Reserve Bank in the sights of scapegoat hunters
Things are about to get very rocky in South Africa. The economy is reopening just as the pandemic is entering a more destructive phase. If the health system begins to buckle under the mounting death toll, the national mood is bound to darken and the search for scapegoats could become uglier.
In addition to the obvious array of inept politicians, one of the institutions plumb in the firing line is the SA Reserve Bank. Calls to nationalise the Bank, an existing ANC policy conference resolution, and to tamper with its mandate are already beginning to resurface.
The Bank becomes fair game if it is seen as having failed to do enough to cushion the economy against the pandemic. There is a growing chorus, which includes some of South Africa’s top economists, demanding that the Bank undertake massive US-style quantitative easing (QE).
Fortunately, Bank governor Lesetja Kganyago is no pushover. He showed his mettle in the way he saw off public protector Busisiwe Mkhwebane’s attempted infringements of the Bank’s independence during the Absa lifeboat saga. It earned him the coveted governor of the year award from Central Banking magazine in 2018.
Kganyago has sound technical arguments as to why extensive QE in the SA context might do more harm than good, but they are not being heard. What is being heard is that central banks the world over, including many in emerging markets, are resorting to QE but we are not.
This makes the Bank seem slow and conservative regardless of the fact that it has freed up more than R600bn in disposable income and funds for on-lending since March, in addition to backing a R500bn credit guarantee scheme with the National Treasury.
After rate cuts amounting to 275 basis points, South Africa’s repo rate, at 3.75%, is also the lowest it has been and is set to turn slightly negative in real terms. Several economists think inflation could remain below 3% for the coming year, which would create room for the Bank to cut rates even further.
The problem is that even such deep cuts can do little to stimulate the economy at a time when confidence and demand have collapsed. Consumers are too risk-averse to take on more credit and, anyway, are afraid to go shopping; firms with ample inventory and spare capacity are preoccupied with survival, not investment; and banks, which want to conserve capital and avoid risk, don’t want to lend.
As Kganyago never tires of pointing out, the Bank “cannot on its own improve the potential growth rate of the economy or reduce fiscal risks”. These should be tackled, he says, by implementing prudent macroeconomic policies and structural reforms that lower costs and increase investment opportunities, potential growth and job creation.
In other words, there are no short cuts to sustainable growth. The real answer to South Africa’s problems is not QE but having cheaper broadband, trains that run on time, and a professional public service able to stimulate investment in renewable energy, infrastructure and labour-intensive exports.
Despite this, policy debates risk being dominated by calls for unorthodox policies, including novel ways of tapping into pension funds and resuscitating state-owned enterprises, as well as that perennial red herring: the nationalisation of the Bank.
This is why any perception that the Bank is not pulling its weight, even among orthodox economists for whom these debates are merely technical, poses such a danger. A draft ANC economic recovery plan, reportedly sanctioned at the last meeting of the national executive committee, relies on the same tired state-led, interventionist model that would have these same economists running for the hills.
With Covid-19 having shattered the economy, it is imperative that SA prioritises a few, essential, growth-supportive structural reforms the whole country can get behind. An infrastructure-led push would be a good place to start. But if the country allows itself to be dragged back into an interminable economic policy battle, everyone will be the poorer.
• Bisseker is a Financial Mail assistant editor.