Malema – leave the South African Reserve Bank alone

Recent calls to “nationalise” the South African Reserve Bank imply that the Bank is a private entity, thereby raising questions about the correspondence between legal definitions and the realities of control, policymaking, and administration. In fact, the Reserve Bank is a statutory creation of the South African Parliament, which also determines the main policy goals that the Bank is tasked to fulfil. Further, more than half of the Bank’s board of directors, including all the executive directors, is appointed by the President of the Republic in consultation with the Minister of Finance and a governmentally appointed Panel. That Panel, in turn, approves a list of candidates from which eligible private shareholders may elect the remaining board members.

The private shareholders have no direct control over any aspect of monetary policy or Reserve Bank operations. Their only role is in the election of a minority of board members from a pre-approved list. This involvement is valuable to the extent that it requires greater openness and provides transparency to the operations and auditing of the Bank. Successive amendments to the South African Reserve Bank Act have weakened this role and, with the proposed transfer of all shareholdings to the government, it would be lost completely.

The Reserve Bank has always been an instrument of the state. Despite its corporate structure with ostensibly private shareholding, control has always resided in governmentally appointed officers and the politicians who appoint them. The South African government is also the residual claimant on profits. Dividends paid to private shareholders are statutorily capped at a maximum of 10 cents per share, with any profits in excess of this amount going partly into reserves and the remainder to the government. The private shareholders, their limited voting powers aside, most closely resemble preferred shareholders or fixed-income bondholders. Even in liquidation, the government would have a majority claim on any residual proceeds. Complete nationalisation would require an act of Parliament and a determination of the compensation owed to private shareholders.

From the perspective of control and monetary policy, the transfer of all shareholdings to the government would have no more effect than if the Reserve Bank repurchased a small portion of its outstanding debentures. The oversight and informational benefits would be lost, but there would not necessarily be any change in policy or in the control mechanisms. The marginal loss of transparency could, over time, increase the risk of more aggressive or more politically sensitive policy interventions. The greatest risk comes from the underlying motivation within Parliament to nationalise the Reserve Bank and how that motivation would be reflected in the enactment of changes to its mission or structure.

Several influential stakeholder groups have expressed their desire for a more aggressive and stimulative approach to monetary policy. But the destabilising and inflationary dangers of a politicised central bank are well known and any move in that direction would downgrade the ranking of the rand within the international monetary system. A weaker and less predictable currency invariably distorts capital flows and trade patterns, hindering economic progress and increasing the likelihood of recessions and losses of employment. If a desire for more aggressive monetary policy is indeed the motivation behind the imminent nationalisation proposal, then it is unquestionably better to leave the South African Reserve Bank Act unchanged.

Given that the Reserve Bank has long been a de facto nationalised agency, the proposal to transfer all outstanding shares to government ownership would, at best, be a cosmetic change. There is always a danger that legislative changes can lead to unexpected and undesirable institutional consequences. A safer and more predictably beneficial action by Parliament would instruct the Reserve Bank to reduce its inflation target range. This would improve the rand’s performance as a currency – both internally and externally – and would not require any structural changes at the Bank.

[This article is the FMF’s comment on the South African Reserve Bank Amendment Bill, 2018 (Private Member's Bill) to be introduced by Julius Malema]

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