South African Reserve Bank (SARB) Governor, Lesetja Kganyago, came out strongly against the notion of private ownership which has led to the calls to nationalise the Reserve Bank.

“There is no private ownership of the Reserve Bank. There are private shareholders, but they don’t own the bank,” Kganyago commented.

He was speaking at the Public Lecture, on 24 July 2019, titled Delivering on our mandate: Monetary policy, inflation, and balanced and sustainable growth, held by University of South Africa, Pretoria.

Kganyago stated that owning shares of the SARB does not mean owning the bank and its assets. The Reserve Bank has $50 billion in its reserves and shareholders do not have anything to do with ownership of those reserves.

Kganyago, who was recently re-appointed by President Cyril Ramaphosa earlier this month for another five year term, was critical when he answered a question on public education interventions that the bank was doing to counter political populism on the matter of the Reserve Bank ownership.

Kganyago said the issue is not the general public but the “chattering classes” that are deliberately confusing the real message. He said they know that private shareholders only get 10 cents per share.

The legal framework does not allow for a shareholder to hold in aggregate with his, her or its associates, more than 10 000 shares, meaning no shareholder can earn more than R1000 per annum. The governor called the ownership debate a R200 000 per annum debate, because that is all combined shareholders earn.

The SARB has a total number of 2 000 000 issued shares currently valued around R10. Kganyago asked whatever the amount the shares worth (roughly R20 million at current share price), why should a state buy out private shareholders ‘’instead of fixing a hospital or school’’.

Where did the issue of ownership of Reserve Bank come from?

  • The South African Reserve Bank and seven other central banks (Belgium, Greece, Italy, Japan, Switzerland, Turkey and US) have private shareholders other than the governments of their respective countries.
  • Kganyago stated that central banking is boring globally, but in South Africa it is of huge public interest because of the perceptions about ownership.
  • In 2010, the South African Reserve Bank Act was amended and it stated that no one together, his/ her/its associates and family shall altogether own more than 10 000 shares.
  • Anyone who had more than 10 000 shares was compelled by law to sell the shares. This was finalised in 2016 through the Court Order.
  • Kganyago reiterated that the ownership of SARB is not necessarily a South African debate. He said the debate about ownership of SARB was driven by a particular German shareholder, who argued that SARB share was closer to R1200 , the current share is around R10.
  • His arguments were based on his claim that $50 billion US Dollars in SARB reserves belonged to the shareholders. Kganyago stated that the ownership debate is inspired by foreign interests that want to capture our state by bringing an argument with nefarious intentions.

SARB Ownership debate is an attempt to capture monetary policy

The governor compared the attempts by politicians to meddle with monetary policy to a Trojan horse, which was used as a ploy by the ancient Greeks to enter the fortified city of Troy. In his narration he said when Greek army saw that the city was well protected and could not be broken into.

Then Greeks sent a wooden horse as a gift to Troy. Hidden inside the wooden horse were Greek soldiers. When the horse was inside the city the Greek warriors came out and captured the city.

Kganyago said private shareholding is being used as a “distraction” away from difficult conversations that are needed for economic growth.

Kganyago said removing private share ownership will not result in higher growth, will not result in education outcomes, and will not result in improved health care.

According to Kganyago, the shareholders have very limited powers as in their AGM they only do two things, elect few directors (other directors are appointed by the president), and vote for an audit firm and how much it will cost and that’s all shareholders do.

Governor Kganyago has been kept busy protecting the independence and mandate of the Reserve Bank. On 06 June 2019, Kganyago was quoted by Fin24 decrying the continued pressure on the central bank as the arrival of the “barbarians at the gate of SARB”.

Calls for nationalisation of Reserve Bank

African National Congress

In 2017, the ANC’s 54th national elective conference reaffirmed the resolution of the 53rd National Conference Resolution on the mandate of the South African Reserve Bank which states: “South Africa requires a flexible monetary policy regime, aligned with the objectives of the second phase of transition. Without sacrificing price stability, monetary policy should also take account of other objectives such as employment creation and economic growth.”

The ANC conference resolved that the Reserve Bank should be 100% owned by the state. It said, it was a historical anomaly that there are private shareholders of the Reserve Bank.

It called for government must develop a proposal to ensure full public ownership in a manner that does not benefit private shareholder speculators.

Magashule

On the 04th of June 2019, ANC secretary-general Ace Magashule claimed the party’s highest decision making body between conferences agreed that the SARB’s mandate will be expanded beyond price stability to include growth and employment.

Public Protector

In 2017, Public Protector Busisiwe Mkhwebane as part of her remedial action recommended that Parliament should include amending Section 224 of the constitution to change the bank’s mandate to include socio-economic transformation. The High Court later overturned Public Protector’s remedial action after SARB took it to judicial review.

Economic Freedom Fighters (EFF)

In June 2019, the Economic Freedom Fighters (EFF) said it would table a bill to realise the nationalisation of  the Reserve Bank.

Ramaphosa

President Cyril Ramaphosa has consistently committed to the public ownership of the Reserve Bank although he has stressed that the mandate of the bank should remain unchanged as enshrined in the constitution.

Inflation Targeting is a superior Monetary Policy Stance

Kganyago said there are calls from various places including academics, economists and many other for SARB to cut interests rates substantially to promote growth. The governor is of the view that cutting interests rates yields very little growth.

He mentioned as our economic circumstances get more difficult; he was worried that people choose to avoid making hard choices and pretend they do not need to be made, as if the SARB could just cut rates enough and all will be well.

He warned that cutting interests rates could not single handedly bring the envisaged growth. Kganyago, said cutting interest rates by 100 basis points can only yield 0.5% growth and it will be difficult to do so without risking high inflation.

He clarified that cutting interests rates happens only if the inflation outlook is stable within the acceptable level of mid-point of 3% to 6% which is 4.5%. Statistics SA released information that South Africa’s headline consumer inflation remained unchanged at 4.5% year-on-year in June.

International Monetary Forum country representative Montfort Mlachila said South Africa is now belonging is 75% of countries with higher inflation rate globally, while previously South Africa has been in the 25% of lower inflation in the world. Kganyago criticized using employment as a monetary policy instrument.

Just like it was the case recently in South Africa there was negative growth yet StatsSA reported more jobs created. Kganyago concluded by saying any monetary policy regimes have similar objective which is price stability and that inflation targeting is a superior monetary policy stance globally.

Inflation Targeting Started

Inflation targeting was started by SARB in 2000. Since 2001, the Reserve Bank inflation target has been between 3%-6% and since then there has not been inflation below 3%. Countries with low interest rates are mainly countries with low inflation and SA cannot be expected to do the same because the country has one of the highest inflation rates.

Kganyago said the SARB is often accused of being hawkish in its behaviour by keeping interest rates high. He said that was unfair as SA is constantly unfairly compared with low inflation countries.

High inflation brings temporary growth that is not sustainable. He said higher inflation rates begets higher interest rates.

Higher inflation rates impacts on the daily living costs with high interests on study loans; mortgage bonds, car repayments, and has great impact on personal income.

SA’s growth problem is structural and change of monetary policy would not help. Structural reform is inevitable. Reducing interest rates without structural reform yields no growth.

The inflation target, agreed between the SARB and National Treasury, was initially set at 3-6% before being shifted to 3%-5%. The emerging market crisis of 2001 led to the reinstatement of the 3-6% target, and it has remained since then.

Flexibility of the SARB means the bank should avoid excessive volatility in growth and interest rates.

Kganyago mentioned that emphasising 4.5% is an optimal monetary policy and a key macroeconomic accomplishment for South Africa.

South Africa’s growth problem is caused mainly by structural factors, like a constrained electricity system as well as policy uncertainty.