Mon, 09 Dec 2019

Should the South African Reserve Bank be nationalised?

Can the government print money? What does ANC secretary-general Ace Magashule mean by quantitative easing? Dr Malan Rietveld lays out the battle for the soul of the central bank.

In short, it means the central bank sets the interest rate. The SARB's Monetary Policy Committee (MPC) sets the central bank's all-important policy rate (repo rate).

he repo rate, in turn, affects the interest rates that individuals and businesses - either as savers/lenders or as borrowers - face on their financial assets and liabilities.

Monetary policy has immense power over the total amount of, and the balance between, total borrowing and lending in the economy. At all times, the key constraint on lowering the interest rate (thereby favouring borrowing over saving/lending) is that it will lead to inflation if interest rates are too low.

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It is true that elements of the SARB's ownership are somewhat unusual, notably the existence of private shareholders. But the existence of private shareholders is completely inconsequential to what really matters: the mandate for monetary policy, which is set by the government and the conduct of monetary policy, which is pursued by the politically independent MPC.

As the SARB is not a profit-driven entity, but rather a public-policy institution, "ownership" is a bit of misnomer - the private shareholders have no say in any matters of consequence to what the SARB actually does.

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Note that this was achieved under the SARB's existing ownership structure. This is why debates around the SARB's ownership or "nationalisation" are most likely just political code word for reducing its independence and clarity of mandate.

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So while we can debate whether the repo rate should and will be changed up or down, depending on inflation and economic dynamics in the foreseeable future, there is absolutely no case for quantitative easing. Those calling for the SARB to adopt quantitative easing are, very misguided and dangerously, eyeing up an opportunity to pressure the central bank into buying the debts and/or assets of troubled state-owned entities. But there is zero policy rationale for it.

10. Can the government "print money" if they take charge of the SARB?

Yes. And it's not like it hasn't happened in the past. It happens all the time in poorly run economies that come under pressure. It takes a while and the magnitude of the monetary disaster may vary depending on the extent of money printing, but the result is always higher inflation, and eventually hyperinflation and economic chaos.

A "take over" or "capture" of the SARB - by which I mean a loss of policy independence, rather than a change in the largely irrelevant ownership structure of the central bank, would likely be a slippery slope to monetary meltdown. First, you'd see more subtle political pressure to have lower interest rates, for example, one year before an election. Second, people will notice this, and if the SARB is seen as less independent and more politically motivated, it will lose credibility and market participants will anticipate higher inflation and a weaker exchange rate.

At that point, you either go through a painful process of reestablishing the SARB's independence and credibility - including a period of much higher interest rates, which would cripple growth - or you lose control completely, and the government starts printing money to pay its obligations. These might include paying for food imports or the debts of the national government and state-owned enterprises. Of course, this is not sustainable at all, and inflation escalates fast, and soon you get hyperinflation.

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