Kganyago: Why not just nationalise SARB?
31 August 2017
Cape Town - "Why not just nationalise the SA Reserve Bank (SARB)?" governor of the SA Reserve Bank (SARB) Lesetja Kganyago asked during his public lecture at the Unisa Graduate School of Business Leadership on Wednesday evening.
"Nationalising SARB will not change anything useful we cannot change in any event. Our shareholders already have no control over SARB policies," he said.
He emphasised that SA has experienced a better economy under inflation targeting.
"Maintaining a relatively low inflation rate helps over the long term and it works against real term devaluation of the rand, according to Kganyago.
"The mandate and role of central banks are hotly debated in many countries in the world at the moment, but in SA we tend to engage in this debate by rhetoric instead of facts," he said.
"Why does our money have value? Why can you exchange it for something? It is not backed by silver or gold or something else, but it works because of trust. There is trust in a promise made in the Constitution, which gives the SARB a very specific job, namely to protect the value of the currency in the interest of a balanced and sustainable economy."
In his view, there is no choice between protecting the value of the rand and social economic wellbeing.
"Destroying the value of the rand through inflation would be of no benefit to anyone. Our tragic increase of poverty actually coincides with inflation growth," he said.
"It might not be the time to rethink our monetary policy right now. SA has far more urgent issues, for instance, reducing unemployment."
Kganyago said giving in to short term demands is not the way to protect the value of the rand.
"The Constitution tells us to protect the currency without fear or favour to anyone. We have to look after the long run interest of the general public," he said.
"Should we target something apart from inflation? I know of no central bank targeting employment, for instance. Monetary policies can do nothing about structural growth and employment. If you do not have skills you cannot have engineers and doctors, for example."
Kganyago pointed out that some critics now claim inflation targeting only works for rich, developed markets. Yet, it is, in fact, popular in both emerging and advanced economies.
"We like using an inflation target band. Inflation targeting has helped SA reach good economic outcomes. Higher inflation is a recipe for more poverty," he said.
"Targeting inflation has enabled us to be more flexible. As a result interest rate changes have become smoother."
Regarding claims that accepting higher inflation would lead to more jobs and more growth, Kganyago emphasised that inflation and growth actually work in opposite directions.
"This makes sense as inflation eats into people's real incomes, making them poorer as they can buy fewer goods with the same money. It also brings higher and more volatile interest rates. So, keeping inflation under control should be growth friendly," he said.
Besides SA, 11 other countries adopted inflation targets and those with lower inflation than SA have had better growth.
"There is nothing growth-friendly about higher inflation. We try very hard to keep interest rates as low as it can be. SA needs capital to develop," said Kganyago.
"We must focus on real depreciation and not just nominal terms. Inflation targeting makes sense for SA as our constitutional duty is to protect the rand. Yet, we need important conversations as some of our critics claim SARB is obsessed with inflation."
Kganyago explained that SA's inflation is quite high. He said it is higher than many other countries, because SA's inflation target band is high and wide. Most emerging markets nowadays have a range of between 3% and 4%. This is the range he feels SA should aim for to reap benefits.
"SA had a recession due to the collapse of confidence driven by serious policy concerns. We are barely clining to investment grade and ratings agencies say our monetary policy framework actually helps us. So why then in this environment would you want to change monetary policies?
More research is always appropriate," he said.
"The evidence for judging us is independently produced in terms of the Consumer Price Index. We also submit annual reports to Parliament.
Regarding questions regarding SARB having private shareholders, Kganyago said this does not mean SARB is run in the interest of private individuals.
"The fact is our private shareholders have no influence on monetary policy or banking. Their roles are highly prescribed. They have received a fixed annual dividend of 10c per share the past 90 years, so it is not a great investment," said Kganyago.
"Our total annual dividend pay-out is R200 000 and SARB's after-tax profits mostly go to Treasury. Shareholders got 0.014% of profits.
"The fact that we have private shareholders is admittedly slightly unusual, though few other central banks still have degree of private shareholders. They are useful regarding governance, for instance, being experienced in mining, agriculture and so on," he said.