The SA Reserve Bank (Sarb) has slammed the continued monetary policy based on quantitative easing in the developed world. File Photo: IOL
The SA Reserve Bank (Sarb) has slammed the continued monetary policy based on quantitative easing in the developed world. File Photo: IOL

Discussing how external vulnerabilities had implications for emerging markets

By Siphelele Dludla Time of article published Oct 28, 2019

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JOHANNESBURG - The SA Reserve Bank (Sarb) has slammed the continued monetary policy based on quantitative easing in the developed world, saying it had negative effects for developing countries.

Quantitative easing is an unconventional monetary policy in which a central bank purchases government bonds or other financial securities from the market in order to inject liquidity directly into the economy by increasing the money supply.

Sarb Governor Lesetja Kganyago on Friday referred to former Brazilian finance minister Guido Mantega, who popularised quantitative easing as “currency wars”.

He said continued quantitative easing in rich countries could lead to more vulnerabilities in emerging market economies and that central banks should deploy macro-prudential tools to address these vulnerabilities.

In June, ANC secretary-general Ace Magashule was reprimanded after saying that the party’s National Executive Committee had asked the government to appoint a task team to explore quantitative easing.

Speaking at the end of the Sarb Biennial Conference on Friday, Kganyago drew a scenario in which South Africa at some point had an equivalent of monopoly money as it created money out of thin air through quantitative easing.

“We had to think about the impact of quantitative easing on the South African economy, and what we had seen is search in capital flows, and the search in capital flows led to the appreciation of the currency,” Kgayango said.

“It didn’t lead to a search in credit, but it did lead to South Africa behaving as if it was richer than what it is. It meant that we could delay the difficult decisions that we were supposed to make because there was cheap money that was available.”

Kganyago said South Africa had ran a current account deficit and a budget deficit due to that monetary policy.

“The way in which we had to think was what the end of quantitative easing would mean. We then had to start thinking that it would be the reversal, which means there would be capital outflows, it would be the depreciation of the currency and that the depreciation of the currency could feed itself into domestic price formation and lead to rising inflation, and we would need to react from a policy perspective,” he said.

Kganyago said the US Federal Reserve had since then, through the taper tantrum which saw gyrations in the markets, communicated so well that he thought the withdrawal of quantitative easing was smoother.

“In our narrative we were preparing for the normalisation of policy, and the Fed began to normalise policy and we’re increasing interest rates now,” he said.

“The point now is no longer that we are concerned that quantitative easing is being withdrawn, it’s that it might return and it returns in a different environment to the one that we had seen and if this time around it’s driven in the main from the European Central Bank, because earlier on it was the Fed that was the first mover.”

The Sarb Biennial Conference saw academics, economists and policy makers from around the world gathering to discuss how external vulnerabilities had implications for emerging market economies.

Among the delegates were deputy Governor of Kenya Sheila M’Mbijjewe; Luiz Awazu Pereira da Silva from the Bank for International Settlements; and Tobias Adrian from the International Monetary Fund.

Kganyago said that emerging markets central banks had been successful in their mandate of maintaining price stability, but society expected them to do a lot more, which might not be in their remit.

He moved to blame the attack on the Sarb’s independence on the controversial Gupta family.

The politically connected Gupta family had its business accounts closed down by all South African major banks in 2016 over fears over reputational damage following a number of suspicious transactions, which they feared could contravene banking regulations.

The aftermath of the fallout between banks and the Guptas saw government leaders under former President Jacob Zuma bringing pressure to bear on banks to reopen their accounts, while Sarb was criticised for its silence on the matter.

“When there were questions about the role of the Reserve Bank in South Africa, it was not because of what we were doing in monetary policy. It was because we were called upon to interfere with what banks were doing, which was to enforce the laws of this country. And we were expected to step in a relationship between the banks and some other prominent family,” he said.

“And when we said we could not do this, we were faced with this barrage of attacks. I never knew that Twitter could be weaponised, but we were the subject of attacks on social media as a result of that.”

Kganyago has drawn a lot of criticism and praise from different quarters of society for his firm stance on the independence and expansion of the Sarb mandate beyond price stability to economic growth and job creation.

He said this then raised questions whether the Sarb financial stability mandate should be in the hands of the central bank or some other authority.


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