Governments and Central Banks
Governments throughout the world are ultimately responsible for monetary and fiscal policy within the economy of their respective jurisdictions. They need to guide the overall pace of economic activity by striving towards maintaining steady growth, high levels of employment and price stability. From the mid-seventeenth century onwards central banks were established by governments as important mechanisms for addressing the monetary demands of economies and the health of financial systems. It resulted in the typical noncommercial, non-profit maximising public interest nature of central banks, normally subject to various forms of government supervision or control.
Governments, which consist of decision-makers who are subject to political election cycles, are however prone to act in a more shortsighted manner when exercising monetary policy. The temptation for them lies in the fact that money creation has positive effects in the short term, on growth and employment, while the costs, in terms of higher inflation, are paid in the medium term or longer. Since most world currencies consist of paper (fiat) money without any underlying asset, governments are tempted to increase money supply in an attempt to grow their respective economies faster than capacity limits allow and to fund budget deficits, resulting in increased inflation. This creates an inflation bias, making it difficult to credibly guarantee actions which would validate low inflation over time.
Since high inflation gives rise to instability and is not conducive to growth in the economy and employment, measures need to be implemented to address conflicting priorities in policy-making and to anchor prices against inherent swells in inflationary pressures. In this regard, central bank independence constitutes an effective anchor. Handing over decisions on monetary policy to a central bank, which enjoys a substantial measure of independence from short-term political pressures, is widely regarded as a way of binding governments to tolerate whatever measures are necessary to reduce inflation.
The South African Reserve Bank (SARB or BANK) Structure and Objective
The SARB, an executive organ of state, currently functions in terms of the Constitution of the Republic of South Africa Act (108 of 1996), read with the South African Reserve Bank Act (90 of 1989) (SARB Act). The stated primary objective of the Bank is to protect the value of the currency, in the interest of balanced and sustainable economic growth in the Republic. In terms of the Financial Sector Regulation Act (9 of 2017) the Bank is also responsible for protecting and enhancing financial stability in the RSA. The primary objective of the SARB to maintain price stability and enhance financial stability form part of the greater whole economy of the RSA and has the same final objective as the other components of total macro-economic policy, namely, the accomplishment of the highest growth rate in the long term to the benefit of the general public.
The Constitution determines that the SARB, in pursuit of its primary object, must perform its functions independently and without fear, favour or prejudice, but that there must be regular consultation between the Bank and the Minister of Finance. In a legal context, this provision in the Constitution may be regarded as a guarantee of independence of the highest statutory order in favour of the SARB. Accordingly, the SARB conducts monetary policy, free from interference, within an inflation-targeting framework in terms of which it endeavours to maintain the consumer-price inflation within a designated target range, set by government after consultation with the Bank. In the process, a flexible framework is maintained which takes cognisance of the impact of monetary policy on cyclical growth and employment for purposes of minimising the impact of decisions on those factors as far as possible.
The SARB is one of a few central banks in the world which maintains a legal structure that provides for private shareholding. The Bank has an authorised (and issued) share capital of two million rand, divided into two million ordinary shares of one rand each, which may be acquired, held and disposed of by the general public, subject to limitations set by the SARB Act. Unlike public companies with a profit motive, the SARB needs to pursue its goal in the interest and to the benefit of the country as a whole and therefore in the interest of the general public in the country. This non-profit maximisation public interest role of the Bank necessitated a realignment of the rights, powers and status of its shareholders to specifically suit those of shareholders in a central bank. Considerations of public interest and fundamental principles of central banking and the law militate against a central bank being owned and controlled by its private shareholders or anyone else. Shareholders of the SARB constitute less important stakeholders whose interests must at all times yield to the interests of the general public and Government.
Powers and Limitations
The SARB Act and the regulations made in terms thereof regulate these matters. Individual shareholders are prevented from exercising undue influence over the Bank. No shareholder, together with his, her or its associates may hold more than 10 000 shares in the Bank. In confirmation of the non-profit goal of the Bank, shareholders receive a fixed dividend at a rate of ten cents per annum per share, provided that profits are realised. Voting is restricted to one vote for every 200 shares held, with a maximum of 50 votes per individual shareholder (together with his, her or its associates), which may be exercised at meetings of shareholders of the Bank.
Shareholders, together with members of the general public and serving directors on the Board, are able to nominate persons for consideration and possible designation by a Panel (consisting of the Governor, as chairperson, with a deliberative vote, a retired judge and one other person nominated by the Minister, as well as three persons nominated by NEDLAC – "Panel") as suitable candidates for potential appointment into existing vacancies on the Board. At the annual ordinary general meeting of shareholders of the Bank (OGM), held once a year, shareholders are entitled (provided that relevant vacancies exist) to elect a maximum of seven non-executive directors to the Board from a list of potential candidates confirmed by the Panel. Furthermore, the business conducted by shareholders at the OGM consists of the presentation and discussion of the annual and audit report, the appointment of auditors and the approval of their remuneration, special business (limited to issues related to the aforesaid) of which proper notice was given and any further business arising from such items.
The SARB is supervised by a board consisting of fifteen directors, of whom eight (including the Governor and three Deputy Governors) are appointed by the President of the RSA and seven non-executive directors by the private shareholders in the Bank. The management of the business of the SARB vests with the Governors. The Board and the shareholders have no authority over, and play no role in, the crucial function of monetary policy, which is conducted independently in committee by the monetary policy committee (MPC) of the Bank, consisting of the Governors and designated senior officials of the SARB. All directors are required to exercise their duties on behalf of the SARB.
Government in recent times expressed its intention to nationalise the SARB by taking over ownership and control of the Bank from its shareholders. However, the Bank's shareholders merely constitute minor stakeholders of the SARB who exercise no control over the Bank. At most, a form of indirect governance responsibility in respect of the SARB is shared between government, the shareholders and the general public in the appointment of directors, in terms of which government plays the dominant role. Any endeavour by government to nationalise the SARB by taking over, or terminating the shareholding structure of the Bank will not factually or legally result in ownership of the SARB being acquired by government or anyone else. It will, at most, result in the termination of an independent governance measure that enhances the effectiveness of the Bank's institutional structure.
The SARB, an executive organ of state, has since its early establishment as a central bank functioned as a public interest, non-profit maximising, non-competitive statutory institution, incapable of being legally owned. The public interest and economic development in the RSA has, right from its inception, always been at the centre of the existence of the SARB. Any such proposed nationalisation will also not affect the way in which the Bank fulfils its primary objective. It will still function independently, without fear or favour, in its endeavours to protect the value of the currency in the RSA, in the interest of balanced and sustainable economic growth, for the benefit of the general public in the country. If the independence of the Bank was to be affected, it would require an amendment to the Constitution. The President, however, indicated that government did not seek to interfere with the Bank's independence since the Constitution was clear on how independent the SARB should be.
De Jager is General Counsel, South African Reserve Bank.