SA experienced rapid rates of inflation before 2000 when the official inflation-targeting regime was introduced (and the problems of hyper-inflation have been well-documented, with Zimbabwe and Venezuela as prime examples).
I believe that SA's issues are more structural and that there are other tools for addressing unemployment, before we need to consider MP.
My belief is there is enough room on the fiscal side to stimulate growth and enact real change in SA, provided that rampant and institutionalised corruption and 'state capture' are brought to a halt once and for all.
Additionally, to do its part in confronting the significant challenges facing the South African economy, the SARB must continue to use the target band to its limits; allowing inflation to drift towards the upper limit (6%) and sustaining it there for a period of time. With the majority of the developed world targeting 2% inflation, SA aiming for 6% is already a decent consideration in our context.