ANC bombs on Reserve Bank add to rand woes
This is the second time Luthuli House officials have been taken to task for misleading public statements about the status of the central bank
On a day marred by news that the economy had its biggest contraction since the depths of the global financial crisis, ANC secretary-general Ace Magashule dropped economic bombs, saying the party would expand the mandate of the Reserve Bank and explore the use of quantitative easing to deal with government debt.
Several hours later, the head of the ANC’s economic transformation committee, Enoch Godongwana, issued a statement, contradicting Magashule and saying that consideration of quantitative easing was not on the ANC agenda and that there was no decision by the ANC to expand the mandate of the central bank.
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This is the second time that officials at Luthuli House have been taken to task for misleading public statements about the status of the central bank. The issue has become a proxy war between the Ramaphosa camp and the Zuma fight-back faction.
Magashule is also accused of sneaking a clause on the central bank mandate into the ANC’s election manifesto, without agreement.
The day began with a release from Statistics SA showing GDP shrank 3.2% in the first quarter, the biggest decline since 2009.
The economic data, which highlights the challenge that President Cyril Ramaphosa faces as he seeks to boost the economy and investor confidence, and the attack on the Bank, knocked the rand to its biggest decline in a week against the dollar. It was 2% weaker at R14.7378/$ by 7.28pm.
The currency has erased its pre-election gains, which were driven by speculation that an ANC victory would strengthen Ramaphosa’s hand against populists within the ruling party, enabling him to push ahead with reforms that economists say are necessary to prevent the country losing its remaining investment-grade rating.
Since May 10, the last trading day before the results of the May poll were confirmed, the rand is down almost 4% against the greenback, the worst performance among emerging markets tracked by Bloomberg. The Turkish lira, a currency that has been battered by political uncertainty and attacks on its central bank, has gained more than 3% over the same period.
The ANC’s statement, which came after its lekgotla, a biannual planning meeting, said that the ANC would also instruct the government to consider forming a task team to explore “quantity easing measures to address intergovernmental debts to make funds available for developmental purposes”.
The statement included the misspelling of the policy known as “quantitative easing”— a policy used by central banks in the US and Europe to inject money into the economy by buying government assets, such as bonds.
While the proposal for quantitative easing is new, the debate on the Bank’s mandate has been a source of contention in the ANC for years. At the ANC’s conference at Nasrec in December 2017, a similar resolution was taken. It was included in the ANC’s election manifesto for the May election. This is the first time that the ANC has said that it will implement the resolution.
Bank governor Lesetja Kganyago as well as most of the ANC’s economic transformation committee have consistently argued that the bank’s focus on inflation is the best way to protect poor people from economic shocks. Their detractors, in Cosatu, the SACP and the ANC, have argued that this focus leads to a high interest-rate regime that chokes growth and stifles employment.
In response, the Bank said it “would continue to engage with the finance minister, who in terms of section 6 of the Public Finance Management Act, is responsible for the co-ordination of macroeconomic policy.”
The mandate of the central bank, which is enshrined in the constitution, is to “protect the value of the currency in the interests of balanced and sustainable economic growth”.
Godongwana, in his statement, made the same point, saying that macroeconomic policy was determined by the finance minister and the Bank in line with the injunction in the constitution. As the mandate of the Bank had already been discussed in correspondence between it and the minister of finance in 2010 “the debate about the mandate of the bank was therefore closed from that date”.
Of greater surprise was the ANC’s introduction of the suggestion to explore quantitative easing as a means of dealing with government debt.
Quantitative easing has been used widely as an economic stimulus in Japan, the US and eurozone, where central banks buy bonds to inject money into the economy. They’ve usually done that to avert deflation and a sustained drop in consumer prices, and only once interest rates are so low, or negative, that conventional policy loses effectiveness.
In SA, the inflation rate is running above 4% while the repo rate is at 6.75%. In Zimbabwe, printing of money has led to hyperinflation and economic collapse.
While some senior ANC sources told journalists that this was only a proposal and would not fly, it was nonetheless clear from other participants at the lekgotla that serious discussions were held on the potential for using quantitative easing mechanisms to assist with debt.
SA has a growing debt problem with both Eskom and SAA unable to raise new debt, spurring fear that their existing debt will not be rolled over.
National government debt has been growing at an alarming rate with the debt to GDP ratio expected to reach 60.2% by 2024. Moody’s Investors Service said in May that this could reach more than 70% if the budget deficit continues to rise and Eskom debt is included in the government’s balance sheet.