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The South African Reserve Bank plays an essential role in formulating and implementing monetary policy and in ensuring the country’s financial stability. In this Wits Business School Leadership Dialogue, Professor Mills Soko speaks with Reserve Bank Governor Lesetja Kganyago about the central bank and the issues it faces on a daily basis.
Mills Soko: When you were appointed governor, one of the first things you did was go to your village and go shopping. What was the significance of this gesture?
Lesetja Kganyago: I felt it was an opportunity to teach people the value of money. And I went back to the same store, where every morning I went to buy bread before going to school. There was an important lesson in inflation because at the time – 1972 – a loaf of bread cost 10 cents. And I was telling the villagers, today you can’t get a loaf of bread for ten cents. You can’t even get it for R10 but the bread size is still the same. I told them, this is the lesson of inflation, and this is the reason why we need to control inflation. I think the message has reached them.
Mills Soko: Are there any differences between the mandate of the South African Reserve Bank and other central banks around the world?
Lesetja Kganyago: Central banks are creatures of their society. Society creates institutions and gives them special responsibility. The only thing common to central banks is that they are responsible for price stability.
The authors of our constitution believed that price stability is not an end in itself. It is a prerequisite for balanced and sustainable growth. The South African constitution goes even further. He says the central bank can do other things as well, usually done by other central banks, as long as they are spelled out in national law.
The bank is also responsible for financial stability, described in the Financial Sector Regulation Law, and the country’s payment system, enabled by the National Payment Systems Law.
Mills Soko: Why is the focus limited to price stability? Why not focus on unemployment?
Lesetja Kganyago: We need balanced and sustainable growth. Price stability is a necessary condition for this growth. But this is by no means a sufficient condition.
It is important to distinguish two important aspects. Monetary policy can only affect what is called cyclical growth. It will not affect structural growth. The monetary policy horizon is 12 to 18 months. Thus, monetary policy can only affect growth in the short term.
Job creation is the result of sustained economic growth. For this to happen, all players in the economy must work together to make it happen.
I have a friend who explains this using the metaphor of the speed limit on the road. If you are driving faster than the speed limit, there is a good chance that you will even lose your life or have a court appointment very soon because you have exceeded the speed limit. If you are driving below the speed limit, there is a good chance that you will reach your destination later than you would have done otherwise.
Central banks are better able to influence cyclical or short-term growth.
The central bank alone will not create the higher rate of growth we need. There is nothing monetary policy can do to produce the engineers the country needs for its economy to grow. This is just one example.
Mills Soko: How does the Bank’s Monetary Policy Committee work?
Lesetja Kganyago: It includes the governor and the three deputy governors. They then add one or two staff members. Right now we have the chief economist, and they make up the Monetary Policy Committee.
The model we use for forecasting, like all economic models, has assumptions. The process therefore begins with a meeting of the members of the monetary policy committee with the department of economic studies to agree on the assumptions for the forecasts. The two most important assumptions relate to the price of oil and the exchange rate. They are important because they influence the course of inflation and economic growth.
Once we have approved the assumptions, the Bank’s modeling team builds a forecast of what they think is economic growth and inflation.
The Monetary Policy Committee will then meet with a number of officials for three days. On the first day, we assess the state of the economy, starting with the global economic outlook, moving to the national economy, and then we look at the global and domestic financial markets respectively. On the second day, a smaller group discusses the forecasts.
On the third day, the Chief Economist will outline the options and give the reasons why we should keep interest rates the same, why we should raise or lower them.
Each member of the committee will then say what their preference is.
If there is disagreement, we will debate and debate and debate again. If we fail to convince each other, we go with the preferences of the majority of the committee. Once done, the chief economist drafts the statement, which is sent to all members. The committee then discusses each word and the location of each comma. And by then you realize that your English is more important than your economy.
Mills Soko: Your opinion on a cryptocurrency?
Lesetja Kganyago: It is a crypto asset. A currency must meet the following three criteria. First, it must be a generally acceptable medium of exchange. Second, it must be accepted as a store of value. And third, it must be a unit of account. A cryptocurrency is a store of value. It is a medium of exchange, but it is generally not accepted. It is only accepted by those who participate.
Our approach is that we are going to have to regulate this because people are going to invest in cryptos and when they lose money they ask what the government has done about it.
Many of these crypto assets have a technology called blockchain behind them. It can be useful in many other ways. And so, like many other central banks, we are experimenting with blockchain technology.
Mills Soko: Are there any plans to regulate FinTech companies the same way banks are regulated?
Lesetja Kganyago: We don’t intend to regulate fintech companies like banks. But if he walks and quacks like a duck, then he’s a duck. So if you are a fintech company and accept deposits, we will regulate you as a deposit taker. If you are a FinTech company making money transfers, we will regulate you as a payment provider. If you are a FinTech company and sell insurance policies, we will regulate you as an insurer.
Our regulatory mandate is to regulate the activity.
It’s important that we understand the value that FinTech companies bring to the financial industry. We have created an innovation hub at the Reserve Bank in response to the growth in this area.
Mills Soko: Central bank governors have been criticized for being a bunch of unelected bureaucrats who make decisions without being held accountable. What is your answer ?
Lesetja Kganyago: Central bankers are not elected. Yes, we are technocrats. Yes, we have a lot of power. One author has called it an unelected power.
I don’t think we should have elected central bankers. I think this defeats the purpose because instead of focusing on the task at hand, they will focus on the next election.
The central bank has been handed over to technocrats whose job it is to make the tough decisions. But all over the world, the power of technocrats is limited. There are parameters. And within these, central bankers must act independently, without fear or favor. In our case, this is prescribed in the South African constitution.
The other aspect of preserving independence is accountability. We need to be responsible for the decisions we make and how we make those decisions.
We report to parliament. We also report to the public through our own public forums. The decisions we make are transparent and in the public domain, and therefore open to public scrutiny.
This is an excerpt from the Wits Business School Leadership Dialogue. The full interview is available here.
Mills Soko does not work, consult, own stock, or receive funding from any company or organization that would benefit from this article, and has not disclosed any relevant affiliations beyond his academic appointment.
By Mills Soko, Professor: International Business & Strategy, Wits Business School, University of the Witwatersrand
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