Nationalising The South African Reserve Bank: A Case Of Infantile Populism?
By Dr Garth le Pere
The nationalisation of the South African Reserve Bank may not matter given that such a decision must not impact the independence of the central bank.
The Central Bank’s core function is to provide a financial infrastructure for the government and commercial banks.
In doing so, central banks play a crucial role in ensuring that businesses can operate in an economy where liquidity is protected, and inflation is kept under control.
In 1920, Lenin wrote a famous polemic titled, Left Wing Communism: An Infantile Disorder. Borrowing from Lenin, we may well ask whether the ANC and the EFF’s call to nationalise the South African Reserve Bank is not a case of infantile populism? The recent revival of this debate harks back the EFF’s motion in its SA Reserve Bank Amendment Bill of August 2018 and the ANC’s ratification of this move to nationalise the Bank at its December conference in 2017. There is a healthy dose of election opportunism here which is driven by political expediency since nationalising the Reserve Bank will not make an iota of difference and amounts to nothing but a silly and confused technicality.
It will be essential to explain why such is the case and that is the purpose of this article. To begin with both the ANC and the EFF will require a super-majority to amend Article 224 of the Constitution which states that the primary objective of the Bank is to protect the value of the currency and then further in Article 224(2), that in pursuit of this objective the Bank “…must perform its functions independently and without fear, favour or prejudice but there must be regular consultation between the Bank and the Cabinet member responsible for national financial matters.”
Therefore and in terms of the conventional functions of a central bank, nationalisation will not matter since because by definition such decision cannot compromise the independence of the Bank; it will not affect how the value of the currency, money supply, interest and exchange rates are determined or how inflation is managed; and finally as pointed out by the Governor of the Reserve Bank, Lesetja Kganyago, it is bound to be a protracted and costly affair and in the ultimate analysis, will be a waste of time. It is essential to bear in mind that the Reserve Bank’s shareholding structure is prescribed by the SA Reserve Bank Act of 1989. Change in ownership will require amending the Act which no doubt will be vehemently opposed by the 696 private shareholders who enjoy the protection of international treaties against nationalisation. Besides, the shareholders could rightfully argue that the Reserve Bank’s R50 billion in reserves belongs to them and they could then demand appropriate compensation if the Bank is nationalised.
Nationalising the Reserve Bank, therefore, represents stereotypical populist and left-wing policy catastrophes and forms of statist economic manipulation whose consequences will be dire for the country. There are no inherent benefits except the political capital it might generate for the two political parties and here we need to look no further than Zimbabwe and Venezuela.
Even nominally socialist regimes such as Cuba and China fiercely guard the independence of their central banks.
Background and History
The South African Reserve Bank has a long history with some unique features: it remains one of six privately owned banks in the world (the others being Belgium, Greece, Japan, Switzerland and Turkey). This private ownership is the main gravamen and complaint of the EFF and ANC nationalisation lobby. The Reserve Bank was established in 1921 and was the fourth central bank of its kind outside the UK, Europe, the US, and Japan and is the oldest central bank in Africa. It has a Board of 15 Directors which includes the government-appointed Governor and three Deputies. Of the 11 non-executive Directors, four are appointed by the President and seven by the shareholders who ‘own’ the Reserve Bank. The Bank has 2 million issued shares which is uncommon but not unprecedented: one out of eight central banks worldwide have shareholders other than governments while the Bank of Italy and the 12 Federal Reserve Banks in the US make provision for shareholding by commercial banks. In South Africa’s case, the limitation is that no shareholder may own more than 10 000 shares.
In terms of monetary policy, it is important to note that the private shareholders have no say whatsoever; the Bank’s Monetary Policy Committee, which is the nerve-centre for holding the South African economy together, is appointed by the Governor and is his/her sole prerogative. The great virtue of private ownership of the Bank has been the avowed transparency in its governance processes and accountability not only to its shareholders but to the South African public which it must ultimately serve.
Our basic argument then is whether nationalised or not, there are elementary functions which underpin the efficacy of the Reserve Bank and it holds these in common with central banks all over the world. The transformation of central banks into public policy agencies after the Second World War was primarily prompted by the depressions and economic crises between the world wars, the breakdown of the gold standard, and the change from fixed to floating exchange rates. A significant consequence was a rethinking of the changed and changing role of government in economic management such that central banks became an essential component of the state’s macro-economic toolkit.
In such a changed and changing environment, the public policy emphasis was a predominant focus and consideration, especially concerning the nature and purpose of the monetary policy function. It did not matter whether central banks were nationalised or not: the challenge was and continues to be how countries can best maintain the internal and external values of their national currencies in the context of market volatility and uncertainty as South Africa has often experienced.
In philosophy, policy, and practice the exercise of this choice is at the core of maintaining the independence of any central bank. Besides monetary policy as a core function, central banks also provide core financial infrastructure for supporting an efficient monetary exchange system as well as managing financial operations in a manner that ensures financial and monetary stability. It must be emphasised again that the prudential execution of these tasks requires complete or near complete autonomy of any central bank and this explains the constitutional rationale of Article 224 referred to above.
Payment Systems, Oversight and Regulation
Financial and monetary stability critically depend on the robustness and effective functioning and oversight of payment systems and moreover, it is essential to understand the causes and symptoms of any instability as this may adversely affect the operational integrity of payment systems. This requires a solid understanding of both domestic and global contexts, and it is not surprising, therefore, that the research and analytical capacity of central banks have grown and expanded in recent decades and the South African Reserve Bank is no exception.
Next, there is the oversight and regulation function which became increasingly formalised and direct and which, in the main, was determined by the shifting attitudes towards the role of government in intervening, guiding, and regulating economic activity. The evolution and history of the Federal Reserve System in the US have done much to shape thinking about the regulatory and directive powers of central banks, from which many others have learnt useful lessons. Finally, central banks have provided a strategic impetus for economic development both directly and through the banking system to stimulate economic sectors that were targeted by the government as vectors of rapid growth, employment, and welfare enhancement.
In general terms then, central bank operations support economic policy, especially since they have come to rely on transactions in open financial markets where liquidity management and price stability are critical considerations. This function was painfully evident in the role that the South African Reserve Bank had to play in the aftermath of the 2008 financial crisis which had severe and adverse knock-on effects on the South African economy and where the virtues of its independence were once again on display regarding helping to guard against the severe implications of large financial losses. The independent role played here by the Bank’s Monetary Policy Committee cannot be underestimated. This included reserve management based on official reserves of foreign exchange, where reserves are managed by the central bank and typically owned by it or at least reflected on its balance sheet.
Financial System Infrastructure
At the end of the day, the supreme function of any central bank is to provide infrastructure for the overall financial system, and this is where the South African Reserve Bank has acquitted itself with distinction since the end of apartheid; moreover, it has had to do so in a difficult and challenging environment of economic stagnation and sluggish growth. The core activities of this infrastructure include issuing currency for everyday private and public use in the form of banknotes and coins and ensuring their efficient circulation; providing banking services to commercial banks and the government; and providing central bank money in settlement of transactions.
Hence, payment and settlement systems make up a crucial part of any modern economy and where these are compromised or fail, there are serious consequences not only for individuals and market actors but for the entire economy.
Where policy responsibility fails, the results are often catastrophic for inflation management, consumer and business confidence, and the value of the currency as we have seen in Zimbabwe and other countries as far afield as Argentina, Russia, Brazil, Thailand, Portugal, and Turkey. Debt management is of relevance here because central banks are not only the government’s bank but are close to financial markets. Central banks, therefore, have a keen interest in the government’s management of debt based on the general norm that government borrows entirely on open markets and at market rates. In South Africa’s case, the country faces a particularly difficult debt burden where government debt is a frightening 55.8 percent of GDP. To make matters worse, the government has borrowed R1 trillion in the last eight years; and interest payment on debt has risen from R57 billion in 2010 to R162 billion in 2018. This situation will hardly be alleviated by nationalisation of the Reserve Bank in the general context of high levels of racialised poverty, inequality, and unemployment.
Finally, the Reserve Bank plays a vital role in assisting the country’s banks in adhering to international banking standards and here the Basel Accords are of special significance. It is worth setting out the nature and purpose of these Accords since they have played a critical role in ensuring the stability of the sector and the better quality of South Africa’s banking services. The Accords were established in the 1980s to encourage greater financial stability by improving prudential management, surveillance, supervisory know-how, as well as the quality of banking supervision on an international scale. The Accords are named after the Swiss city of Basel which is where they originate from and where the secretariat of the Basel Committee on Bank Supervision is based that manages and oversees the Accords. The initial accord, Basel I, focused on the capital adequacy of financial institutions and as it took root, a need was identified to develop regulations dealing with capital requirements, market discipline, and three forms of risk related to capital, markets, and operations. This is the essence of Basel II whose thrust is to ensure further that financial institutions have enough capital on account to meet their obligations and can absorb unexpected losses.
Basel III was of great significance for the global banking industry since it was developed in the destructive aftermath of the 2008 financial crisis. It put in place the over-riding imperative of strengthening the Accords to address systemic problems of poor banking governance, risk management, moral hazard, and perverse incentive structures as well as dealing with the severe challenge of the over-leveraged banking industry.
So here is the million-dollar question: to what extent will a nationalised Reserve Bank pay any allegiance to critical international standards and regulations such as those contained in the Basel Accords? This is particularly important when it comes to the appropriate degree of independence in the sphere of bank supervision. As a governance issue for the Reserve Bank, a critical consideration must be the presumptive logic that its operational autonomy is a crucial dimension of adequate oversight.
It seems that both the ANC and EFF have not clearly and thoroughly contemplated what the implications of nationalising the Reserve Bank might be beyond their infantile populist posturing. Worse still, they appear to be oblivious to the underlying institutional arrangements that govern the Reserve Bank. This relates both to monetary policy and financial stability at a critical juncture in the country’s post-apartheid history.
The ANC and the EFF currently are devoid and destitute of more compelling reasons or a persuasive argument or a cogent explanation of why they prefer nationalising the Reserve Bank and what the putative advantages and benefits might be. And therefore, like Macbeth, theirs will remain “a tale, told by an idiot, full of sound and fury, signifying nothing.”
Dr Garth le Pere is an Extraordinary Professor at the University of Pretoria