An address by Daniel Mminele,
Deputy Governor of the South African Reserve Bank (SARB),
to the Rand Business Club dinner
Johannesburg
28 May 2019
The role of the SARB
in the context of growth and development in South Africa
Introduction
Ladies and gentlemen, good evening, and thank you for allowing me the honour to
address this dinner hosted by the Rand Business Club.
Our country has gone through general elections in the past month. With it came and
went the usual debates about what the results would mean for South Africa over the
next five years. What is unlikely to go away, however, is the debate over the policy
priorities for the years ahead, and what authorities should focus on to lift the country
from what increasingly looks like a 'slow growth trap'. Monetary policy is already part
of that debate, and is likely to remain there. Hence the relevance of the topic chosen
tonight's
for address: The role of the South African Reserve Bank (SARB) in the
context of growth and development in South Africa.
I thought it might be useful to first address the SARB's mandate, its independence in
fulfilling that mandate, and why it often seems misunderstood. I will then look at how
our institution has performed over the years in the fulfilment of that mandate, and what
tasks still lie ahead, before tuning into the current debates on whether central banks
in general, and the SARB in particular, should reassess or broaden their mandates
at the context of South Africa's
and strategy, looking specifically development needs.
SARB's
On the mandate, independence and ownership
issue of the SARB's
The mandate, as I have said earlier, is a topic that often raises
emotions, partly because some people do not fully appreciate what the central bank
can and cannot do, what the role of its private shareholders is, and how its
accountability is ensured.
South Africa's
When Constitution was adopted in 1996, the drafters of our fundamental
law insisted that the primary objective of the SARB was to 'protect the value of the
currency in the interest of balanced and sustainable economic growth in the Republic'.
had to
They further said that the SARB, in pursuit of that goal, 'perform its functions
independently and without fear, favour or prejudice, but there must be regular
consultation between the [SARB] and the Cabinet member responsible for national
financial matters'.
It is not by chance that these words were inscribed in our Constitution. Such wording
was in line with international best practice at the time. Following the failure of many
countries to deal with stagflation problems in the 1970s, the global trend was to give
central banks increased independence from political authorities in their search for price
stability.
But the South African context also played a key part. By the time of the
1994 democratic elections, South Africa had experienced two decades of high and
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very volatile inflation even as economic growth gradually came to a halt. Monetary
policy, in the absence of both a clear framework and a political pledge of non-
interference, had struggled to contain these price gyrations.
But central bank independence never meant that the SARB would have completely
free reign; neither did it mean lack of accountability. As indicated in Article 224 of the
Constitution, which I have just quoted, there has to be (and there is) regular
consultation between the SARB and National Treasury.
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It is also this consultation that produced the SARB inflation targeting range the
'yardstick' against which we would measure the achievement of price stability.
The SARB has operational independence in how to best achieve its policy goals, but
does not unilaterally shift these goalposts. Put differently, the SARB is independent
within the overall system of economic governance, but not independent of it.
Furthermore, accountability extends beyond consultations with National Treasury. The
Governor and senior staff meet periodically with members of parliamentary
committees, and the SARB also submits an Annual Report to Parliament.
Consultations with the general public, in the form of publications as well as Monetary
Policy Forums, have also become the norm, as the SARB seeks transparency in
explaining the rationale for its policy decisions.
SARB's
The ownership structure has also raised concerns, albeit misplaced ones,
about control and accountability. Admittedly, the SARB is one of only a handful of
central banks in the world with private shareholders. Yet these shareholders do not
have the power to amend the SARB Act1, which can only be done by Parliament.
Neither can they appoint the Governor and Deputy Governors, who are responsible
for monetary policy, because that is a presidential prerogative. Through their
representatives on the Board of Directors, these private shareholders merely exercise
SARB's
oversight over the governance. There is no way in which they can interfere
with monetary policy or financial stability policy decisions, prudential supervision, or
SARB's
the other day-to-day responsibilities.
SARB's
The performance: price and financial stability?
But how well has the SARB delivered on this mandate set by the Constitution?
Let us first recall how the technical modalities of the mandate evolved over the years.
From the more eclectic approach that was in place in the 1990s, including a framework
for monetary aggregates, the yardstick for the measurement of price stability moved
to an inflation target in 2000.
South Africa's situation at the time, including the sensitivity of inflation to swings in
energy and food prices as well as the structural changes the economy was undergoing
(such as the effects of an earlier reduction in tariffs and capital controls), led authorities
to select a 3-6% inflation target range. It was always understood, however, that this
target was not cast in stone and could be reviewed if justified.
The 2008-09 global financial crisis then taught us that achieving price stability was not
enough. Many countries had witnessed a significant growth in financial imbalances
even as inflation remained muted. These countries faced major economic adjustments
as these imbalances unwound. While South Africa's banks
and its financial system
had remained sound during the crisis, and domestic financial markets had kept
functioning properly, the SARB felt that it would be wise to follow international best
practice and place greater emphasis on monitoring the stability of the financial system
while developing tools against the potential build-up of severe imbalances.
The inflation-targeting approach has yielded gradual yet significant results over
the years. So far in this decade, targeted consumer price inflation has averaged 5.2%,
down from 6.8% in the previous decade (the first of the inflation-targeting regime).
Inflation volatility has declined too. The standard deviation of year-on-year consumer
price changes since 2010 stands at 0.9 percentage points, compared with
2.4 percentage points between 2000 and 2009.
Importantly, in the present decade, inflation has exceeded the 6% upper end of the
target range for only 26 months, compared to 70 months in the previous decade.
Inflation expectations, as measured by the quarterly survey of the Bureau for
Economic Research, have also become more stable over the years, and while they
remained stuck at around 6% from 2012 to 2017, they are now showing an
encouraging decline towards the midpoint of the target range.
South Africa's banks
Meanwhile, our financial system continues to enjoy stability.
remain sound and appropriately capitalised. Growth in credit to the private sector has
not deviated significantly from nominal GDP2 growth in the past few years.
In fact, expressed as a deviation from its trend, the credit-to-GDP gap currently stands
at a negative 3.9%. In contrast to many other emerging markets, inflows of non-
resident capital (be they portfolio flows or bank loans) have not spilled over into
excessive domestic credit growth. Equally, residential property prices have been
subdued since the global financial crisis.
Where does South Africa stand at present?
Improved policy performance towards the goals of price and financial stability has
resulted in lesser volatility of interest rates, which in itself is good for long-term
economic growth as it helps to smooth economic cycles and reduces the uncertainty
that investors face when they assess capital spending opportunities. Between 2014
and 2016, the policy rate increased by 200 basis points over a period of 26 months.
By contrast, the previous tightening cycle, which began in 2006, saw the repo rate rise
by 500 basis points over a period of equal duration.
of South Africa's economy -
Nevertheless, because of the nature which is a relatively
small and open one, vulnerable to external shocks, yet one where the domestic price
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and wage formation process is fairly rigid the fight to stabilise inflation is far from
over. Throughout 2018, the SARB was concerned that the depreciation of the rand,
together with higher oil prices, was skewing inflation risks to the upside and raising the
odds of an overshoot of the target. This balance of risks informed the decision of the
SARB's Monetary Policy Committee (MPC)
to raise the policy rate by 25 basis points
in November 2018, reversing a cut of a similar magnitude in March of the same year.
In subsequent months, though, the combination of downside inflation surprises,
continued softness in global food prices, and the stabilisation in the exchange rate led
the SARB to revise downwards its inflation projections. As of the MPC meeting in
May 2019, the SARB projects headline inflation to average 4.5% in 2019, 5.1% and
2020 and 4.5% in the fourth quarter of 2021. Inflation should thus remain within target
over the forecasting period.
Meanwhile, core inflation is expected to average 4.8% in 2020 (compared with a
forecast of 5.5% six months ago) and 4.5% in 2021. The MPC assessed the overall
risks to the inflation outlook to be more or less evenly balanced. The recent downward
trend in inflation outcomes were welcomed. As previously indicated, the MPC prefers
inflation to inflation to stabilise at around the midpoint of the target range. Future
adjustment the monetary policy stance will be informed by a careful assessment of the
balance of risks to the inflation outlook.
While oil prices, electricity prices and the rand continue to pose upside risks to the
inflation outlook, these are offset by the downside risks emanating from the weakness
in demand and the projected inability of sluggish economic growth to close the output
gap even by the end of the forecasting horizon. Beyond the volatility of GDP from one
quarter to the next, economic activity has disappointed over the past year. From 1.9%
six months ago, our model's projection for GDP growth in 2019 has now been revised
to just 1.0%. And while an acceleration is expected over the next two years, the
projections for 2020 and 2021 (1.8% and 2.0% respectively) only indicate, at best, a
sluggish recovery in the absence of implementing reforms to restore confidence,
attract investment, support growth, and rebuild buffers.
Should the policy framework be reviewed?
As economic growth continues to disappoint, some observers might feel that the SARB
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is not doing enough to help kick-start economic activity or, in a word, that the
inflation-targeting framework may be less appropriate now than it was in the previous
decade, when growth was dynamic and inflation cycles were more demand-driven
than is currently the case.
This debate does not occur in isolation. In many countries, economists and
policymakers are questioning the surprising lack of sensitivity of inflation to shifts in
demand and unemployment, the trend decline in neutral real interest rates, and the
efficacy of monetary policies as central banks get closer to the effective lower bound
on interest rates.
The mix of subdued demand growth, low inflation and low interest rates is keeping
alive talk of 'secular stagnation', although economists disagree on whether this is a
temporary phenomenon linked to post-crisis adjustments or a more permanent one.
It is, however, important to take into account the differences between countries and
be wary of 'one size fits all' recommendations. Some people, for example, look at the
rigidity of expected and actual inflation in the advanced economies, and question
whether monetary policy should more formally incorporate real economic targets in its
framework. In South Africa, however, the period of relative stability in inflation
expectations has been much shorter than in economies like the United States,
Germany or Japan. There have been, admittedly, some encouraging developments of
late, like the lower pass-through of exchange rate variations to prices and the
moderation in unit labour costs. But these dynamics are not yet fully understood, and
the SARB cannot therefore be sure whether they indeed represent a structural,
permanent shift towards lower and more stable inflation.
Consequently, alterations to the monetary policy framework at this stage would create
the risk of confusion among economic agents and market participants. At worst, it
could mean de-anchoring inflation expectations and reversing the gains of the past
few years.
For now, it appears to us that a strategy of limiting inflation volatility and hence the risk
premium embedded in the cost of capital in South Africa is the best approach to
support medium-term economic growth. Our internal research, for example, suggests
that the country could benefit from somewhat lower borrowing costs if inflation
expectations were credibly anchored at around 4.5%. But because of its structural
current account deficit, South Africa has to compete with peers to attract international
capital. Such gains, therefore, cannot be neglected.
Some people might also wonder whether our current inflation target range of 3-6% is
too high or not wide enough, and whether it consequently imposes unnecessary
constraints on the economy. However, as I have alluded to earlier, the standard
deviation of inflation since 2010 has been 0.9 percentage points.
This suggests that the current band is wide enough to allow for normal cyclical
fluctuations in inflation while limiting target misses to the minimum, provided that
expectations are anchored close to the target's midpoint. It is also important to note
that many of South Africa's emerging
market peers have lower or narrower inflation
target bands than our country, yet their trend economic performance has been better
over the past few years, with no evidence of undue constraints from the monetary
policy framework.
Equally, alternative anchors to the inflation target would be difficult to implement in
South Africa. Prior to inflation targeting, the SARB, like many other central banks at
the time, used monetary aggregates as a key guideline. However, the relationship
between money growth and inflation became too erratic to validate the role of the
former as a reliable lead guide to the latter. Private credit growth, which is the main
counterpart of money supply, does at times play a role in driving inflation, yet economic
and financial cycles do not always coincide, and the latter generally has a longer
duration. Excess focus on credit growth in a monetary policy framework would
therefore risk missing key cyclical influences on inflation. Finally, using a currency
anchor in an open economy like South Africa, with its large commodity share of exports
resulting in strong terms-of-trade variations, would bring unnecessary real economic
costs in the pursuit of exchange rate stability.
SARB's
The role in South Africa, a developing state
But does all of this mean that, under the current framework, there is little that monetary
policy can do to assist in the build-up of stronger, sustainable and more inclusive
growth? We do not think so. Admittedly, the poor economic performance of the past
few years highlights the urgency for South Africa to boost its growth rate and deal with
the problems of high unemployment, poverty and inequality. Investment needs, both
in public infrastructure and in the private sector, are large, and the need for capital to
be adequately channelled to fund these needs is obvious. But in South Africa, like on
the rest of the continent, many capital spending requirements can probably be met by
a more efficient use of existing capital, stricter procurement processes, and the
reduction in wasteful expenditure. Many of these policies fall outside of the remit of a
central bank.
Politicians may sometimes query why central banks (like the SARB) do not play a
greater role in funding development needs, especially in those sectors where the level
of risk and the duration of projects make it a highly risky investment for private lenders.
But public development finance institutions already exist in South Africa, and their role
can be leveraged through more efficient partnerships with the private sector.
Involvement of the central bank, by contrast, would risk creating conflicts with its other
mandates and eroding its trust with the public.
What a central bank like the SARB is best placed to do, however, is to create the
appropriate conditions for the flow of savings to investment in the economy. Price and
financial stability are indeed crucial to building the confidence of households,
especially lower-income households, for them to accumulate savings, as they are less
likely to fear future capital losses. At the same time, properly functioning financial
markets and a sound banking system would ensure that risk is fairly rewarded and, as
such, this would reduce the risk of capital misallocation.
Whereas the SARB fully comprehends that it should carry out its mandate in the
interest of sustainable growth for our economy, it also understands that inclusive
growth and financial inclusion are prerequisites for sustainable growth. While the
SARB does not currently have an explicit financial inclusion mandate (although the
Financial Sector Regulation Act of 2017 (FSR Act) mandates the Prudential Authority
(PA) to 'support' financial inclusion), SARB's National Payment
as stated in the
financial inclusion is viewed as a
System (NPS) Vision 2025,3 'cross-industry public
policy initiative'.
Collaboration is therefore imperative as it helps to drive the
interoperability and ubiquity of payment services. It also enables payment services to
meaningfully leverage new channels (such as mobile phones), new functionality (such
as instant payments), and new technologies (such as application programming
interfaces (APIs) and distributed ledger technology (DLT)).
From a payments perspective, measures such as (a) promoting competition,
(b) enhancing access to payment systems, (c) making the regulatory environment
more enabling, and (d) promoting collaboration are therefore identified as being the
most helpful in advancing financial inclusion.
In line with this, one of the recommendations in the policy paper on the Review of the
National Payments System (Act 78 of 1998) also advocates for the enablement of non-
bank institutions to provide payment services that involve the pooling of funds (e.g. e-
money, remittances, transactional accounts and others) independently and without the
need to partner with banks. This is with a view to establish a level playing field for both
banks and companies that offer money transfer services and/or transactional services
while also establishing a regulatory framework that will address the pooling of funds
by non-banks when they provide such payment services.
While central banks need to remain alive to changes in their operating environment
and stay relevant to their context, the German Development Institute made some
interesting observation that can serve as guiding principles when considering
challenges that may come with mandating central banks with developmental
objectives:

Trade-offs between developmental and stabilisation objectives: central banks
are likely to struggle if they are mandated to achieve too many objectives but
have too few policy instruments to pursue these objectives.

A wider mandate may give too much power to institutions that have limited
accountability: often when central banks seek to play a promotional role, the
performance of relevant developmental policies is not systematically evaluated
and regularly reported on.

Central banks with a wider developmental mandate may face significant
political pressure to pursue developmental policies at the expense of stability.
Conclusion
To conclude, allow me to reiterate a few important issues: The South African Reserve
Bank certainly has a role to play in the context of growth and development in South
Africa, and I would submit that it is indeed playing its appropriate role, in line with its
The SARB's mandate forms
assigned mandate. an integral part of economic and
development policy, and this is what our founding fathers and mothers envisaged
when they drafted the Constitution.
It is important to not conflate issues of mandate, ownership and independence.
The current monetary policy framework has served the SARB and South Africa well,
and while continuous improvements and refinements should be welcomed, any
fundamental changes to the policy framework would need to be underpinned by a
convincing problem statement.
The SARB serves development best by doing what it knows it can do well, and that is
what forms part of our mandate. At a time when central banks, somehow against their
words,
will, became 'the only game in town', in Mohamed El-Erian's trying to reach
beyond their mandate would probably trigger too big a risk of a loss of legitimacy. Not
well-considered broadening central mandates will likely complicate the trade-off
between independence and accountability, whilst also complicating the conduct of
monetary and financial stability policies given likely tension that may arise with
developmental policies.
Thank you.