Is the monetary policy genie out of the bottle?

A statement released by the ANC secretary-general Ace Magashule sets out the government’s “five-year programme to translate the ANC’s contract with the people of South Africa into action” and signals a sharp jump to the left. However, hours after its release, Finance Minister Tito Mboweni denied there was an agreement to alter the mandate of the Reserve Bank.

The National Executive Committee of the ANC met in its annual Lekgotla over the weekend of 1-3 June 2019 to chart the way forward for South Africa and its people.

It would not have been a relaxed meeting. The ANC is under pressure to act. First quarter GDP figures released on 4 June reflected the biggest quarterly drop in GDP growth since 2009 (-3.2%) and the lowest yearly growth rate since the beginning of 2016, when the full follow-on impact of Nene-gate was felt. 

Unemployment is at its worst level yet. Parastatal debt at Eskom, SAA and others is nearing R700-billion, and debt repayments are becoming due. Even the ANC, known for kicking the economic can down the road, cannot play the delay game anymore.

Key to this growth is monetary policy and the much-discussed and debated mandate of the South African Reserve Bank (SARB).

According to the plan, the ANC NEC Lekgotla also agreed to expand the SARB mandate beyond price stability to include growth and employment.

It also directed the ANC government to explore “quantity” (sic) easing measures to address intergovernmental debts to make funds available for developmental purposes.

“These measures should consider inflationary impact on the currency and the poor and all must be done to cushion them. This is consistent practice by developed countries to save their economies. This will go a long way in dealing decisively with the triple challenges of unemployment, poverty and inequality,” the statement read.

“Modern monetary theory”, or “unconventional monetary policy” as a fix-all solution to the country’s woes is not a new idea in ANC. It has been discussed for years, and a flexible monetary policy regime was adopted as policy at its national conference in 2017.

The idea has gained traction since central banks across the developed world adopted the policy to stabilise the global financial system and prop up banks that were “too big to fail” after the global financial crisis of 2008.

However, he said, while nothing may happen in the short to medium run in terms of actual change, severe damage can be done as these issues are pushed forward.

Indeed, it was just a few hours after the statement’s release that Finance Minister Tito Mboweni reacted.

“I am now reaching a point of total exasperation with this continued attack and obsession with the South African Reserve Bank,” he said in a statement. “I have explained on many occasions the purposes and functions of the South African Reserve Bank. What is the issue? What is the problem you want to solve? You blame the Reserve Bank for everything. Water, unemployment, electricity, growth... No people, No.”

Yet despite a spirited defence of the independence of the SARB and current monetary policy by the likes of Mboweni and SARB governor Lesetja Kganyago, the idea refuses to die.

What is enticing about quantitative easing is that it served its purpose in the US and Europe where the economies are strong and the currencies in which goods are paid for are reserve currencies such as dollars, euros and pounds, which ensures that inflation remains low, says economist Mike Schüssler.

However quantitative easing did little to ease inequality — in fact, it exacerbated it. And in countries such as Argentina, Venezuela and Zimbabwe, which have structural problems in their economies, as South Africa does, increasing money supply will drive up inflation exponentially, Schüssler says.

The ANC has observed the lessons of Venezuela and Zimbabwe, but perhaps it believes it can execute a similar policy with different results, he says. DM