There is no reason to nationalise the Reserve Bank
Calls by the EFF and ANC are premised on political ideology and a poor grasp of the law
Proposals to replace the private ownership of the Reserve Bank with full ownership by the state are frequently raised on the political scene.
It is a debate that seems to be fuelled not by a motivation to remedy any existing flaws but rather to appeal to populist ideology. Should these proposals meet with success, it will be to the detriment of the Bank’s much-respected institutional strength.
The Bank is owned by private sector shareholders rather than the more common model where the central bank is owned by the government. Ideologically, this does not sit well with some political parties because they believe such a vital entity should be owned and controlled by the state. The EFF tabled a bill in parliament to nationalise the Bank. This bill seemingly is aligned with the ANC’s views. However, while the ANC believes that shareholders should be compensated, the EFF is proposing nationalisation without compensation.
The ANC has rightly said that nationalising the Bank is a low priority relative to Covid-related fiscal measures that have placed immense strain on fiscal resources. However, nationalisation has been adopted as official ANC party policy and therefore may still occur in the future.
The views of the EFF and the ANC on the subject seem to be premised on a combination of political ideology and a poor understanding of the existing legislation. They have not presented any compelling arguments as to why state ownership will improve the existing arrangement. The reality is that the existing ownership structure is far more beneficial than the proposed state-ownership model.
First, the private sector ownership of a central bank has global precedent. There are various central banks that have versions of private sector ownership such as Belgium, Japan, Turkey, Switzerland, Greece, Italy and the US. The SA ownership structure is therefore not unique.
Second, the legislation that governs the Bank is very clear on the powers, rights and responsibilities of the shareholders, the board of directors and the Bank. Shareholders at the annual general meeting have the right to appoint seven of the 15 directors and the financial auditors, and determine the remuneration of the auditors. The government appoints the other eight directors, which include the governor and three deputies.
Consequently, the government already appoints more than 50% of the board.
It also contains safeguards to prevent undue influence by shareholders. For example, the SA Reserve Bank Act prevents a shareholder and associates from owning more than 10,000 shares and shareholders must be resident in SA to be able to vote on Bank matters.
Importantly, according to section 4A of the act, the role of directors is limited to matters of good corporate governance and selected financial matters such as approving the budget and financial statements. The current act stipulates that all other powers and duties are vested with the governors.
Given this focus on corporate governance (and not on the central bank’s policy mandates), it is good practice for there to be independent nonexecutive directors. Importantly, this aligns the Bank governance structure with principle 7 of the King IV Report on Corporate Governance for SA.
At times it has been asserted that the shareholders have a financial benefit from owning Bank shares. Nothing could be further from the truth. In terms of the act, the dividend payment to shareholders is set at 10% of paid-up share capital. The total dividend payment is therefore a fixed amount of R200,000 per annum, or 10c per share.
With a share price of R12.50 (as at November 6 2020) that equates to a paltry yield of 0.8%.
Further to this, as per section 24 of the act, financial surpluses are paid over to the government. Consequently, the private sector shareholders receive no material financial benefit from the profits of the Bank, while the government is the sole beneficiary.
Based on these comments so far, why is there such a drive to nationalise? Many commentators believe this links to the motive to influence monetary policy and to be able to exert control over the Prudential Authority within the Bank (which sets the prudential regulatory requirements for various financial institutions). Quite frankly, this could already be done because the government appoints the governor and deputy governors who bear those responsibilities.
The policy of the EFF and the ANC to nationalise the central bank holds little merit. The existing ownership structure provides a significant benefit in that it aligns the Bank with accepted principles for corporate governance while private shareholders receive no meaningful financial benefit.
Removing the private sector shareholders and reverting ownership to the state would be detrimental and regressive from a corporate governance point of view. Proposals to nationalise the central bank should be rejected outright.
• Myburgh is former head of financial markets at the Reserve Bank.
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