X P Guma: Communicating reserve management and exchange rate
policies - a South African perspective
Address by Dr X P Guma, Deputy Governor of the South African Reserve Bank, at the Bank
of Tanzania-IMF-East AFRITAC Regional Seminar on Central Bank Communication,
Stonetown, Zanzibar, 6-8 May 2008.
* * *
1. Introduction
Chairperson, Lila Mkila, Deputy Governor of the Bank of Tanzania, distinguished
participants, ladies and gentlemen; I wish to start by thanking the organisers of this seminar
for their invitation to me to participate in these proceedings and to proceed on the premise
that all protocol has been observed. Having said that, I must especially acknowledge Dr B.
Ndulu, Governor of the Bank of Tanzania and my senior in several respects - not least in the
context of the Africa Economic Research Consortium from which I benefited as a young(er)
economist all those years ago, which he served with characteristic distinction.
2. Communication: of what, how?
A story is told, which I think may be appropriate to repeat here. It is said that in 1991 when
Mr Mervyn King, the current Governor, joined the Bank of England he visited the former
Chairman of the Federal Reserve of the United States of America to seek advice and Mr
Paul Volcker obliged with a marvellous word, "mystique".
And that appears to have been the desired practice of senior central bankers of the time,
"mystique". The object of their communication was to create such uncertainty as to ensure
that their decisions would be treated with the kind of awe that attends the devotions of the
converted. Mr Volcker, it is said, described the central bankers of the Bretton Woods system
as "high priests, or perhaps stateless princes", the process by which they made monetary
policy decision resembling the elusive mysteries of papal successions. That perhaps
explains the sea change that has occurred in thinking about communication by central banks.
Having come of age in central banking at a different time, my purpose today is to be brief, to
the point and as clear as possible. In the paragraphs which follow, I will outline the evolution
of reserve management in South Africa, indicate the nature of the communication strategy
which has been pursued and conclude. The interesting part, our joint deliberations, will be off
the record.
2.1 Of what?
Reserve management in South Africa has occurred historically in an environment of
exchange controls. These were originally introduced in 1939, together with the United
Kingdom and other members of the then sterling area, as part of the emergency Finance
Regulations applied by that group of countries. The original objective was to retain a free
movement of funds between these countries whilst preventing "hard currency" funds from
flowing out of the area to non-sterling countries.
Whilst the Sterling Area exchange controls were removed gradually after the end of the
second World War, liberalisation of controls in South Africa was halted by the declaration of a
State of Emergency in March 1960, and the imposition by the authorities in May and June
1961 of comprehensive measures which were intended to strengthen both the current and
the capital accounts of the balance of payments. As Roger Gidlow (1995:181 et seq) states
then, stricter import controls included restrictions on inheritance, gift and maintenance
transfers as well as allowances for tourists and emigrants. Even more significant, capital
transfers abroad by residents were disallowed while residents were called upon to declare
their foreign assets and liabilities. Furthermore, the transfer of profits earned by foreign
controlled companies prior to 31 December 1959 was prohibited.
Reviewing developments from the vantage point of 1996, the Governor of the South African
Reserve Bank (SARB) wrote as follows (Stals, 1996-06-17): The initial non-economic factors
that led to the outflows of capital from South Africa during the more than thirty years, from
1961 until the early 1990's rapidly disappeared after the announcement of the election of the
Government of National Unity towards the end of 1993. Although a large amount of funds still
flowed out of the country during the first half of 1994, the situation changed dramatically
thereafter. In the second half of 1994, there was a net inflow of more than R9 billion into the
country, and during the calendar year 1995 a further net inflow of R21,7 billion, to bring the
total net inflow for the 18 months from July 1994 to December 1995 to more than R30 billion.
In April 1994, when the Government of National Unity took office, the Reserve Bank held
about R7 billion in foreign reserves, but also had about R6 billion outstanding in short-term
borrowings.
During the years which ensued, the SARB followed a policy of trying to stabilise the
exchange rate of the rand by intervening in the domestic foreign exchange market, this being
consistent with the provisions of the interim Constitution of the Republic of South Africa
which required the Bank to protect the internal and external value of the currency. However,
as Mminele (2007) notes, because the level of its gross reserves were fairly low, averaging
around USD3,8 billion between 1990 and the end of 1997, the Bank funded its intervention
through the forward market, and in the process built up an oversold forward book which, at
tits highest level in 1995, amounted to USD29 billion. This exceeded the level of net reserves
by a considerable margin, leaving a negative net open foreign currency position (NOFP)
which reached a peak of USD23, 2 billion in August 1998; a number which is still mentioned
only in hushed tones by those Reserve Bank staff who can recall those momentous times!
In 1998, the SARB ceased its intervention in the foreign exchange market, abandoned its
attempts to influence the level of the exchange rate and, in addition, made a public
commitment to eliminate the negative NOFP and to close out the oversold forward book. And
this had the desired result. In September 1998, the level of gross reserves, at US$5,3 billion
was still very small in absolute terms and relative to the net oversold forward book of
approximately US$18 billion. By May 2003, the NOFP was marginally positive; but by
February 2004, the positions in the oversold forward book were balanced and gross reserves
had started to increase. At the time of writing, the Template on international reserves and
foreign currency liquidity, which is available to all who may be interested at
www.reservebank.co.za, indicates that the approximate market value of the official reserve
assets as at end of March 2008 was US$34,384 billion. Chart 1, beloved of those SARB
directors and staff who speak in public, illustrates these developments.
In summary, then: the SARB now has reserves to manage. This was not always the case, for
during some periods prior to 1998 what needed to be managed were negative net reserves.
Second, the SARB has made a public commitment not to participate in the market for foreign
exchange in an attempt to influence or to determine the nominal exchange rate. Third,
exchange controls have been liberalised significantly. South Africa does not appear now to
be too different from its peers among emerging market economies.
2.2 How?
The implications for communication of the afore-going narration were and remain
challenging. In a situation of economic vulnerability, such as characterised South Africa at
various moments in its past, the need was for the Bank to maintain a sense of calm.
Statements had to be circumspect without ever inducing a sense of panic. For nobody would
have been prepared to say to all and sundry: "we don't have sufficient reserves, but are still
going to attempt to influence the exchange rate, so there! ..."
Any student of this period in the economic history of the country will be struck by the subtle
nature of the communications of this time. Consider, for example, the difference between the
reporting of developments regarding reserves in the Quarterly Bulletin of the SARB. The
March 1996 report reads as follows in the section on foreign reserves: "South Africa's total
gross gold and other foreign reserves rose from R14,1 billion at the end of 1994 to R15,2
billion at the end of September 1995 and to R18,2 billion at the end of December 1995. After
having increased by R2,2 billion in December 1995, the gross foreign reserves of the
Reserve Bank decreased by R229 million in January 1996. Without taking into account the
credit facilities of the monetary authority, the total foreign reserves of the country were equal
to seven weeks' imports of goods and services at the end of December 1995."
Billions deflected by casual reference to a few millions: weeks of imports, not months; some
numbers refer to the country; others to the Reserve Bank; others still to the monetary
authority. All in Rand, not in SDR or dollar values. And these numbers, of course, do not
include the credit facilities of the monetary authority, which, if included? Draw your own
inference and rest assured that we are not panicking.
This may be contrasted with the confident tone of the most recent Quarterly Bulletin (March
2008) which reports on International reserves and liquidity in the following manner: Measured
in US dollar, the value of the gross gold and other foreign reserves of the South African
Reserve Bank (the Bank) increased from US$ 30,5 billion at the end of September to
US$33,0 billion at the end of December 2007 and further to US$34,2 billion at the end of
February 2008. The Bank's international liquidity position increased from US$28,4 billion at
the end of September 2007 to US$31,3 billion at the end of December and further to
US$32,7 billion at the end of February 2008."
Straight, to the point and, to use the current idiom of some of the young, together!
At least two things were done to manage communication during those difficult times. First, in
order to ensure consistency, it was the practice for only the Governor of the Bank to address
public gatherings on monetary policy. Eschewing the use of speech writers and speaking
authentically and unmistakably in his own voice, the Governor, as the public face of the Bank
would explain what needed to be explained adopting the tone of wounded indignation to
good effect when necessary. For example, commenting on macro-economic adjustment
during 1995 and 1996, the Governor (1997-09-08) wry and as caustic as decency allowed
wrote, "the South African monetary authorities are indeed, in retrospect
(my emphasis), now
criticised by the International Monetary Fund for having intervened excessively in the foreign
exchange market last year .... This was prompted, however, by an acute shortage of foreign
exchange reserves ... at the time of the currency crisis". And then added, diplomatically,
"The Reserve Bank agrees with the Fund that the Bank's role in the foreign exchange market
should be reduced."
This strategy had the positive effect of providing consistency in the language of
communication, effectively countering the nay-sayers in the market who consistently look for
evidence of policy conflict within the Bank. It said, in effect, "one Bank; one policy; one
voice".
Secondly, the number of public speaking engagements was kept limited, but unspecified,
with the Quarterly Bulletin, the statement on foreign reserves and the annual Governor's
address to shareholders of the Bank being the only documents whose release could be
announced in advance. Market participants could, therefore, be assured of a comprehensive
set of data, set out in accordance with the highest international standards, in the Quarterly
Bulletin and the statement of foreign reserves; and would be guided by the Governor's
address on matters pertaining to exchange rate, reserve management and over-arching
monetary policy. Additional information was made available on a discretionary basis.
Third, in recognition of the fact that a central bank can only be as independent as the
government of the day wants it to be, regular contact was maintained with the Minister of
Finance; and the practice of briefings to be relevant Committee of Parliament was
maintained.
3. Conclusion
The challenge of communicating with the general public, financial analysts, the markets and
other interested parties remains. However, at present, the message which needs to be
communicated is that of monetary policy in the context of inflation targeting: exchange rate
and reserve management issues have lost their centrality, important as they may remain.
The tension caused by substantial deviation from the desired outcome, albeit on account of a
concatenation of external shocks of unprecedented magnitude, poses an on-going challenge
- with regard to time-consistent policy responses and with respect to communication.
But these are matters for discussion and debate at another time. Thank you for your
attention.
References:
1. Asso PF, Kahn GA and Leeson R (December 2007) "The Taylor Rule and the
Transformation of Monetary Policy", Federal Reserve Bank of Kansas City; Research
Working Papers.
2. Gidlow, R (1995) "South African Reserve Bank Monetary Policies under Dr T.W. De Jongh
1967-1980", Pretoria, South African Reserve Bank.
3. King, M (2000) Speech to the joint luncheon of the American Economic Association and
the American Finance Association, Boston Marriot Hotel, January.
4. Mminele D (2007) "The Accumulation of reserves by emerging markets and the case of
South Africa", JP Morgan Asset Management Central Bank Reserve Management Seminar,
Johannesburg, November.
5. South African Reserve Bank, Quarterly Bulletin, various issues; 1995-2008.
6. Stals, C.L. (1996) "Exchange Control : How critical is it?" Address by Dr Chris Stals,
Governor of the South African Reserve Bank, at the Europe-South Africa Business and
Finance Forum, Cannes; 17 June.
(1997) "Exchange Controls and Monetary Policy." Address by Dr Chris Stals,
Governor of the South African Reserve Bank, at a Roundtable Discussion arranged by
Economist Conferences, Johannesburg.
(1999) Remarks by Dr Chris Stals, retiring Governor at a Gala Dinner of the
South African Reserve Bank; 8 August.
7. Volcker, P (1990) The Triumph of Central Banking; Per Jacobsson Lecture, Per
Jacobsson Foundation, Washington DC.
BIS Review 58/2008