Article first published in Buddy Wells’ Blog
According to the Constitution of the Republic of South Africa, the SA Reserve Bank’s primary mandate is to “protect the value of the currency in the interests of balanced and sustainable economic growth”.
The policy framework the SARB uses to achieve its constitutional mandate is set by parliament in the SA Reserve Bank Act. Unlike the constitution, this policy framework can be changed fairly easily and legally, as long as the proposed new policies are in line with the SARBs constitutional mandate.
In the late 90s, then Finance Minister Trevor Manuel liberalised SA’s monetary policy, relaxing exchange controls and allowing large companies to delist from the JSE.
Then, in February 2000, the SARB policy framework was changed to give the SARB Monetary Policy Committee one task only: Keep inflation between 3 to 6%.
The net result of these changes can be observed in this graph below: (Note what happens around 2000).
Since then, the SARB has only used one instrument to keep inflation within its 3 to 6% target: The SARB repo rate. But while other central banks also use other instruments to cool and heat economic growth such as adjusting the capital reserve requirement of commercial banks, the SARB inexplicably does not, despite its very purpose being to use whatever tools it can to achieve its constitutional mandate.
Even stranger, the 3 to 6% inflation target has never been adjusted, even when our inflation has been mainly cost push (as in recent years) and not driven by demand from an overheating economy. This is especially strange considering inflation targets vary greatly from central bank to central bank. The 3 to 6% inflation target is a relatively arbitrary one. (Click here to see a list of varied inflation targets of central banks around the world).
Slowing an economy already on the brink of recession and with extreme unemployment in order to try and control cost push inflation is pure madness. (For more on the folly of controlling cost push inflation with the repo rate click here).
Raising the repo rate (slowing the economy) to keep mostly cost push inflation within an arbitrary target when growth is around 0%, unemployment is near 30%, and ratings agencies are threatening to downgrade us due to “poor growth”, also seems a tad unconstitutional, and yet that is exactly what happened over the last few years. At the time, not a word was uttered by the “defenders” of our constitution. We now have record unemployment, recession and junk status.
Parliament has the constitutional obligation to adjust the Reserve Bank Act whenever necessary to ensure the SARB has all available policies in its framework to “protect the value of the currency in the interests of sustainable and balanced growth”. Inexplicably, despite the fact that the ruling party is rightly blamed for our slow growth and despite the growing lack of faith in them as recent polls show, the ANC have not tried any other policies other than the rigid narrow band inflation targeting and the liberalised exchange controls that have proven themselves utterly ineffective. Even now, as the economy contracts into recession, unemployment reaches record levels, record debt and the cost of borrowing skyrockets due to ratings downgrades blamed repeatedly by the ratings agencies themselves on “slow growth”, none of the Ministers of Finance has even once adjusted the inflation target upwards to allow economic growth during times of cost push inflation as they are mandated and constitutionally bound to do.
But it is not just the government that is to blame for the rigid, unimaginative and limited policy framework of the SARB. The general public, and the opinion makers and thought leaders who inform them, have also allowed the SARB and government to ignore their constitutional obligations. We should all educate ourselves on the consequences of monetary policy, not just because it’s a fascinating topic, but because it impacts our pockets more than any other single factor: With the Repo rate at 7%, the SARB pulls around R220 billion per year from our economy. A massive amount. Money that would otherwise be saved, invested or spent on our businesses.
Most South Africans still labour under the illusion that the SA Reserve Bank Act and the SARB policy framework is the best we can do to maintain a strong, stable currency in the interests of balanced and sustainable growth. Recession, record unemployment and junk status are seemingly not impacting on that religious conviction.
While rightly rushing to defend the words of the SARBs constitutional mandate, none seem concerned that the SARB policy framework since the late 90’s has proven itself woefully inadequate at “protecting the value of the currency in the interests of balanced and sustainable growth”.
What’s the use of defending a constitution while ignoring the fact that is being violated?
The evidence shows us that, since exchange controls were relaxed by finance minister Trevor Manuel in the late 90’s (when large corporations were also allowed to delist from the JSE) and inflation targeting were adopted, the rand’s value has been far more volatile, despite assurances that the a “free market” would lead to currency stability.
The graph above shows that the changes to the SARB policy since the late 90’s were clearly unconstitutional, as they have led to extreme currency volatility without any improvement in the long-term decay in the Rand’s value to speak of. Is the silence on this issue from the mainstream commentators because they believe the mythical “free market” is more sacred than our constitution, or the wellbeing of our people? Is the constitution being sacrificed on the altar of the cult of the free market? What good is protecting the wording of our constitution if we turn a blind eye to its violation?
So much for maintaining the value of the currency, but how about achieving balanced and sustainable growth, the end goal of the SARB’s constitutional obligation?
Firstly, for growth to be sustainable, it must exist. We currently do not have long-term economic growth to speak of, and are in recession (negative growth).
Secondly, for growth to be sustainable, it must be inclusive. It is not sustainable if it does not reduce poverty and inequality in the long run. It is especially not sustainable if unemployment is at 28% and growing as we have here in South Africa. Increasing inequality in the face of abject poverty leads to more unrest, and political instability, and if not addressed, eventually, civil war or revolution.
We simply cannot afford to allow our future growth to exclude our poorest.
Thirdly, for growth to be balanced it must be inclusive. It is not balanced unless the lives of all our people and not just the rich are being improved by it. That is self-evident.
Fourthly, to be sustainable, balanced growth has to be environmentally friendly.
Clearly we do not have enough growth of any kind under the current SARB policy framework, and what little growth we have had is not balanced or sustainable.
With 28% unemployment and massive tracts of under-utilized land and capital, SA is ideally suited to protecting the value of the currency and achieving balanced and sustainable growth through increasing the supply of local goods, energy and skills through subsidies, zero interest loans and grants etc.
South Africans have proven to be fierce defenders of the wording of our constitution, but what’s the use of defending the constitution while ignoring the fact that it’s being violated?
If we are to truly defend our constitution, we must be as passionate at demanding that all institutions, especially the SARB, actually carry out their constitutional obligations.