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Memorandum to the Parliamentary Finance Committee:COSATU's Approach to Budget Hearings on the Role of theSouth African Reserve Bank and Monetary Policy6 March 1998 |
Table of Contents
- Need for Public Hearing
COSATU is concerned that despite its original request to Parliament’s Finance Committee that Public Hearings be held on the role, policies and structures of the Reserve Bank and functioning of the Reserve Bank and despite an agreement by the Committee to this effect (at its meeting of 5 August 1997), no such Public Hearings have to date been arranged by the Committee.
COSATU is concerned that the establishment of a Task Group which has chosen to investigate the matter through the mechanism of domestic and overseas visits and through the input of a select group of experts, should not serve as a substitute for Public Hearings on the role, policies and structures of the Reserve Bank.
Such Public Hearings are important as they will allow for the kind of public process which will stimulate the necessary public debate on monetary policy and the role and structure of the Reserve Bank. Public debate is an important part of public accountability. Processes, such as the present Task Group process, which occur outside of public view may unintentionally stifle debate and side-step the difficult issues.
COSATU is convinced that if the Finance Committee had provided a platform for public debate in the form of Public Hearings, Reserve Bank Governor Chris Stals would have been less likely to have made his recent announcement that the debate on the workings of Reserve Bank independence was "losing its momentum" before it even got started.
In this context, therefore, COSATU wishes to reiterate our view that Public Hearings are urgently required regarding the role, policies and structures of the Reserve Bank. In our view such hearings should inter alia address the following related areas:
- Policy Questions
- Negative social impact of restrictive monetary policy
Monetary policy - the domain of the Bank - has a profound impact on the South African economic environment and the ability of the country to meet its development goals. Monetary policy influences the conditions under which the private financial sector can create credit, it determines the growth rate of the money supply and the level of the interest rate. The interest rate, perhaps the most influential price in the entire economy, then impacts on core areas of economic activity - aggregate demand, investment, inflation, and the sustainability of the public sector.
Determination of monetary policy is therefore not a purely technical question, but also not a purely technical question, but has profound implications for all aspects of economic life. We therefore believe that hearings need to investigate the negative social impact of restrictive monetary policy, as well as alternatives to this policy approach.
- Restrictive monetary policy based on questionable theories
- Quantity theory of money
- Link between savings and interest rate
Another argument which is often put forward by conservative economists to justify high interest rates is that savings in the South African economy are too low and that any reduction of the interest rate in a moderately inflationary environment would lead to financial repression -- that is, more demand for investment than the available level of savings can accommodate. Financial repression is often associated with negative real interest rates, when the market interest rate falls below the rate of inflation. Rationing of the small amount of available savings would then occur and viable, productive investments could get squeezed out because of credit rationing.
There are many problems with the financial repression argument. First, it is difficult to show empirically that savings respond significantly to interest rate changes. Second, most of the domestic savings in South Africa are corporate savings which respond more vigorously to an expanding economy than they do to high interest rates. Third, financial repression assumes that an economy is primarily constrained by available savings. Much recent research has shown that investment often leads to savings in many economies, particularly those with a high cost of external financing.
There is a serious flaw in the Bank's rationale for restrictive monetary policy. The Bank bases its views on the quantity theory of money, which argues that when the supply of money goes up, prices will also go up. This theory, however, must make the assumption of full employment. Without the assumption of full-employment (an indefensible assumption in present day South Africa), the decrease in interest rates associated with an increase in the money supply could stimulate economic activity, increase output, and create jobs. While prices might be bid-up during the economic expansion, the direct link between the money supply and inflation is broken.
The issues are made more complex if one begins to look at the structural factors in the South African economy which contribute to inflation. In other words, despite the claims of Monetarists ‘inflation is not always and everywhere a monetary phenomenon’. The existence of these structural factors means that interest rate policy only has a weak impact on price increases (or inflation levels), with the effect that high interest rates can co-exist with a high rate of inflation.
Any investigation into current monetary policy therefore must also take into account alternative economic perspectives, rather than simply being a one-sided and myopic engagement with inappropriate monetary policy theories.
- Questionable interventions by the Bank
Apart from the broad thrust of South Africa's monetary policy, other practices of the Bank must be questioned. The Bank has often intervened in order to protect corporate and financial interests at the expense of the citizens of South Africa. For example, the Reserve Bank also intervened into the ABSA scandal, providing billions of rand to stabilise the banking sector. Furthermore, in 1996, the Reserve Bank provided a substantial amount of forward-cover during the rapid depreciation of the rand in an attempt to supply a veneer of stability to an unstable financial situation. The result was an increase in government liabilities in order to transfer resources to nervous investors.
It therefore needs to be closely questioned whether there is an appropriate policy framework or charter guiding such interventions by the bank.
- Negative social impact of restrictive monetary policy
- Institutional questions
- International experience
Central banks around the world do not conform to one given model or one particular institutional structure. The different structures of central banks define their role in the economy. Some central banks have a very close relationship with the government, which allows co-ordination of macroeconomic policies; others are strongly independent. Currently, the SA Reserve Bank falls into the latter category. We need to examine which model, or hybrid, is best suited to our conditions.
- Constitutional position
The South African Constitution stipulates a form of Reserve Bank independence which requires that the bank "perform its functions independently" but in "regular consultation" with the Minister of Foreign Affairs. This has been interpreted to mean that the bank enjoys ‘instrument’ rather than ’goal’ independence. Further, given the constitutional formulation it is clear that independence cannot be equated with a lack of accountability.
The constitution also outlines the goals which the Bank must set out to achieve: "The primary object of the Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic."
It is important that an assessment be made of whether the legislation governing the Reserve Bank (the South African Reserve Bank Act 90 of 1989) is in line with the provisions of the constitution and where necessary amendments should be made to the legislation to bring it in line with the constitution.
- Amendments to Reserve Bank Act
An analysis of the Reserve Bank Act would suggest that inter alia the following aspects should be considered for legislative amendment, or modernisation:
- Definition of the primary objective of the Bank
- Reporting requirements to the Department of Finance, Parliament and NEDLAC
- Mechanisms for Bank accountability and transparency
- Composition and Representivity of the Board of Directors
- International experience
