Reserve Bank debate: To nationalise or not

The issues the South African Reserve Bank faces run deeper than the question of ownership and talk of nationalisation has raised widely varying opinions.

In January, a casual newsreader would have been forgiven for thinking that the ANC was at war with itself over the shareholders and mandate of the country’s Reserve Bank.

It took an intervention from President Cyril Ramaphosa at an ANC national executive committee (NEC) meeting to bring calm in the form of a call for a unified position.

Left leaning academic economist, and former director of the South African Reserve Bank, Vishnu Padayachee, says the ANC has a “very confused” position on the ownership and independence of the Reserve Bank.

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It’s difficult to disagree with that after witnessing the public war between Finance Minister Tito Mboweni and Ekurhuleni mayor Mzwandile Masina on Twitter in January over the subject, which saw Mboweni telling Masina to “open your brain first before opening your mouth”.

Masina is for the nationalisation of the bank and altering its mandate in line with the decision taken at the ANC national conference at Nasrec. He had also questioned whether Reserve Bank governor Lesetja Kganyago thought he was bigger than the ANC, after the latter defended the bank’s independence and mandate.

The confusion finally came to a head in late January, when Ramaphosa warned members of the ANC leadership not to contradict each other on the ownership and independence of the bank.

‘One voice’

Ramaphosa called for party leaders to speak with “one voice” at the NEC lekgotla in January.

“The ANC has rightly emphasised that the Reserve Bank must ensure that its approach to monetary policy, while not sacrificing price stability, should take account of employment creation and economic growth,” said Ramaphosa.

“Ownership of the SARB [South African Reserve Bank] is distinct from the independence of the bank and we remain committed to addressing the anomaly where the central bank has private shareholders,” said Ramaphosa. “However, we must remain mindful of strategic, financial and tactical considerations that affect when and how we will address the situation.”

Ramaphosa said the ANC conference resolution was clear and the bank would be brought under public ownership.

The message from Ramaphosa was clear: the bank will be nationalised and its mandate is also in the ANC’s sights.

‘A new class of power brokers’

While South Africa fiercely debates its Reserve Bank, central banks globally are increasingly becoming sites of contestation.

In her 2018 book Collusion: How Central Bankers Rigged the World, former Wall Street executive turned global financial sector chronicler Nomi Prins says the financial crisis of 2007-2008 converted central bankers into “a new class of power brokers”, where they began to seek influence outside of mere monetary policy.

She says this power was acquired through the cheap money that was flooded into the banking system by a number of central banks in the wake of the crisis, dubbed Quantitative Easing or QE, which Prins refers to throughout her book as a “conjured money scheme”.

“QE is an overtly complex term that entails a central bank manufacturing electronic money and then injecting it into banks and financial markets in return for purchasing bonds or securities or stocks,” writes Prins.

She says this has the effect of rendering money abnormally cheap.

This conjured money “ran roughshod over the very nature of free markets” and was used as a financial weapon against developing nations, says Prins.

“It altered domestic and international power structures by furnishing capital to G7 nations and their banks so they could speculate globally, especially in developing countries, in markets rather than in direct economic investment that benefited populations.”

Prins writes that “speculation raged” in the wake of this cheap capital, “much as a global casino would be abuzz if everyone gambled using someone else’s money”.

She says the commercial banks “hoarded cash”, using the cheaper money to boost their profits but not to help local economies suffering from the crisis.

‘Selfish’ act

The third round of QE by the United States Federal Reserve System was accused of being a particularly “selfish” act that “harmed emerging countries by “stealing their share of exports” and “provoking” currency market volatility.

Brazil Finance Minister Guido Mantega said at the time that “advanced countries cannot count on exporting their way out of the crisis at the expense of emerging market economies”.

“Collusion among the bigger players renders the smaller or ‘outsider’ ones perpetually caught in defence mode,” writes Prins.

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Which is where the South African economy finds itself.

Ian Cruickshanks, from the economically right wing South African Institute of Race Relations, agrees, saying that the G7 nations have the power to mitigate the impact of the 2008 financial crisis through quantitative easing, whereas developing nations like South Africa don’t have that luxury.

Cruikshanks says Kganyago is doing a “great job in extraordinarily difficult circumstances” and should definitely get a second term when his first expires late this year.

The South African Federation of Trade Unions (Saftu) position is that the Reserve Bank can never be independent while privately owned. Saftu accuses the Ramaphosa government of “reacting to fears within the business world, particularly the finance sector”, which is only interested in “currency stability”.

Saftu calls the private shareholders a “historic anomaly” and says the government must develop a proposal to ensure full public ownership of the bank.

Anomalous shareholding

The private shareholding is so anomalous that when the Mail & Guardian recently contacted agricultural industry association AgriSA for comment about the 1 000 shares it holds in the Reserve Bank, chief executive Omri van Zyl was unaware of the shareholding, saying he didn’t know why the organisation would own shares.

Padayachee says nationalising the Reserve Bank now is unnecessary and there is no reason to tinker with it. “I am completely agnostic about ownership of the Reserve Bank,” he says. “It makes no difference in operational terms, there is no direct role that private shareholders play.”

Padayachee says the ANC had a “one-off opportunity” to nationalise the bank in the transition to democracy. “That opportunity was missed, the horse has bolted.”

He points out that the second half of the 20th century has seen many privately owned central banks becoming state-owned.

Today, South Africa is one of only eight central banks with private shareholders.

‘The norm’

The Bank of England was nationalised in 1946, after World War II, and the latest example is the Austrian Central Bank, which made the move in 2012.

Padayachee says this move from private central bank to state central bank is “the norm” and that if the government did decide to take over the Reserve Bank, the move wouldn’t be expensive in terms of compensating the private shareholders.

“R20 million should take care of it,” he says.

However, Kganyago has said that some shareholders want the bank to be nationalised because they believe they are entitled to a share of the bank’s assets. He warned that a move to nationalise could turn into a protracted and costly legal process.

Cruickshanks says it is wrong to compare the Austrian nationalisation with proposals to nationalise the Reserve Bank.

“One is a First World European central bank with a highly developed financial sector and the other is an emerging nation, slipping down the ranks,” he says.

Changing the Reserve Bank’s mandate

Padayachee says the proposals to nationalise the bank and alter its mandate have been put on the table in “odd ways”.

“When people articulate these ideas for the wrong reasons, it obfuscates the debate,” he says. “If you say anything about changing the Reserve Bank’s mandate, you are branded a ‘macroeconomic populist’.”

He has a point. In February, Seth Mukwevho, a former Rand Merchant Bank country risk strategist who is now a corporate investment strategy consultant, described the proposal to change the Reserve Bank’s mandate as “reckless populism”, drawing links to Zimbabwe and Venezuela.

But New Zealand’s central bank recently changed its mandate to include “maximising sustainable employment” and nobody acted as if the sky was falling down. In fact, New Zealand’s central bank had become the third since the 2008 global financial crisis to alter its mandate to take into consideration employment, following the US Federal Reserve and the Reserve Bank of Australia.

Middle ground

“There has to be a middle way,” says Padayachee. “We need to ask what is appropriate at this point, given the nature of our macroeconomic problems.”

He says he has scant regard for the argument that changing the bank’s mandate to take into account economic growth and job creation will lead to the bank taking its eye off inflation.

He says many people in South Africa are naïve about the role of central banks and that inflation targeting is a relatively new phenomenon, having developed in the 1980s.

“Government could change the inflation target tomorrow. It has the power to do that.”

Padayachee says growth and unemployment are far more “dangerous” factors than inflation.

“My own view is that the Reserve Bank should have operational independence, but their goals should be set by the democratically elected government of the day,” he says.

Structural problems

In February, Reserve Bank deputy governor Daniel Mminele said that while low interest rates are seen as a tool to spur growth, South Africa’s growth problems are largely structural and not cyclical, and that monetary policy couldn’t fix these structural problems.

In Collusion, Prins calls inflation targeting “old school central bank thinking”.

She says inflation targeting was used as a smokescreen to keep pumping money into the banking system after the 2008 financial crisis.

“Inflation, and whether it was low or high, was a convenient detail to be banished at all costs, even if you couldn’t see it,” she writes.

“In the absence of true inflation or growth, central bankers, especially in developed nations, could keep conjuring money, which flowed to banks and market speculators who borrowed it cheaply and in large quantities, because real inflation was so difficult to attain in a faltering economy.”

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