Nhlanhla Nene defends Reserve Bank as a shining star in SA

Cape Town - The independence of the South African Reserve Bank (SARB) is one of the strengths of the country’s financial system, according to former finance minister Nhlanhla Nene.

He spoke to Fin24 after Public Protector Busisiwe Mkhwebane suggested that the government initiate a process to change the Constitution to alter the SARB’s primary objective.

The proposed amendments remove the reference to the SARB’s role to protect the value of the rand, which is a key element of the bank’s inflation-targeting mandate.

Although Nene made it clear that he was not sure of the context in which the Public Protector recommended the change, he suggested a thorough reading of the Constitution on the role of the Reserve Bank.

“It is very clear. It does not preclude the bank addressing the issue of growth, but it is in the context of price stability,” said Nene. “It is not just about inflation targeting per se, but it is price stability."

Nene explained that the SARB doesn’t just forecast inflation without taking into account issues such as growth and employment on a sustainable basis.

When asked if the SARB is doing a good job, Nene said: “It is actually one of the strengths.”

SARB governor Lesetja Kganyago echoed this view on Monday night.

“The ratings agencies have been clear that the effectiveness of the central bank is one of the strongest pillars supporting this economy – a claim that speaks to both our price and financial stability mandates,” he said in a prepared speech at an event hosted by the Centre for Education in Economics and Finance.
 
Kganyago promised that the Reserve Bank will continue to honour its constitutional mandate and the trust placed in it by the South African society.

READ: Governor strikes back: SARB has duty to protect rand

"Our fundamental, constitutional mandate is to protect the value of the currency in the interests of balanced and sustainable growth," he explained.
 
Balanced growth is about seeing to it that the value of the currency allows both exporters and importers to engage productively in the economy, said Kganyago.

“It also means that the economy’s growth is sustainable, that imbalances are neither generated that cause crises through over-heating nor throw the economy into severe downturns. All of this is clearly in the interest of all South Africans.”

READ THE GOVERNOR'S FULL SPEECH: SA's crisis of confidence and the policy response

Weak confidence

Kganyago said at the present juncture, South Africa’s  fundamental problem is confidence.  

“In economic discussions, ‘confidence’ is sometimes an opaque and disreputable concept.… But I’m afraid that, in South Africa at the moment, we can’t comfort ourselves that confidence is a mythical creature. It would be more accurate to say that it is very real but badly endangered.”

Weak confidence has profound economic consequences, warned Kganyago.

“When  people are  this  worried  about  the  economy, theory tells us, they don’t make large purchases. Businesses defer investments. All of this weakens economic growth. These theoretical predictions are completely consistent with what we see in the data.”

READ: Why it’s not for Public Protector to make economic policy

Wits University economist Dr Kenneth Creamer told Fin24 that in order to promote economic growth, investment and job creation, the most important tasks of the SARB are to keep inflation in check and ensure the overall stability of our financial system.
 
“The maintenance of such price and financial stability is a necessary condition for growth and economic transformation in South Africa.”

He added that the Constitution stipulates that the Reserve Bank must be allowed to operate in an independent manner, free from political interference.
 
“The evidence is overwhelming that any moves to compromise the Reserve Bank's independence would be a step in the wrong the direction,” warned Dr Creamer.

Opposing ideologies

Economist Dawie Roodt told Fin24 that in his view the SARB is one of the few institutions that is not captured.

He said the recommendation by the Public Protector points to a clash of ideologies.

“The one is that we should continuously devalue the currency because if we keep on doing that, it will lead to economic growth and it will lead to wealth creation.

“The other idea is that to continuously decrease the value of the currency may be helpful in the short term, but in the long term it will achieve much because inflation will simple erode everything,” he explained.

“We have an attack on the independence of the financial system and now we are seeing an attempt to change the Constitution to make it more socialist in nature,” reckoned Roodt.