Why SA central bank is under fire

09 Jul, 2017 - 00:07 0 Views
Why SA central bank is under fire

The Sunday Mail

SOUTH Africa’s central bank is under fire by the nation’s ruling party.

The anti-graft ombudsman told parliament on June 19 to start the process of changing the constitution to force the Reserve Bank to focus on the “socioeconomic well-being of the citizens” rather than on inflation.

Many investors took this as a threat to the bank’s independence.

Then the ruling African National Congress proposed that the bank, which has been owned by private shareholders since its founding in 1921, should become state-owned.

With South Africa suffering through a second recession in almost a decade, the 96-year-old central bank has become a scapegoat for many of the economic woes.

Why is the bank being targeted now?

As the ANC prepares for a December leadership contest, many are losing faith in the party’s ability to raise living standards and reduce inequality.

President Jacob Zuma has vowed “radical economic transformation” to accelerate spreading wealth to the black majority.

Some of his supporters say the central bank is reluctant to issue new banking licenses to black-owned lenders.

What do the bank’s defenders say?

That removing private shareholders would be a blow to transparency, since they are permitted to ask questions at the bank’s annual general meeting.

  • The South African Reserve Bank states that its primary purpose is to achieve price stability.
  • Its website’s history section says that it’s the oldest central bank in Africa.
  • In 1996, at a celebration of the bank’s 75th anniversary, president Nelson Mandela praised “this wunderkind of the South African financial system” while admitting its decisions “are not always popular”.
  • Bloomberg News notes that the bank’s rare position as one of the few central banks around the world owned by shareholders gave its critics an opening to question its integrity.

More broadly, that the bank is a last bastion of institutional strength in an economy that’s in need of stability.

How so? Look what happened earlier this year.

After South Africa’s former finance minister, Pravin Gordhan, clashed with Zuma over a nuclear-power expansion plan and the management of state companies as part of his efforts to maintain the nation’s investment-grade rating, Zuma fired Gordhan on March 31.

This prompted two companies to cut the country’s debt to junk within a week.

One of those companies, S&P Global Ratings, cited the bank’s independence and transparency as “important credit strengths.”

Who owns the bank?

Along with Switzerland and Japan, South Africa is one of the few nations that still hasn’t nationalised its central bank. South Africa’s Reserve Bank has about 650 shareholders, who can hold up to 10 000 shares each.

If the bank ends the year with a profit, it pays a dividend of 10 cents per share, or a maximum of R200 000 (US$15 000) in total.

These modest returns, the illiquid nature of the stocks and the fact that shareholders have no say over policy decisions or who the governor is means holding Reserve Bank shares is more about sentiment and symbolism than about chasing yields.

What are the complaints about the bank?

Some critics say interest rates are moving in the wrong direction.

Since 2014, the bank has raised its benchmark repurchase rate to 7 percent from 5 percent, drawing criticism from labour unions who say the bank should be promoting employment rather than fighting inflation.

Also, the Reserve Bank’s licensing and oversight authority came under fire from some ministers last year after four large banks closed the accounts of companies tied to a prominent family that is friendly with Zuma and in business with his son.

Does the ANC have the power to reshape the bank? Maybe, but it will take some doing.

South Africa’s constitution guarantees the bank’s independence and prescribes its primary objective, which is to protect the value of the currency.

South Africa’s anti-graft ombudsman, known as the Public Protector, wants to start by scrapping that objective, effectively removing the bank’s mandate to target inflation.

Separately, the ANC would adopt the state-ownership proposal as policy at its national conference in December, then it would ask parliament to change the South African Reserve Bank Act. While the party may be able to drive the change in the act because it holds 62 percent of the seats in parliament, amending the constitution would be a more difficult hurdle because it would require the votes of two thirds of lawmakers.

What would these changes do to the economy?

It’s unclear whether nationalising the central bank would change much. Currently, the owners have no say over policy or the appointment of the bank’s executives. The Government determines the inflation target in consultation with the central bank, without any input from the shareholders.

If the mandate is changed, the rand could weaken and inflation accelerate, something the Reserve Bank says would exacerbate poverty and inequality. – Bloomberg News.


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