Africa-Press – South-Africa. The ANC’s plans to change the Reserve Bank’s mandate to explicitly pursue employment and growth will not improve economic outcomes but could damage South Africa’s reputation for sound monetary policy.
This is because South Africa’s economic issues are largely on the supply side of the economy, not because interest rates constrain demand and consumption.
Lower interest rates will do very little to improve the performance of Eskom and Transnet, make South Africa’s labour market more dynamic, or make it easier to do business in South Africa.
This is feedback from the Centre for Risk Analysis (CRA), which released a note analysing the ANC’s proposal and the potential risk it presents to the country’s economy.
An ANC discussion document released last week stated that the Reserve Bank’s “mandate could be updated to explicitly pursue employment and growth”, with employment “at the centre of macroeconomic policy”.
Additionally, “government should be willing to run deficits to finance growth-promoting investments, as long as debt remains sustainable in the long run”.
While widening the SARB’s mandate would provide the short-term feeling that ‘something is being done’ to address South Africa’s long-term low growth and high unemployment situation, the CRA said doing so would involve far more risks than benefits.
Such a move would not only weaken the Reserve Bank but also weaken South Africa’s strong monetary policy reputation.
This is a crucial string in our bow in the new era of increased geopolitical and geoeconomic uncertainty and volatility.
It is also seen by ratings agencies as South Africa’s saving grace, alongside the competence of the National Treasury.
The Reserve Bank is widely recognised as one of the best-run central banks globally, with Governor Lesetja Kganyago being widely acclaimed.
It has successfully managed inflation within its 3% to 6% target range since the Global Financial Crisis, despite a significantly weaker rand.
The Reserve Bank also regulates South Africa’s banking and financial sectors, which are regarded as some of the best-run in the world.
Changing its mandate could significantly impact the Reserve Bank’s reputation, which is key to attracting investment and ensuring financial stability.
It may also result in elevated inflation, which has the potential to be far more damaging to the economy than subdued demand.
No reward for the risk
Even if the ANC were to pursue the policy of changing the Reserve Bank’s mandate further, despite the risks, there would be little economic reward for South Africa.
The CRA said widening the Reserve Bank’s mandate to pursue employment and growth will not address and remove the government’s ideological and policy barriers to business activity.
These factors are the main reasons for South Africa’s lacklustre capital formation, investment, and job creation.
It said supply-side constraints in the South African economy – that drove the average growth rate down to 0.8% between 2012 and 2023 – will remain untouched.
As long as these anti-growth, investment-dissuading policies remain in place, changes to monetary policy will not significantly enhance economic growth.
They will only provide some business and consumer relief in the form of lower interest rates, which will be short-lived and result in a temporary rise in economic activity.
But it will only paper over the deep, widening cracks in the structure of the South African economy, the CRA said.
The ANC has been highly critical of the Reserve Bank in the past, saying that it should ease monetary policy to boost the economy.
Some other political parties have even floated the idea of nationalising the bank and putting it fully under the control of the state.
The Reserve Bank has pushed back against these comments, while analysts have stressed the importance of an independent central bank for investor confidence and stability in a modern economy.
Governor Lesetja Kganyago has repeatedly reminded the government that South Africa’s relatively high interest rates are driven in large part by the country’s elevated country risk premium, which is due to the state’s historic financial mismanagement.
“I hope you will also have noticed that the second-biggest driver of interest rates is country risk, because doing something about that brings me to the other key topic of this speech – macroeconomic policy,” Kganyago told the National School of Government recently.
He explained that South Africa’s country risk is driven mainly by the strong growth of the state’s debt burden over the past 17 years and the failure to stabilise and reduce this debt load.
Relative to the country’s GDP, debt has grown every single year since 2008, when the state last ran a full budget surplus.
This has resulted in one of the fastest debt increases of any country in recent history. Compared to its peer group, South Africa also has one of the highest debt levels on record.
To compensate for this, the Reserve Bank’s Monetary Policy Committee keeps interest rates elevated to make local assets more attractive to investors by increasing the returns on offer. This attracts capital to South Africa and bolsters the rand, limiting imported inflation.
“If there were widespread confidence that debt levels were heading lower, this would create space for monetary policy to support growth through lower interest rates,” Kganyago said.
“All the drivers point in the same direction: credible fiscal consolidation would lower country risk. Improved investor confidence would also help the rand, which eases inflation.”
For More News And Analysis About South-Africa Follow Africa-Press
