MONEY

Zvikomborero Nyika

UCT Law Student

Envision the ordinary South African when buying petrol, bread, milk, and any basic item; the cost of living has a natural political attachment to the man they elected to lead their nation Who is to blame? The African National Congress, apartheid, The International Monetary Fund, foreigners, the President? There is an intellectual constituency that believes the nation’s current economic problems rest at the heart of the ownership, independence, and mandate of the South African Reserve Bank (SARB) In this article, we shall assess the legal relationship between the central bank and the state And how the law could create a platform for economists to actualize the aspirations to cure wealth inequality and redress racial inequality.

History

The SARB was formed in 1921 against the backdrop of monetary conditions emanating from World War I. At the time currency operated on a gold standard basis. The gold price in the United Kingdom was higher than that in South Africa. This created a buying and selling arbitrage. Banks requested the government to relinquish them of this obligation to convert notes into gold. A select parliament committee in consultation with industry players recommended an establishment of a central bank. Shortly after that in 1921, the central bank of South Africa was established

What is the role of a modern Central Bank?

Monetary policy is the bedrock of modern central banking Central Banks have a market regulation role together with a monetary role Economists have a syndrome of using complex language to gatekeep their area of study, hence it is critical to breaking down how these tools operate.

What is monetary policy? Economics

professor David Moss describes it as the efforts of a central bank to influence economic performance through short-term interest rates and money supply Three basic tools influence performance Firstly, the central bank lends to banks at an interest rate it chooses Money has a price, meaning if the interest rate is low more economic activity will occur through borrowing and the inverse is also true It is crucial to note that interest is the price of money Hence, there is a recent hysteria on interest rates because they impact the cost of borrowing and spending Secondly, the reserve requirement on bank deposits is a tool The central bank sets a proportion of every bank deposit that must be held. If the reserve amount is low that means more money is loaned pushing economic activity. Raising the reserve amount places brakes on lending, hence slowing down economic activity. The third basic tool is open market operations. When the central bank wants to increase the money supply it buys assets from private institutions and government bonds. When the central bank decides to halt the money supply it implements an open market sale which withdraws money from the economy.

What is the mandate of the South African Reserve Bank?

The central bank’s primary mandate is to protect the currency and foster sustainable economic growth. There is a constituency that argues that the emphasis on protecting the rand is in the interest of capital and does not trickle down to support the poor. This school of thought is led by the miners’ unions. In apartheid South Africa the rand was kept healthily balanced so that multinational corporations could access their exit options into other currencies maintaining a profit.

Furthermore, this left-leaning corner points out that the rand’s strength does not encourage export and hence has seen a decline in manufacturing However, the constitutional dispensation has seen the SARB’s interpretation of section 224 (1) as maintaining price stability which is keeping inflation under manageable levels to protect the poor The SARB points out that inflation wipes out the purchasing power of the poor effectively prejudicing them 10

Criticisms of the bank from the left

There is an argument that the central bank has failed to balance economic development in pursuit of price stability. In 2015 the National Union of Metal Workers criticised the central bank for several reasons. It alleged the bank was failing to control inflation, a lack of democratic transparency, inability to adapt to development agendas, high-interest rates, and inability to solve imbalances The EFF has also echoed its criticism of the central bank in similar terms The assertion is that the ‘white monopoly capital’ benefits from speculative capital inflows (which are premised on a strong rand) into financial instruments that do not help the poor This constituency argues that the central bank’s legal mandate must be changed to match the needs of the South African population They argue that the bank should have a full employment mandate given the high unemployment rate Their rationale is that the central bank has not been ambitious enough with interest rates The rates have been high mostly ranging above 5-20% for most of the 21stcentury They point out that high-interest rates have meant that black business has had access to expensive loans and hence has been deterred from participating in the free market The question that emerges is that has the bank failed to meet the evolving needs of the nation and should the law look to alter this position

Has the bank failed, and should we draft a new mandate?

Section 224 (1) is already inclusive of what the other constituencies may want the bank to pursue. Full employment ambitions are attainable through the current mandate. Traditional economics points out that the Philips curve creates a trade-off between employment and inflation. There is no need to get into an intellectual debate over this contentious matter. As lawyers, the idea is to create the legal room for an economist (Although lawyers have shown to be brilliant central bankers for example, Jerome Powell Chairman of US Federal Reserve). Legal room refers to the security of tenure and independence. The wording of the section has no ambiguity. Employment may be read as an obvious salient feature of economic growth, hence there is no reason for the central bank to get a constitutional amendment. Instead, there are several statutory tools within the arsenal of the executive to guide the central bank while maintaining its independence.

Should money be depoliticised?

Is the public right to blame the presidency for inflation and the cost of living? The central bank is heavily insulated by section 224 (2) which guarantees the bank's independence The particular provision also gives the government policy guidance to the bank Interest rates are powerful tools that can be used for political purposes In apartheid South Africa the National Party lowered interest rates in a bid toward a byelection in Primrose This proved to be crucial for the National Party as they won the seat The purpose of having an independent bank is that these quasi-public officials who are unelected do not have pressure to make a populist decision Instead, they must make long-term sustainable decisions that give fiscal policy (government spending) a chance to transform the economy. There is an argument that the minister of finance must carry the burden of setting rates. The Bank of England only got full independence in 1997 after Gordon Brown ceded the Chancellor’s right to set interest rates. This illustrates that model could work as England operated on such grounds from 1947 to 1997. Economists argue it is an isolated case and that there is enough data to illustrate the effectiveness of central bank independence. Furthermore, the political climates are different hence a comparison may be fundamentally flawed.

In the constitutional dispensation, the court made a critical intervention in the central bank’s independence (Public Protector v South African Reserve Bank). The public protector’s office had been investigating a R3.2 billion preconstitutional transaction between the Reserve bank and ABSA. There were serious allegations of corruption. The public protector had intended to change the bank's mandate away from currency protection to “socio-economic well-being of the citizens’’. The Court threw away Advocate Mkhwebane's case with serious punitive costs. Mogoeng CJ held that the current wording of the provision does not necessarily show obvious favour towards any particular group and the central bank must be trusted. He also held that the central bank is not beyond legal reproach and the nature of the case illustrated intimidation by the bank. He stated that no institution should use the courts to institute a culture of impunity and untouchability. The SARB in its submission had stated that the president had no role in the promulgation of new legislation to change the mandate of the bank. The court reminded the central bank of section 85(2)(d) of the Constitution which gives the executive the imperative to carry legislation forward. This illustrates that if there is an issue with the composition of the current central bank setup the president has the constitutional arsenal to change it. Keynesian economists are likely to agree with the mould of left-leaning educated They believe central bank independence may conflict with democratic values hence the court must open a clear path to holding the bank accountable

Is the ownership a problem?

The South African Reserve Bank's private ownership has created a perception of private influence over the bank. The aspersions of conflation between the bank and private business by the Public Protector, unions and the EFF have not helped the outlook of the bank. In practice, the regulating act of the central bank stipulates that the owners nominate 7 directors of the board (out of 15). It could be argued that if the central bank were fully state-owned the selection of the directors could be done differently. One may even suggest a nomination process of judges as a template of how to select directors of the bank. However, does the composition of the board have an impact? The state chooses the other half of the directors and elects all top senior positions such as the governor. The state also selects the majority of the monetary policy committee members. This is the committee that is crucial in the promulgation of interest rates.

The governor sets the inflation target in consultation with the minister of finance illustrating the government's tools to work with the bank. What rather haunts the central bank is the perception of that collusion. The public needs to have faith in the central bank otherwise its measures are useless. Credibility is key to the institution’s effectiveness. Take for example Zimbabwe’s central bank has struggled to impact the economy after its colossal failure to control inflation in 2008. This is due to a lack of credibility and alleged state influence. However, it is common practice for central banks to be stateowned. The ANC passed a resolution to nationalize it. There are hurdles such as market sentiment, after the purchase financial markets may collapse. Furthermore, a price needs to be agreed upon by the current shareholders. The central bank's shares are not remarkably profitable, but the sale would be a promising payout for the shareholders. Ownership change would likely bring a minimal operational change unless the independence of the bank is altered through mandate.

A possible solution is that the SARB may be bought by the state, which will appoint members of the board. The legislation would have to be crafted with several guards to protect the bank from government interference.

Conclusion

Central banks are a trending topic now given the impact of the covid 19 pandemic and the RussoUkrainian war which have put pressure on basic commodities. The South African Constitution is perfectly balanced on the mandate of the bank and has created checks and balances to ensure the bank is well insulated. However, these quasipublic officials who lead the bank have an enormous bearing on our day-to-day life and who will be elected in the next cycle. It must be stressed that the state has all the relevant constitutional tools to bring sustainable economic growth hence the executive should take responsibility for matters concerning the employment and socio-economic wellness of citizens.