SA cannot afford to use reckless populism to change Reserve Bank mandate
Undermining central bank independence can only result in economic harm as in Zimbabwe and Venezuala
Political encroachment and interference in central bank management are becoming increasingly common in both developed and developing economies. These take varied forms that may include overt political appointments, erosion of statutory powers, or the suppression of sound economic judgment on account of government ownership of the central bank, all merging into the primacy of the political variable in policymaking.
In an effort to appease his base, US President Donald Trump is applying unrelenting pressure on Federal Reserve chair Jerome Powell to change the unfolding tightening monetary policy, notwithstanding economic analysis that indicates maintaining low interest rates will result in higher consumer prices.
In India, central bank governor and Yale University-educated economist Urjit Patel resigned after Prime Minister Narendra Modi demanded that the Reserve Bank of India transfer its $5.7bn surplus to the national fiscus for the financing of the primary deficit in the run-up to the general election in April. Political designs on the central bank are also unfolding in Mexico, Turkey, Brazil, Sweden, Slovenia, Latvia and Cyprus, among others, the common denominator being the political elite’s preference for political orthodoxy as a measure for undercutting bank policy independence.
Policy slippages are a well-trodden path. In the 1950s Venezuela was the fourth-richest country in the world, and its currency, the bolivar, was one of the strongest in Latin America.
Notwithstanding the increasing calls for equity and ownership changes on the domestic front, SA’s policymakers would do well to reject calls for the nationalisation of the Reserve Bank on the basis of the devastating consequences that tend to befall countries that undermine the autonomy of the main monetary policy institution in developing economies.
In the mid-2000s Zimbabwe’s central bank surrendered its independence to acquiesce to the political agenda of the governing Zanu-PF. Faced with international sanctions and shrinking liquidity, the political elite resorted to printing money, which was used to finance political projects such as agriculture inputs for resettled rural dwellers, sustenance of patronage, appeasement of security chiefs, and financing of the war in the Democratic Republic of Congo in support of then president Laurent-Desiré Kabila.
The printing of money by the Reserve Bank of Zimbabwe was imprudent, but it showed the extent to which political consideration had crept into monetary policy management. This resulted in a surge in consumer prices to hyperinflation levels, and ultimately led to the suspension of the Zimbabwean dollar as legal tender when the highest denominated note reached 1-trillion Zimbabwe dollars and was no longer tradeable against other currencies. This underscores the fact that undermining central bank independence for the sake of short-term populist goals is a slippery slope leading to currency collapse.
Policy slippages are a well-trodden path. In the 1950s Venezuela was the fourth-richest country in the world, and its currency, the bolivar, was one of the strongest in Latin America. This success was weakened in the 1970s by the socialist presidency of Carlos Andres Perez, who undermined the independence of the Central Bank of Venezuela, successfully pressurising it to offer easy money. The new elite and institutions that benefited from nationalisation of the oil industry at the time used the money on price speculation, issuing a slew of imprudent bonds, and the government had free access to national reserves, fuelling corruption and resulting in an aggressive increase in public debt.
Over time, this led to stagflation, an economic situation that was exploited by Hugo Chavez, who trumpeted populist rhetoric as an antidote to the underlying economic problems, thereby gaining the presidential seat in the 1998 election. The Chavez policy package simply augmented the left-wing economic agenda. He imposed price controls and dictated monetary policy, but there was no respite.
His successor Nicolás Maduro has fared no better, and Venezuela is now a shadow of the former country of stability and prosperity: 70% of the population is facing starvation, the bolivar is practically worthless; a haircut is paid for with bananas and a taxi ride is redeemed by a carton of cigarettes — a return to the stone age. This attests to the fact that undermining central bank independence on the basis of political expediency can only result in widespread economic harm.
For South Africans, the corollary of reckless populism of central bank management is easily evident on our doorstep: Zimbabwe is an economic failed state, is bereft of currency, food shortages are common, and the government cannot even afford basic health-care services, leading to the outbreak of containable diseases. The recent unrest was directly caused by runaway fuel inflation and the imposition of extortionist tax measures to plug the primary deficit. Pointedly, the uncontrolled exodus of Zimbabweans into neighbouring countries, mainly SA, is caused by economic pressures linked directly to central bank collapse and the resultant economic hardships.
Ratings agencies and the investment community take a negative view of the erosion of central bank independence. Within our domestic body politic, proponents of central bank nationalisation argue that the inevitable collapse of the rand will be contained, but they offer little in the way of stability measures to attain this. In contrast, our research has observed that in developing countries currency collapse borne of central bank interference easily reaches a point of no return. Among others, the peso (Argentina), dollar (Zimbabwe), bolivar (Venezuela), sol (Peru) and escudo (Chile), are currencies that collapsed in similar circumstances, some taking decades to be revived.
As John Maynard Keynes pointed out, in the long run we are all dead; a clarion call indeed to promote the independence of the central bank as a tool to drive economic growth and forestall economic catastrophe.
• Dr Mukwevho, a former Rand Merchant Bank country risk strategist, is now a corporate investment strategy consultant.