JOHANNESBURG – The global 2008 financial crisis saw citizens and policymakers across the world look at their central banks to cultivate both financial stability and economic growth. However, the expectation that central banks can foster economic growth is misplaced.
Indeed, central banks were met with new challenges in maintaining financial stability in the wake of the global financial crisis.
The demise of Lehman Brothers showed that banks and non-banks can lead to systemic disruption.
Many central banks responded to the crisis by adopting new policy measures called “unconventional monetary policy”. One example of an unconventional monetary policy is quantitative easing (QE).
This means a central bank buys government bonds or other assets from the market in order to lower interest rates and increase the money supply.
Many economists to date believe that the US Fed QE of $4 trillion (R55.21trln) aided in saving the US economy and the world economy from the 2008 financial meltdown.
In our own backyard, the governing ANC seems determined to put a new twist on what “unconventional monetary policy” means.
The governing ANC over the weekend again brought the role of monetary policy into sharp focus when it called on the South African Reserve Bank (Sarb) to allow monetary policy to take into account “other objectives such as employment creation and economic growth”.
To those who have kept abreast of the ANC's rhetoric in the past 10 years, this was not something new.
The party's 54th National Conference in December 2017 resolved that: “South Africa requires a flexible monetary policy regime, aligned with the objectives of the second phase of transition. Without sacrificing price stability, monetary policy should also take account of other objectives such as employment creation and economic growth.”
This resolution reaffirmed the resolution of the ANC's 53rd National Conference Resolution in 2007 on the mandate of the Sarb.
I argue that the ANC is myopic and misguided on what monetary policy can and cannot do.
It is not in the central bank's purview to avert every economic hardship or recession or pacify each and every episode of financial instability.
Nor is it in the province of the Sarb to ignite economic growth and create employment.
The Sarb’s most vital contribution to economic growth, I would submit, is to maintain low and stable inflation.
I argue that it is a mistake to think a “flexible” monetary policy will be a boost to our economic challenges.
A large portion of our economic and social ills have been own goals and the ANC must take responsibility for low growth.
The economy has grossly underperformed in the past decade, due to policy uncertainty and corruption on an industrial scale. No one with their thinking faculty intact would blame the moribund economy on the Sarb’s monetary policy.
The Bureau for Economic Research (BER) in a study released last year found that the unemployment crisis has been home-made.
The BER research looked back at the performance of the South Africa economy between 2010 and 2017.
The study found that since the global financial crisis, domestic real gross domestic product growth has underperformed relative to both emerging market peers and average global growth.
The organisation said the underperformance hurt job prospects and tax collection.
The research showed that under different assumptions regarding post-crisis growth and the elasticity of employment, the economy could have created between 500 000 and 2.5 million more job opportunities over the eight-year period.
It is not as if the ANC-led government is helpless in influencing the country's economic trajectory.
The governing party has fiscal policy as its tool to foster economic growth. The government can also help create policy that elevates business and consumer confidence.
Monetary policy at its heart looks into ways central banks manage the supply of money and interest rates in their economies.
These monetary policies, however, are not cast in stone.
They are adjusted according to the economic conditions that a country is facing. We should shun the temptation to cry wolf whenever monetary policy changes are mooted as long as the independence on the central bank is maintained.
Monetary policies evolve. Inflation targeting, which many central banks including Sarb use, was pioneered in New Zealand only in 1990.
South Africa formally introduced inflation targeting in February 2000. This demonstrates the monetary policies are subject to change. The debate over ANC's stance should be constructively debated and not be shouted down.
It would be wise to heed the counsel of Maarten Ackerman, the chief economist and advisory partner at Citadel, when he said: “It is a global trend for central banks to ask, “What is most appropriate to set monetary policy? What do you need to focus on? Can it be as limited at just looking at prices? Or should it be much broader than that?
“I think that all-in-all, as long as the Reserve Bank can remain independent; there is room to adjust the mandate to be more specific to what is currently needed in the economic environment.”
The ball is now in the ANC's court to articulately explain what it means by a monetary policy that takes into consideration job creation and economic growth. The failure to adequately explain this policy stance is an unnecessary distraction at a time the economy is facing both domestic and external headwinds.