NOMPU SIZIBA: The South African Reserve Bank is a hundred years old this month. It was established in 1921 and is the oldest bank on the African continent. It first opened for business on June 30, 1921, and issued its first bank notes to the public on April 19, 1922. The South African bank is a creature of statute governed by the South African Reserve Bank Act and Section 225 of the Constitution. So how has the central bank fared in this primary role of ensuring the reasonable value of the rand, and guarding against inflationary pressures on the economy, as well as doing its bit to create a conducive economic environment for businesses and households to thrive?
Well, to discuss these important issues and the challenges the central bank has had to grapple with over time, I’m joined on the line by the Reserve Bank governor Lesetja Kganyago. Thanks very much for joining us, governor; thank you for making the time. Now, a hundred years of existence and the oldest African central bank – that’s quite a feat. So give us a bit of history around the birth of the South African central bank, and is it correct that it was born out of the Gold Conference that took place in 1919?
LESETJA KGANYAGO: The South African Reserve Bank was born out of the conference?
NOMPU SIZIBA: Yes, the gold conference.
LESETJA KGANYAGO: No, that is not how this South African Reserve Bank was born. The South African Reserve Bank was born out of the banking crisis that took place in South Africa around 1918. At that time, because of the banking crisis, it was felt that we actually needed a central bank that would oversee the banking system.
So that’s how the central bank was created. The Gold Conference in  was just another matter. But the South African Reserve Bank evolved out of that banking crisis and opened its doors in 1921. And yes, as you said, the only central bank on the African continent. It is a central bank whose history evolved with South Africa, it has very much been a part of the economic developments in the country and the political developments in the country.
But if you do want to talk about the value of institution and you look back now, and you are saying that this is an institution that is a hundred years old, and I am only the 10th governor, then you’ll get to understand that creating institutions in a democracy is one thing. Making sure that those institutions are run by competent people with integrity is another. And that is where the central bank was able to be sustained and is well recognised globally among the community of central banks [and] is actually something that South Africans should be proud of.
NOMPU SIZIBA: Governor, what’s the history around the shareholder structure of the Reserve Bank, and doesn’t the fact that commercial banks have shares in it, albeit fairly insignificant, make it less independent in its dealings with them?
LESETJA KGANYAGO: Not at all. Where it happens, political leaders create institutions and then think afterwards, how do we fund them. The truth of the matter is that when the central bank was created the government didn’t have enough capital to put into the central bank, and it needed South Africans to put money into the central bank. Sometimes they can do that. And so it was offered to members of the public.
But there was something else with the banks: every time every bank introduced its own bank notes, and the bank notes of different banks competed with each other, as part of the deal to say to the banks that they must give up their issuance of notes, they were also offered shares in the South African Reserve Bank.
But when this thing was done, there was also a view that the banks had caused the crisis in 1918, and because [they] were responsible for that crisis, we are going to make sure that you are not dominant in the central bank, and that is the history behind restricting the shares in the central bank to no more than 10 000.
NOMPU SIZIBA: Just remind us, what is the mandate of the South African Reserve Bank?
LESETJA KGANYAGO: The mandate of the South African Reserve Bank emanates from the Constitution of the Republic of South Africa, Section 224. It is that the South African Reserve Bank shall be the central bank of the Republic of South Africa. That’s how it was based, which means the primary object, meaning the mandate of the central bank, is to protect the value of the currency in the interest of government’s sustainable growth in the republic.
So the South African Reserve Bank is a creature of the Constitution and one asks this question: How does it become a creature of the Constitution if the Constitution came afterwards, and one would have to look back and see that in the old days it used to be that policy that sat with the board of directors, and the board of directors put these policies [in place] with the governor. Theoretically, given those days, they could withdraw the delegation.
But with the advent of the Constitution and the central bank of the Republic of South Africa, the governor and the deputy governor were given original powers in terms of the South African Reserve Bank Act, meaning that policies rest with the governor and the deputy governor, and not with the board; and that made the board a pure governance body.
This now talks back to your question, when you asked whether the fact that the banks own shares [compromises] the independence of the [Reserve] bank. I say to you no, and the reason it is no is because the board is a governance board, it is a unitary board. It does not discuss policy. It’s a pure governance board. The people that get onto the board of the Reserve Bank, their fiduciary responsibility is to the bank, and not to the shareholders who might have elected them, and out of this board of 15, eight members are appointed by the president. The governor and the three deputies and another four non-executive directors are appointed by the president.
NOMPU SIZIBA: So governor, the inflation-targeting regime which was instituted in 2000 has its supporters and its detractors, the detractors arguing that an emerging-market country like ours should be able to enjoy a bit more inflation for growth. Why have you been quite resolute in supporting the policy, and do you think on balance it’s been effective?
LESETJA KGANYAGO: I suppose you can have an inflation target and set it higher if you so desire. That doesn’t change the fact that inflation targets are a superior monetary policy framework.
Secondly, we are the 13th adopter of the inflation-targeting framework in the world. When we adopted that and we put an inflation target of 3% to 6%, other emerging markets came afterwards and adopted the inflation targeting framework. And guess what – many of them have resigned to a target and, guess what, they all have revised the target lower, with the exception of a few like Turkey or [a country that] would go for higher inflation. But can I underscore: there is no virtue in higher inflation. Higher inflation begets higher interest rates. If you want lower interest rates in this economy, you have to have lower inflation.
But inflation that is higher than those of our competing countries make our economy less competitive. Higher inflation makes South African goods more expensive than the goods of the countries that have lower inflation. That means that those countries would be able to outsell us in international markets, otherwise we can live with our inflation rate at the same level, [if] we have lower inflation than them. Inflation is a very important driver of competition.
You and I are working people on fixed salaries, and if we negotiate with our employers and we get our salary increases this year [of] almost 3%, and inflation comes out at 4% for the course of the year, that means that the salary we end with this year has essentially declined in the real terms. It is buying fewer goods and services because prices have risen faster than our salaries.
However, if we got salary increases of 4% and inflation comes out at 2%, we have got a real increase in our salaries. But we are on a fixed income and have to negotiate, and you would be lucky to come out with a situation where inflation has come in less than what you have set for.
Think of this, you can’t go to your employer and say we are agreed on a salary increase of 3%, and inflation is 4%, you are now claiming more. You would not be able to do that.
But, Nompu, if you are rich and you have got money on the stock exchange, the stock exchange will compensate you. You must actually, if you buy property, which tends to rise [in value] with rising inflation, you can protect yourself against inflation. Even better, you can buy inflation-protected bonds, inflation-linked bonds, and protect yourself against inflation. But if you are who we are, you and I, with fixed salaries, inflation is linked to our income. It gets even worse if you are a social grant recipient, because social grant recipients can’t even negotiate an increase.
NOMPU SIZIBA: Governor, before we run out of time, how would you characterise the life of a modern central banker? How tough is it with all the complexities of the modern global society and economy that we live in, and for you, what would you say have been the most testing moments for the bank? I’m sure the Covid period would certainly be one of them.
LESETJA KGANYAGO: Well, the Covid period by far would be the most pertinent for central banks. It forced central banks to deploy all the tools at their disposal. Some of the tools, although they were in our toolkit, had never been used before. For example, the last time the Reserve Bank got into [such a programme] was in 1998, but even then it was part of the moment for the government and we had to do it during Covid and there was a lot of learning that had to take place]. But for me, the biggest learning for the modern central bank is that [there is no virtue in high inflation. You’ve got to preserve price stability, but price stability is not enough on its own, you actually have to bring in financial stability, that is why, many modern central banks now also have a financial stability mandate, which then means you have to be juggling between financial stability and price stability, and the way in which substantive to this is to assign one of the mandates as a primary one, in our case the primary mandate is price stability so we have to take account of financial stability because we have registrative responsibility for it ….
And then of course is the fast pace of technology, that’s posing a challenge for modern central banks, which means that we have to be re-looking at our payment systems, digitisation in the financial sector, and South Africa like many other central banks has been exploring the possibility of a central bank digital currency, and it has to do with the fact that central banks have to be for [inaudible].
Lastly, is that climate change poses a significant risk to a central bank, we are all trying to grapple with what the impact of climate change is on the financial sector and to what extent the financial sector itself is exposed to the risk from climate change, do we understand what the quantum of these risks are, do we understand where the vulnerabilities will come from, do we have the instruments to mitigate against those vulnerabilities, but also climate change may pose a risk to food production, for example. It poses a risk because of new weather patterns, whether it is drought or floods, what does it do to food prices and its impact on food prices, what would it mean for inflation and price solution going forward. So, a modern central bank has to juggle all of these.
LESETJA KGANYAGO: I have said everything that I had to say about this subject, and I have taken the counsel of the Minister of Finance who said to me, leave this to the politicians, so I leave it with the politicians.
NOMPU SIZIBA: We will park it there. That was Lesetja Kganyago, he’s the Reserve Bank Governor.