RICHARD J GRANT: Expanding the mandate to a fool’s errand

ANC chair Gwede Mantashe was recently quoted saying “the mandate of the Reserve Bank has to be expanded to meet the needs of the economy”.

Though there is no firm proposal on how the mandate should be expanded, it is commonly asserted that the Bank should shift its policy towards stimulating economic growth and employment. But to achieve that would require changes to the constitution, which states that “the primary object of the SA Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the republic”.

“To protect the value of the currency” is understood to require a low and stable rate of price inflation. A dependably stable currency, with mild natural fluctuations, is essential for balanced and sustainable economic growth. That is why the framers of the constitution were wise to give the Reserve Bank this one task within its competence, and to assert the central bank’s independence from political influence.

In truth, it is not obvious that the Bank has succeeded consistently in protecting the value of the currency, or in avoiding consideration of wider goals and political pressures. With a long-standing inflation target range of 3%-6%, the Bank has not set itself a strong standard for price stability.

Even if the inflation rate were steady between 3% and 4%, each generation would inherit a rand that had lost half of its purchasing power. That the December 2022 headline inflation rate was above 7%, a rate widely believed to be a severe underestimate, cannot but weaken confidence in the currency.

But it is worse than that. High rates of inflation, especially with their increased tendency to fluctuate, degrade the currency’s function as a unit of account. Not does this hamper daily commerce and business planning, it disrupts capital markets and increases the likelihood of investment errors and the inability to refinance projects.

Reserve Bank governor Lesetja Kganyago is correct to remind everyone, especially politicians, that a central bank does not have the tools to create sustainable economic growth or even to create real employment. The Bank can create currency, and thereby create inflation, but it cannot create wealth. It is the daily trade and production by those who actually use the currency that improves lives and builds the capital necessary to finance future growth.

High inflation makes it difficult to invest and maintain capital. Injections of new currency into the banking system can produce a temporary illusion of capital expansion, but the most it can achieve is a redistribution of capital, usually away from those who produced it and are best able to manage it. The long-term effect is a growth rate that is lower and less stable than it would have been.

When a society exhibits high unemployment, civil disorder and chronic economic stagnation no amount of currency creation by a central bank can solve those problems. When a third of the labour force is officially unemployed and almost as many have left the labour force through discouragement, that is not a currency problem. It is a problem caused by the people who now insist on expanding the mandate of the Reserve Bank and would thereby make the problem worse.

A government that interferes with people’s everyday commerce, that imposes rules to create conflict rather than co-operation in the workplace and that redistributes capital from those who are productive to those who are not — and into more than a few politicians’ hands along the way — is a government that destroys the hopes and dreams of its people.

The solution is not to expand government mandates but to shrink them. The Reserve Bank should be asked to produce less currency and not to react to other people’s problems and imagined crises. The national and provincial governments should be asked to spend less of their people’s money and to direct more of what they do spend towards the protection of their people’s lives and property.

No amount of currency creation can improve the schools, bring competence to the police services, remove the regulatory obstacles to employment and build a culture of trust, respect and co-operation. But a Reserve Bank that already faces difficulty in its sole task of keeping inflation low and steady would surely buckle under the burden of the fool’s errand in a newly mandated effort to create employment and economic growth with nothing but monetary tokens of shrinking value.

• Dr Grant, a Free Market Foundation senior consultant, is professor of finance & economics at Cumberland University, Tennessee. He writes in his personal capacity.