Public debate about the Reserve Bank is never too far away, and went up a notch higher in the run-up to South Africa’s May 2019 national elections.
The ruling African National Congress said it intends to nationalise the central bank. “There is no hidden agenda, there is no manga-manga business,” President Cyril Ramaphosa told a parliamentary question and answer session in March 2019.
The ANC’s push for nationalisation is supported by the Economic Freedom Fighters, the second largest opposition party. In August 2018, the EFF tabled the South African Reserve Bank Amendment Bill, which seeks to make the state the sole owner of the bank. It is still under consideration by the National Assembly.
Yet others have argued nationalisation will not make much difference.
But what does it all mean? There are many arguments, many of them confusing. In this factsheet we go back to the basics and answer nine key questions about the Reserve Bank.
1. What is the South African Reserve Bank?
The Reserve Bank is the central bank of South Africa.
It was established in 1921 to protect South Africa’s commercial banks after a rise in the gold price following World War I put them at risk. It took over responsibility for holding gold and issuing bank notes.
The bank has since taken on a number of other duties and its mandate is protected by the South African constitution.
2. What does the Reserve Bank do?
One way to protect a currency’s value is by controlling inflation – an overall increase in the price of goods and services.
Inflation is measured by defining a basket of goods and services that a typical person would buy. The increase or decrease in the cost of that basket over time gives you the inflation rate. A positive inflation rate means people have to pay more for the basket, even though no extra items have been added. It also leads to other “distortions” in an economy.
The Reserve Bank tries to control inflation by setting a target for price increases from one year to the next. Currently, the inflation rate should range between 3% and 6%. The bank tries to meet this target using policies such as setting the rate at which commercial banks can borrow money or requiring them to keep a cash reserve.
But why is a stable currency important?
“It ensures that what I can load in my supermarket trolley this month can also be afforded next month or in six months from now without me having to adjust my budget,” Charles Wait, professor emeritus in the economics department at Nelson Mandela University, told Africa Check.
This is particularly important for people who can’t increase their income when prices rise. “Think of pensioners or those relying on social grants from the state.”
A stable currency also helps businesses plan for the future with greater certainty. “There are less concerns about… the prices of inputs and outputs or the cost of expanding activities,” Wait said. The same is true for the government when it draws up its medium-term budget of costs for the next three financial years.
“One complication in estimating costs in year three is the degree of inflation that is likely to occur between year one and two… for example, the budget presented to parliament in February 2019 was planned during 2018 but has to forecast until [the] end of March 2022.” An unstable currency would complicate this further, Wait explained.
3. How does the bank function on a day to day basis?
The bank also provides some banking services to the central government and oversees the movement of currency between countries.
It is also the banker for commercial banks. It provides banks with cash when there are cash shortages, holds some of their cash reserves and supervises the South African banking system in general.
The Reserve Bank also issues banknotes and coins. Commercial banks then make these available to the public.
4. Is the Reserve Bank independent?
The bank enjoys a “considerable degree of autonomy”, it says on its website. Its mandate and independence are guaranteed by the constitution, which says the bank “must perform its functions independently and without fear, favour or prejudice”.
The constitution is the highest law of South Africa. Any changes to the constitution require support from two-thirds of the National Assembly and six out of nine delegations from the National Council of Provinces.
So changing the founding structure of the Reserve Bank would not be easy. Some people, including the reserve bank governor, believe this is rightly so.
“A central bank has normally got a monopoly in producing the country’s banknotes and coins,” Wait said. “It holds the key to the printing press. That key must be kept under a safe lock because if too much money is printed and put into circulation, we can get a situation where too much money chases too few goods.”
This could result in hyperinflation, seen in Zimbabwe and, more recently, Venezuela.
This could especially be the case where a government, not understanding the risks of inflation and overspending, sees a country’s central bank as a source of funding for its budget deficit.
A budget deficit is when a government expects to spend more money than it collects, according to a guide to South African government budgets.
“The SARB is legally restricted in its ability to bailout the government in cases of the latter’s budget deficits. When [Tito] Mboweni was the president of the SARB he spoke about the need to tighten these screws,” said Wait.
“At times of undesirably high levels of inflation, this independence is essential for the bank to be able to carry out its constitutional mandate of protecting the value of the currency.”
5. Who owns the Reserve Bank?
The bank is owned by about 750 private shareholders who together hold 2 million shares. Most shareholders are individuals but some shares belong to companies, trusts, provident funds and unions.
For example, Anglo American, a multinational mining company, and Discovery, a South African financial services group, own 10,000 shares each. The National Library of South Africa owns 200 and the Nelson Mandela Children’s Fund owns 100.
During the March 2019 parliamentary question and answer session, Ramaphosa expressed concern about the bank’s “external shareholders who live in various countries in the world”. The bank’s latest Shareholder Index report shows that about 11% of its 2 million shares are foreign-owned.
6. Who can buy shares?
Anyone can buy shares over the counter. The bank regularly publishes the price of its shares and the number of shares available.
As at 7 May 2019, shares were trading at R8 each. There are currently 3,786 shares on offer to sell.
Investors may not buy more than 10,000 shares each. And a prescribed maximum yearly dividend has been set at 10 cents per share. This means that even if an investor owns 10,000 shares, the most they can make in a year is R1,000.
7. What powers do shareholders have?
Shareholders have the power to:
- Elect seven of 15 board members
- Attend the annual “ordinary meeting of shareholders” at the bank
- Approve the annual report on the state of the economy
- Appoint external auditors
Shareholders do not have the power to:
- Influence monetary policy
- Instruct the day to day management of the bank
- Appoint executive board members.
These last three functions are carried out by the Monetary Policy Committee, the bank’s governors and the South African President respectively.
8. What other assets does the Reserve Bank have?
The bank is almost 100 years old. In that time it has built up a portfolio of assets that include shares, gold and foreign exchange reserves.
As at March 2019 these assets totalled R793 billion.
9. What would ‘nationalising’ the Reserve Bank mean?
Nationalising the bank would make the government its sole owner. According to Ramaphosa, this would “confirm” South Africa’s sovereignty.
“A large number of central banks have been nationalised since 1945,” he told Africa Check. “So the world trend is in favour of nationalisation with shareholding becoming a rare exception.”
(Disclosure: Jannie Rossouw was previously employed by the Reserve Bank and owns shares in the bank.)
There is a misperception that ownership would give the government control over the bank’s monetary policy. “The shareholding structure and whether we nationalise or not will have no impact whatsoever on the constitutional mandate of the bank,” Rossouw said.
Prof Andrè Roux, head of the Futures Studies programmes at the University of Stellenbosch Business School, agreed.
“Shareholders actually have very limited rights,” he said. “So nationalising the reserve bank won’t make much difference unless the Constitution is changed, which I think is very unlikely.”