The recent debate about the mandate of the South African Reserve Bank (SARB) started with a seemingly out-of-nowhere attack by Public Protector Busisiwe Mkhwebane. She incinerated the legal bounds imposed on her office and ordered Parliament to change the SARB’s mandate from achieving and maintaining price stability in the interest of balanced and sustainable economic growth in South Africa to “promote balanced and sustainable economic growth, while ensuring that the socio-economic well-being of the citizens are protected”.
If it is true that Mkhwebane only consulted with the Gupta-paid Black First Land First group of Andile Mngxitama and the obscure holocaust denier Stephen Goodson, but not with the Reserve Bank itself, Julius Malema and the Economic Freedom Fighters are right: Mkhwebane is unfit for office and must step down. Why she would waste her political capital on a case that is so far outside the realm of law, rationality, and reason will remain her secret.
It didn’t take long for Gupta henchman and newly appointed Deputy Finance Minister Sfiso Buthelezi to come to Mkhwebane’s help. At an event at the Gordon Institute for Business Science, Buthelezi is reported as saying that inflation targeting was “bad” for emerging economies. While it is true that certain preconditions should be met for inflation targeting to be effective, saying it is outright “bad” is a Trump-like oversimplification that renders the statement plainly wrong.
Despite all this, it was the ANC’s Western Cape spokesperson Yonela Diko who stooped lowest in his personal attack on Reserve Bank Governor Lesetja Kganyago. When Diko writes “The current reaction of Reserve Bank Governor Lesetja Kganyago – a man who has never shared with the country just what his vision is for the Reserve Bank – towards the Public Protector has exposed him for lacking any appreciation of the developmental agenda of the country,” I must ask: have you no shame? Are you so desperate for attention that you are willing to sully someone who has been a passionate and dedicated public sector servant for over 20 years?
Let’s dissect Diko’s vitriolic statement for a moment. It begins with “The current reaction” which implies that the Governor might eventually flip-flop on his current position. It is probably natural for a politician to think in such a way, but it is squarely outside the realm of what central bankers do, let alone Governors. Consistency is a key ingredient for central bank policy and cherished by central bankers around the world. In fact, later in his article Diko exposes the duplicity of his argument by criticising the Governor at length for only being able to “do the job” and not having “changed the job” (sic). Hell, if only ministers like Bathabile Dlamini or SAA chairperson Dudu Myeni were able to “just do their job”, what a glorious country we would have.
Next, Diko claims the Governor had never shared his vision for the Reserve Bank. In what world does Diko live? Leaving aside the fact that every Quarterly Bulletin, every Financial Stability Report and every Annual Report is an expression of the Governor’s vision for the bank and the country, Diko could have at least spent the same 30 seconds it took me to find a number of speeches from the Governor in which he outlines his vision personally and in great detail.
Which brings me to the last, and most outrageous part of Diko’s statement, where he claims the Governor lacks “any appreciation of the developmental agenda of the country”. Anyone who met the Governor will immediately testify just how dead-wrong Diko is here. In a 2015 speech at the Bank for International Settlements, a forum for the G20 central banks, the Governor himself explains that: “By anchoring expectations within a credible inflation-targeting regime, we prevent inflation creeping higher. This is a valuable objective. Additional inflation would hurt people who lack the power and privilege to protect the real purchasing power of their wages and savings.” This exactly summarises a crucial point that the critics of inflation targeting frivolously ignore: high inflation will hit the poor much harder than the rich. Hence, the first duty for central bankers in an emerging market must be to safeguard the purchasing power of those who have to carefully balance their budget to make sure there still is food on the table at the end of the month.
At this point, one cannot help but wonder how the Reserve Bank all of a sudden has gained the attention of those frequenting the Saxonwold Shebeen. Sure, it helps that we now seem to have a Public Protector who only whispers to power, and that Treasury is steered by Gupta puppets. But why is it valuable for team Gupta to get control over the Reserve Bank?
There are several explanations. Let’s start with the most sinister scenario and look at the efforts to capture the Reserve Bank and the push to establish another state-owned bank in a joint context. How does the giant Gupta-enabled state looting machine work? Start with a state-owned entity like Eskom, Prasa, or SAA. At their head, establish a confidant who is willing to bend procurement rules, tamper with tenders, and funnel money to Gupta-linked companies. When the SOE runs out of liquidity that can be misappropriated, claim the SOE fulfils some social function and bail it out with taxpayer money. Eat, sleep, and repeat until the fiscus runs out of money.
Now, either buy a troubled bank, or start your own bank which is able to raise liquidity cheap, for example by endowing it with government guarantees. A state-owned bank is perfect for this purpose. Endow the bank with a mandate for social transformation and start funding the SOEs which are oh-so-important for the country’s poor. Research on the Japanese banking crisis in the 90s shows that banks are willing to engage in so-called zombie-lending, ie they provide loans to companies who use the fresh capital not for productive investments, but only to roll over maturing debt. If this sounds all too familiar at the moment, it is, since SAA is effectively a zombie airline since the latest bail out.
Next, make sure the state-owned bank becomes systemically important by either making sure it is large enough, or by incentivising sufficiently many poor and vulnerable South Africans to deposit with the bank, for example by having it hand out all social grants. This is precisely when the Reserve Bank comes in handy. It is the only institution that can provide emergency liquidity in such a situation and keep the bank afloat. Conversely, a diligent and independent central bank will, through their banking supervision department, keep a watchful eye on the risk taken by any state-owned bank. Examples of a central bank saving zombie banks exist in Japan and more recently in Europe, where the European Central Bank has arguably kept otherwise insolvent Greek and Italian banks artificially afloat.
A less sinister scenario is that the President is hoping for lower interest rates and a more relaxed stance on inflation. This would deflate some of the country’s domestic sovereign debt and is generally assumed to foster growth. But the link between low interest rates and growth is much less strong than the link between inflation and poverty. Keeping the interest rates too low for too long was arguably one of the problems that lead to the global financial crisis of 2007/2008.
Either way South Africans, and especially poor South Africans, must be vigilant that the Reserve Bank remains a token of integrity and independence in the country. While the often-cited Zimbabwe scenario is probably too far-fetched, even under a captured Reserve Bank, it will always be the poor who pay the highest price if we allow the state capturers to infringe on the Reserve Bank’s independence. DM
In other news...
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