Sympathise with the Reserve Bank’s Monetary Policy Committee

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Spare a thought for the monetary policy committee (MPC) members who manage monetary policy for South Africa. 

The Reserve Bank is, thankfully, fully independent of the state. It has a mandate to target inflation (to keep it under 6% per year). Inflation is typically understood as too much money chasing too few goods. Inflation eats value, whereas stable prices help to create the right conditions for economic growth. 

Limiting the money supply is, theoretically, the way to curb inflation according to conventional economic wisdom. Of course, the reality is more complex. It’s complex because the Reserve Bank really only has one instrument at its disposal — interest rates. 

Technically, pushing up the interest rate is meant to induce savings and reduce spending. In the South African context, though, most consumers are indebted and higher interest rates simply mean more money spent on servicing that debt. It might tame inflation but only within a closed model. 

There is also a global reality. South Africa is a tiny economy, highly dependent on imports. Imported goods, such as refined fuel, are largely priced in US dollars. So, the Reserve Bank must consider not only the volume of money in circulation locally to tame inflation but what interest rate movements might do to the value of the rand. 

There is a reason, for instance, that the MPC typically follows the US Federal Reserve’s interest rate decisions or tries to pre-empt them by moving our interest rates to get ahead of the curve. 

If you’re still following, this is how it works. The US Fed also has an inflation-targeting mandate, and US inflation has been out of order lately, resulting in the Fed continuously hiking rates. This makes US bonds relatively attractive to hot money and so liquid investment chasing yields tends to move out of emerging market currencies and back to safe havens such as the US dollar. 

Our MPC then hikes rates to keep some hot money chasing bond yields and thus buoying the value of the rand to temper import-driven inflation. However, this only works ceteris paribus (all else remaining constant). But nothing in our context — local or global — is stable. 

The MPC, in a highly considered statement on 25 May, decided to increase the repo (repurchase) rate by 50 basis points to 8.25% a year — commercial banks operate at 400 basis points higher than the Reserve Bank, so they’re retailing interest at 10.25%. 

Unusually, it was a unanimous MPC decision. In light of the global outlook, the tightness of global oil markets and sticky core inflation outlooks across the world, it took out the big guns. Normally, the rand strengthens when interest rates go up. This time, it tumbled substantially. It was trading at R19.26 to $1 on 24 May. After the 25 May announcement, it dropped to a record R19.82. It has since recovered to R18.35. 

But the point remains that the Reserve Bank has a blunt instrument with which it is trying to put out fires that it didn’t start and are sustained by villains elsewhere. There are three major fires ravaging South Africa and the fire hydrant to solve them is not fiddling with interest rates. It is nothing less than political and economic reform. 

First, our foreign policy is killing us. As I write this column, Business Day reports our foreign minister, Naledi Pandor, as saying that the country “will not be coerced into changing its non-aligned foreign policy stance on the conflict between Russia and the Ukraine” for the sake of trying to remain eligible for the US trade pact commonly known as Agoa (the African Growth and Opportunity Act). 

She is playing dangerous games. It’s not a “conflict”; it’s a war started by an aggressive, unwarranted invasion by Russia. And losing Agoa would cost South Africa in the region of R60 billion a year in lost exports, thanks to privileged access to US markets protected under the pact. 

It’s not just that the ruling party seems to be putting its own interests ahead of those of the country, it’s that South Africa has appeared to be actively aligned to the Russian Federation until now. Nonetheless, President Cyril Ramaphosa’s 10-point plan to stem the conflict can be criticised for many things but partial to Russia it wasn’t. 

A confidential briefing I’ve just seen indicates that the idea of South Africa having supplied arms to Russia (the Lady R saga) is unlikely, but not impossible, especially given that the president has ordered an inquiry into the matter.  

Second, load-shedding continues to plague the economy. No power, no economy. The Reserve Bank has forecast growth recovery to 1% next year. I don’t see it happening, as even if load-shedding does not stay at stage 6 or worse into 2024, the very reason for recovery will be because energy-intensive businesses — mining, construction and manufacturing — are in decline. The FNB/BER Building Confidence Index, just released, indicates that “more than 70% of respondents are dissatisfied with prevailing business conditions”. 

Third, organised crime continues to destroy not only Eskom’s ability to deliver power (nevermind the grand corruption that enabled organised crime to flourish) but also Transnet’s ability to provide rail and port services efficiently. Of course, one cannot only blame organised crime — rampant corruption and blatant incompetence at the highest levels play a substantial role too. 

What is the upshot of these matters? Well, big business eventually stood up and said, “We’ve had enough and we’re here to help.” They’ve set up various workstreams and there’s some positive momentum. Of course, they’ll see quickly why little gets done — the state is disorganised and struggles to deliver its core mandate to provide public goods, such as justice and basic services: water, roads, rail, health and education. 

Even if these workstreams manage to find solutions, they won’t be sustained unless there’s insistence on institutional reform. Moreover, big business would be well advised to invest prudently in institutions that help the government to become more effective but also that also help citizens to hold the government to account. 

Institutionalised constraints on executive power remain the critical building block of any society that hopes to have a future. Our Chapter Nine institutions and the National Prosecuting Authority need to be strengthened. You can fix potholes today but tomorrow the road will fall apart because the basic structures of managing contracts in incorruptible ways haven’t been put in place. 

Even with big business stepping up to the plate, we have to face the reality that those “for sale” boards going up all over the place in wealthy suburbs are not just a sign of a bunch of rich know-it-alls semigrating to the Cape; they’re a sign of real wealth leaving the country. 

As Rob Rose reports in the Financial Mail, the Africa Wealth Report reveals that the number of high-net-worth South Africans with more than $1 million in “investable wealth” has fallen by 690 in the past year. This is mostly due to emigration. Over the last decade, the number of local dollar millionaires has fallen by 21%. 

Applications by South Africans for citizenship elsewhere rocketed by 340% in the first quarter of 2023 year-on-year. These are mostly by people who are trying to get out before it becomes too difficult. Either way, emigration of the wealthy is, unfortunately, often a harbinger of middle-class departure too — those hardest hit by the double whammy of inflation and interest rate hikes. 

Of course, people leave for various reasons but the trends are not encouraging. For those of us committed to staying, we must do the hard work of fighting for institutional reform alongside identifying the opportunities that will help to move us out of this morass. 

A version of this piece will appear as a column in the July edition of Modern Mining. 

Ross Harvey is the director of research and programmes at Good Governance Africa and a research associate at the University of Johannesburg’s Institute for the Future of Knowledge.