Hugo Pienaar, chief economist at the Bureau for Economic Research (BER), and Dr Malan Rietveld, an independent economist and research fellow at the Department of Economics at Stellenbosch University, on Monday outlined why it was important to push back firmly against any efforts to undermine the SA Reserve Bank (Sarb) and its contribution to domestic macroeconomic stability.
In a comment from the BER, they said Sarb once again found itself in the crosshairs of South African politics, as senior figures in the governing ANC have suggested that changes to the central bank’s mandate are under consideration.
“While it remains to be seen whether this latest debate is anything more than an episode of political theatre, it is important that the Presidency and the National Treasury push back firmly against any efforts to undermine Sarb and its contribution to macroeconomic stability. We outline three risk scenarios if this current debate is dragged out in the coming months, rather than roundly dismissed,” they said.
What has happened?
On January 6, Gwede Mantashe, ANC chairman and high-ranking Cabinet minister, said during an interview at the conclusion of the party’s elective conference that, “The mandate of the Reserve Bank has to be expanded to meet the needs of the economy.”
The BER said Mantashe, who was a powerful and influential ANC official, had said discussions at the conference had focused on whether the central bank’s mandate should be extended beyond ensuring low and stable inflation to include promoting employment.
Unsurprisingly, there had been mixed messages from senior government officials about how serious and widely supported this idea is, the BER said. While Mantashe suggested that the idea of adding employment to Sarb’s mandate enjoyed widespread support among the ANC’s national leadership, President Cyril Ramaphosa and Finance Minister Enoch Godongwana subsequently made comments downplaying the risks of a mandate change, with Godongwana saying Sarb’s concern over employment is “implied”, and that “price stability is sacrosanct”.
Further, draft resolutions from the conference stopped short of explicitly advocating for a change to Sarb’s mandate. As before, it did call for the central bank to “implement monetary policy in a balanced manner taking into account growth, employment, and exchange rate factors.”
Mmamoloko Kubayi, head of the party’s economic transformation committee, said rather vaguely that “various options” needed to be explored to change the central bank’s mandate, and explicitly mentioned that a constitutional amendment would be required to achieve this.
A constitutional amendment, which can only pass with the support of two-thirds of legislators, would be a high but not insurmountable hurdle. With the ANC currently holding 58% of the seats in Parliament, a disciplined party-line vote, coupled with support from the radical EFF could result in enough votes to formally change Sarb’s mandate.
“At this stage, it is unclear how serious the latest proposal is. It is not unusual for the ANC to introduce a range of new debating points and party resolutions, particularly in the aftermath of a contested internal leadership election.
But rarely does the party have the political resolve and unity to act on more dramatic proposals and resolutions, examples of which in recent years included the expropriation of land without compensation, the National Health Insurance, and the mooted establishment of a national development bank or a sovereign wealth fund,” the BER said.
It said it was also worth noting that Sarb had all too often been the focal point of this type of “debate” in recent years, including the long-standing proposal to “nationalise” the central bank with suggestions that its inflation target should be replaced with a “growth target”, and that it should tolerate higher and more variable rates of inflation.
These endless cycles of political debate around the role, mandate and independence of a central bank can, over time, impose economic costs and risks, the BER warned.
“It is clear that the opening of a debate around Sarb’s mandate, regardless of whether it reflects the ANC’s true intentions on the matter, serves several political purposes. First, the populist positioning of Sarb as an overly technocratic institution, and out of touch with the needs and realities of the South African labour market is also convenient for politicians eager to shift the blame for poor economic performance,” it said.
Second, proposals of this kind were often not primarily about policy or institutional substance, but rather part of an elaborate process of horse-trading and posturing in the context of internal party divisions.
The mandate-expansion idea might be nothing more than a bone thrown to progressive or radical elements within the ANC. Or it could be used as a bargaining chip in future political and policy debates: something that could be dropped to extract other concessions.
This kind of thinly-veiled political attack on Sarb is not without costs or risks. Should the current noise around its mandate drag on in the coming months, the BER envisaged three potential risk scenarios.
∎ Risk scenario 1: no mandate change, but persistent attacks on Sarb potentially unnerve investors, requiring a more hawkish policy stance from the central bank in order to shore up its independence from political influence, and the credibility of its commitment to price stability.
∎ Risk scenario 2: the mandate is changed, requiring Sarb to explain how the change affects their monetary policy framework and public communications in order to comply with an amended Constitution. Under the most benign approach, Sarb would reassert its independence and argue – as the Fed does – that a sustainable level of employment is also a non-inflationary level of employment.
“And even if such a change in the wording of Sarb’s mandate does not materially affect the implementation of monetary policy in the long run, it may require a period of tighter policy to reinforce the central bank’s independence and credibility,” BER said.
“In our view, the current leadership of Sarb would pursue this approach. However, it does then render future government appointments to the Monetary Policy Committee (MPC) even more critical, as interpretations of the revised mandate would be heavily scrutinised by market participants.”
∎ Risk scenario 3: the nightmare scenario, which we fortunately regard as highly unlikely at this stage would see a mandate change precede a series of so-called “pro-growth” appointments to the leadership of Sarb and the MPC. This would amount to a dismantling of Sarb’s hard-won credibility and independence, which could seriously undermine price and general macroeconomic stability. Unlikely as this scenario is at this point in time, it could conceivably form part of a broader political realignment in South Africa, particularly through coalition arrangements between a declining ANC and radical political parties currently in opposition.
The BER said none of these three risk scenarios needed to materialise if the president, the finance minister and other key Cabinet members and senior ANC figures act decisively to shut down the proposal should it continue to simmer in the months ahead.
“For the time being, it appears that the interventions of President Cyril Ramaphosa and Finance Minister Enoch Godongwana have successfully managed risk perceptions around the noise coming out of the ANC conference. They should be prepared to do so again, should the ill-advised proposal of a change in Sarb’s mandate resurface – possibly in the lead-up to next year’s critical general elections,” it said.
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