SA Reserve Bank Governor Lesetja Kganyago decided to keep the repo rate unchanged.Picture: Simphiwe Mbokazi
Patrick Bond
Not only is South Africa’s central bank letting down those aiming for an economic recovery based on reasonable interest rates, given 10 increases since late 2021 as the main SA Reserve Bank “repo rate” soared from 3.5 to 8.25%.
According to the SA Reserve Bank, it has a constitutional “mandate to protect the value of the rand.”
But that approach isn’t working, given that the value of the rand to the dollar has collapsed periodically, especially once exchange controls were lifted, including the “Financial Rand” penalty for withdrawing funds from South Africa in 1995, and when permission for the largest firms to move their financial headquarters to London was granted in 1999-2000.
From 2017-20, the “junk” borrowing status imposed on South Africa by the main credit rating agencies – Fitch, Standard & Poors and Moody’s – was catalysed by the firing of former Finance Minister Pravin Gordhan and the choice of his replacement: Malusi Gigaba, and was cemented by the onset of Covid-19.
A junk rating suggests a high risk of default, and indeed, international financial markets deem South Africa among the highest-risk borrowers, paying 10.3%, the fourth highest among countries issuing 10-year international bonds (behind only Russia, Turkey and Brazil).
The SARB also claims “a mandate to protect and enhance financial stability” and to “identify and mitigate systemic risks,” there are more grounds for scepticism.
The SARB’s most recent risk assessments reveal a concern about ‘insufficient and unreliable electricity supply’ – something beyond its control – as well as ‘capital outflows’, which is a risk it and Treasury are largely responsible for amplifying, thanks to fast-loosened capital controls.
In February 2022, for example, Finance Minister Enoch Godongwana announced that R4 trillion could be invested abroad.
Indeed another problem is the perception by international financial regulators that Godongwana and SARB Governor Lesetja Kganyago are slackers when it comes to combating illicit financial flows. And the SARB admits the risk of “remaining on the Financial Action Task Force greylist for an extended period,” which is the third highest likelihood among the nine risks tracked.
Yet, the SARB’s reaction to these risks – some self-inflicted – since late 2021 illustrates the failure of a one-size-fits-all approach: only using the interest rate.
In May, Cape Town-based Alternative Information and Development Centre senior economist Dick Forslund accused Kganyago of “trying to increase the value of the rand in the belief it would curb the pressure from rising costs for imports and protect the currency reserve,” a strategy that “brought the opposite of what they were trying to achieve.”
Forslund continued, “If ordinary people are to be protected against rapidly rising prices, there is a need for price controls against sudden currency outflows. Capital controls are the only method, which policy the SARB abhors.”
The same month, the General Industrial Workers Union of South Africa’s president, Mametlwe Sebei, argued: “The Reserve Bank’s inflation targeting policy – keeping the rate between 3% and 6% - results not only in Kganyago using a sledgehammer to kill a fly, but with it, the table on which it is resting. The persistent raising of interest rates, at the same time, Kganyago allows trillions of rands’ worth of (mainly rich white people’s) investment funds to escape South Africa through relaxed exchange controls represents a cruel, anti-working class Neo-liberal policy.”
Kganyago does indeed appear allergic to controlling those outflows, for as he told the International Monetary Fund in a major speech on July 11, “when sanctions were lifted at the end of apartheid, we looked forward to restoring access to global financial markets. We also appreciated that the end of sanctions did not mean the taps were open. Foreign investors all loved South Africa, but they would not invest based on warm feelings. And there was going to be a limit on how much investment we could attract, even with good policies.”
Yet, he continued, this condition led policy-makers to even further neo-liberal concessions to attract foreigners: “Interest rates would then have to rise to rebalance savings and investment, slowing growth. This was the core problem statement of the macroeconomic strategy adopted by the Mandela government in 1996. The goal was to attract more foreign savings, apply some fiscal discipline to improve the country’s investment profile and reduce government’s demands for savings, thereby permitting lower interest rates to allow more private sector investment.”
Although he claims the policy “worked,” nearly all the 1996 ‘Growth, Employment and Redistribution’ targets failed, with the exception of a lower budget deficit and lower-than-expected inflation. The economy suffered Decline, Unemployment and Polarisation Economics, as society and business – and Mandela, too – were duped by Treasury and the SARB.
Another mandate the SARB claims is to “regulate financial institutions and market infrastructures to promote and enhance their safety and soundness and support financial stability.” But not only has the rand been terribly unstable, but South Africa’s stock market has also suffered from having the highest sustained ‘Buffett Indicator’ of overvalued shares in relation to the economic output of any country in history.
Between 2000-20, that indicator tripled, while in the US, it doubled, and in the world, as a whole, it increased only 50%.
Forslund is correct to complain, “The truth is that the Reserve Bank is inflicting extreme pain on the poor to protect the financiers’ investments in the speculative financial sectors and to protect the interests of large creditors.”
The challenge for a genuinely democratic Reserve Bank – not one insulated from society thanks to its official “independence” and its ownership by commercial banks – in a future, more responsive government would be lower interest rates for ordinary people and tighter exchange controls to prevent a run on the currency.
Kganyago won bankers’ applause – and became chair of the policy-setting IMF monetary and financial policy committee – by adopting the opposite approach. And we’re all the worse off as a result.
Patrick Bond is Distinguished Professor and Director of the Centre for Social Change at the University of Johannesburg
The views expressed do not reflect the views of Independent Media or IOL