Don’t shoot the messenger (the SA Reserve Bank) – Majozi

Phumlani Majozi is a senior fellow at African Liberty, a platform which advances individual freedom, peace, and prosperity in Africa by promoting civil discussion and debate. He points out that in South Africa, the two chief mandates of the SARB, as outlined under Section 224 of the Constitution, are to protect the value of the currency in the interest of balanced and sustainable economic growth; and to “perform its functions independently without fear, favour or prejudice.” Over the past two years, inflation has been spiralling out of control across the world. And with an inflation rate that has gone way beyond its upper target limit of 6%, the SARB has had no choice but to raise the rates, just as central banks have done in other countries also dealing with the  inflation problem. Read more in his article below. – Sandra Laurence

Let’s stop with populism on the South African Reserve Bank

By Phumlani Majozi

Since the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) raised interest rates for the third time in the year 2022 last November,  by 75 basis points, the Bank has been under attack by some people.

I see the attacks as unfair, and they are directed at the wrong people in the context of South Africa’s current socioeconomic situation.

Before people attack the SARB, or any central bank around the world, it is vital that they understand the chief mandate of a particular central bank in a particular country.

Understanding the central bank’s chief mandate will help in making sense of the decisions that central bankers have to make in their work, and the central bank’s role in the macroeconomy. The understanding of the chief mandate, will also help in understanding what central banks can and cannot do within the macroeconomy.  

In South Africa, there are two chief mandates of the SARB as outlined under Section 224 of the Constitution of South Africa: it “is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic”, and, to “perform its functions independently and without fear, favour or prejudice.” 

Some countries have more mandates, but the protection of the value of the currency, controlling inflation, is the primary mandate of central banks around the globe.

Over the past two years, inflation has been spiralling out of control across the world. What led to this inflation is what I have described as reckless public policy decision making by politicians.

With its chief mandate,  the SARB must attempt to suppress the skyrocketing inflation, because the Bank must protect the value of the currency. On its website, the SARB states its mission as “To protect the value of the currency in the interest of balanced and sustainable economic growth in South Africa”.

The major tool the SARB uses to suppress, or control,  inflation is the repo rate. The repo rate is the policy rate of the SARB. 

When inflation skyrockets, the SARB raises the repo rate, making it expensive for commercial banks to borrow from the SARB, reducing money supply in the macroeconomy. The commercial banks then adjust their lending rate to the public upward, which ultimately discourages increased borrowing and spending amongst the citizens, resulting in reduced inflation. At least that is the expected outcome when the SARB increases the repo rate. Citizens’ increased spending contributes to, and fuels the rising inflation.

With the skyrocketing inflation rate that has gone way beyond its upper target limit of 6%, the SARB has had no choice but to raise the rates like other central banks have done in other countries, as they  are also dealing with the  inflation problem. 

Had the SARB not acted last year by adjusting the repo rate upward, in an attempt to reduce inflation, it would, in a sense, have failed in its chief mandate, disadvantaging South Africans as inflation would have gotten worse later. They have done what they have done, with the tools they have,  to attempt to help South Africans.

What is also important to understand, is that the monetary policy decisions of the SARB are data-dependent. The MPC makes policy rate decisions based on South Africa’s macroeconomic data. The decisions are not political and must not be political or factor in the opinions of the general public;  they are, and must be, driven by the data.

The populism is not helpful

Lately, after the November repo rate announcement, populism on the SARB has gained traction again. Populists have reiterated their long-time call for the nationalisation of the SARB. 

The reason they want the SARB nationalised, is because they are of the view that the government would have full control of it. Obviously, these people  want the independence of the SARB weakened.

If the SARB is nationalised, it is highly likely that the bank’s tradition of making decisions based on macroeconomic data will be abandoned and politicians will take full control and do what advances their political interests.

The truth we must tell, is that the nationalisation of the SARB would not address South Africa’s socio-economic problems that are structural and require structural reforms – from reducing tax rates, to educational reform, to labour market reforms, to reforming energy, to reducing regulations, and so on. Monetary policy cannot resolve South Africa’s socio-economic problems. Even Lesetja Kganyago, the chairman of the SARB, has been clear on this.

The governing party, the African National Congress (ANC), has proposed an expanded mandate of the SARB – which would include economic growth and job creation. But still, this would not help given that what South Africa needs is structural reforms. The ANC has failed on public policy, and now thinks that the SARB will help. It will not.

I have commended Kganyago’s work numerous times. He’s a brave man. He fights for the independence of the SARB, and has condemned populist rhetoric against it. He must be strong and firm for the good of South Africa. His great work and boldness are why he is one of the highly respected central bankers in the world.

I say again, as I have said before, having learned from Alex Forbes’ chief economist Isaah Mhlanga. What greatly concerns me about South Africa, is that we are a nation fixated on wrong conversations. Our dialogues are on the wrong topics.

You do not only find populism in relation to the role of the SARB in our society, you also find it in matters relating to land reform, the structure of the economy, crime, and so on. Politicians generally fuel populism in hope of attracting votes from the ignorant and gullible segments of our society.

All this is not to say the SARB’s work must not be criticised. It can be criticised, and must be criticised if, and when necessary.

Popular economist Mohammed El-Erian of Allianz, criticised the American Federal Reserve (Fed) in his article published on Project Syndicate last month. 

Mohammed argued that the Fed made mistakes in its analysis, policy making, governance and communications in the past two years. That this year, Mohammed argued, the Fed must make up for its past mistakes. His criticism was constructive and reasonable, it was not populist as much of the current criticism is in South Africa.

We South Africans must wise up, stop with populism, and hold our political leaders accountable.

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