What changing the ownership of South Africa’s central bank will, and won’t, do

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What changing the ownership of South Africa’s central bank will, and won’t, do

South Africa’s second largest opposition party, the Economic Freedom Fighters (EFF), has lodged a parliamentary motion to amend laws that govern the management and ownership of the country’s central bank.

Judging by the content of the South African Reserve Bank Amendment Bill the EFF is clearly intent on upping the ante on economic policy ahead of the national elections in 2019. The amendments come hot on the heels of the party pushing for the expropriation of land without compensation. The EFF was formed five years ago after it split from the African National Congress, positioning itself on the left of the political spectrum.

The EFF on its own won’t be able to affect the Reserve Bank change given that it only has 25 MPs in parliament. But the ANC has also thrown its weight behind the idea, adopting a resolution at its national conference last year to nationalise the South African Reserve Bank.

It’s not the call for the nationalisation of the central bank, per se, that’s raising concern. It’s how its been dressed up by the EFF and the prevailing political environment.

What the EFF wants to achieve is control of monetary policy by politicians. This would be dangerous for South Africa. Experiences from other countries that do this, like Zimbabwe and Venezuela, are not good. They are all economic basket cases.

The fact is that a change of ownership of the South African Reserve Bank would not in and of itself be a disaster. Most central banks in the world have a share ownership structure that has the state as the majority, or only, shareholder. The South African Reserve Bank is one of only eight central banks in the world with private shareholders. But this does not equate to politicians running central banks. There are governing structures in place that ensure that central banks – even if the majority shareholder is the state – are free to implement monetary policy without political interference.

Ownership isn’t the point

South Africa’s central bank has come under attack over the years. Many of the attacks have come from the left – within the ruling party and its allies the Congress of South African Trade Unions and the South African Communist Party.

The unhappiness has revolved around the role of the South African Reserve Bank – particularly its focus on keeping inflation under control by sticking to an inflation target – and its perceived failure to inspire economic growth. These concerns are now being manifested in the debate about the bank’s shareholding structures.

Unfortunately, the debate is informed by the mistaken view that private shareholders affect monetary policy. The corollary is that nationalisation would give the government, as the major shareholder, control over central bank policy.

Both assumptions are wrong.

Even though South Africa’s Reserve Bank has private shareholders, they have absolutely no say over monetary policy. Similarly, the state doesn’t dictate monetary policy in the vast majority of central banks that have governments as their major holders.

What this means is that changing the shareholding of South Africa’s bank won’t change the way the bank is run.

The bank main mandate – to keep inflation under control – is in fact anchored in the country’s Constitution. To change this focus would require a change in the constitution.

Private shareholders of the South African Reserve Bank have very little influence over it. They play no role in the day-to-day management of the institution and also no role in the appointment of the executive management, the Governor and deputy governors.

Their powers are limited to electing a minority of board members, the right to attend the ordinary general meeting of the central bank where they also approve the minutes of the previous year’s meeting and the annual report of the bank, and the appointment of the external auditors.

The private shareholders are also entitled to receive a dividend of 10c per share per annum (before dividend withholding tax of 20%). But no individual shareholder, or group of shareholders, can hold more than 10 000 shares. This is to prevent any concentration of power. This means that in any given year the maximum a shareholder can be paid in dividends (after dividend withholding tax) is a paltry R800.

Expropriation without compensation

The EFF bill is styled as an amendment to the existing South African Reserve Bank Act. The bill aims to change the ownership of the bank through nationalisation. The state would, under this scenario, own 100% of the bank.

The bill also seeks to move functions currently entrusted to private shareholders to the minister of finance. These include the appointment of some board members and the appointment of external auditors.

Giving the minister the power to appoint certain board members doesn’t make sense given that the SA Reserve Bank Act currently stipulates that the President of South Africa appoints the majority of the board members (including the governor and deputy governors). Giving the finance minister the power to appoint some board members would create two classes of board members – a nonsensical state of affairs.

More disconcerting is the fact that the bill makes no provision for any compensation for current shareholders. The bill simply transfers ownership from shareholders to the state.

The proposed amendment goes as far as to state that the change of ownership will have no financial implications. This may be taken as confirmation that provisions on compensation were not inadvertently omitted or left to be considered later. The stated objective is clearly nationalisation without compensation.

This comes on the back of efforts to push for the expropriation of land without compensation.

Both moves set a dangerous principle and put South Africa on the dangerous slope of economic disintegration.

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