By Redge Nkosi
THE 2007/8 crisis, whose negative persistent effects on output, productivity, employment etc lingered in South Africa until met by the 2020 coronavirus economic crisis was much a financial crisis as a crisis of macroeconomics.
The crisis not only shook the consensus on macroeconomic policy, but exposed the severe limitations of monetary policy, especially the key tenets of its intellectual foundations.
As a consequence, in Europe, Japan, US, and in developing countries like China, Bangladesh, Brazil and many others, the crisis caused swift changes in the operational conduct of macroeconomic policy, especially monetary policy.
In South Africa, it was, sadly, business as usual, despite critical plodding from careful economists. It had to take one and half decades of suffering for the South African Reserve Bank (SARB) to recognise that the conduct of monetary policy may, after all, never be the same again. Why and how?
On November 26, 2021, SARB published a paper proposing reforms of its current monetary policy implementation framework. An implementation framework is about the technical nuts and bolts of how the monetary policy committee decisions are given effect on a day-to-day basis. How these are designed and implemented can have profound micro and macroeconomic implications.
The paper’s central thesis is about de-linking money from monetary policy (interest rate policy). Once money is divorced from monetary policy, the central bank suddenly acquires significant freedoms critical to engaging in policy adventures such as quantitative easing (QE) and related unconventional monetary policies. The SARB, however, rejects that its proposed reforms are a prelude to QE.
But here is how the SARB used its current monetary policy implementation framework technicalities to reject calls for QE and back up its failure or refusal to save a moribund South African economy.
Following a spate of criticisms, Lesetja Kganyago, the governor of SARB, went on roadshows in 2020 to defend his position. At his Wits University roadshow, he warned that full blown QE would not only bankrupt the SARB but also lead to inflation. He admonished his critics, this author being one, that we “have not appreciated the inescapability of this choice”. “There is no free lunch”, he chided further.
Threats of bankruptcy, inflation and no free lunch hinge on monetarists’ theories of money/banking and the implementation frameworks thereof. To justify these threats the governor went to technically detail out how excess reserves (money) that would arise from the purchase of government bonds (QE) must be sterilised at high cost to the SARB, thus bankrupting it, otherwise the excess reserves would drive the interest rate down close to the floor, in which case a reserve bank loses control of monetary policy.
He further rejected QE on account that such a high pile of excess reserves would lead to inflation, and after all, QE is deployed only when interest rates are zero or near zero.
On July 6, 2020, in an opinion I penned in the media, I dismissed all of the above threats as ideological and not based on macro-monetary science, and that we appreciated the escapability of them all. I then proposed a monetary policy implementation framework where the SARB could decouple (divorce) money from monetary policy, thus freeing itself from the sterilisation costs, engage in QE and related developmental policies while still in full control of monetary policy.
I further insisted, as I still do, that QE does not require rates to be near zero or zero, unless one has an exceptionally poor grasp of the concept.
Elsewhere, Wits lecturer in economics Professor Chris Malikane weighed in on similar issues, including rejecting the sterilisation costs bankrupting the SARB and that QE deployment does not require rates to be zero.
Indeed, one and half years later, the SARB has published a monetary policy implementation framework proposing exactly what I had proposed: divorcing money from monetary policy. It consulted many leading reserve banks in the world and decided to copy and paste the New Zealand and Norwegian approach. Domestically, it consulted itself and its parent, the Treasury.
While it is comforting that macroeconomic science has finally trumped ideology, I reject the New Zealand and Norwegian approach as inconsistent with South Africa’s macroeconomic dynamics. Here is why.
First, my proposal for a monetary implementation framework where money is decoupled from monetary policy rests on the clarity that monetary policy does not revolve around money and that the price of money (interest rates) is not the key macroeconomic variable for growth. Non-monetary instruments are central. From this conceptual framing therefore, the central bank’s balance sheet becomes the primary monetary policy tool, and not SARB’s interest rate policy as is the case today, where the size of the balance sheet is primarily driven by autonomous (exogenous) factors.
On this critical score therefore, the SARB’s copied approach hardly meets South Africa’s urgent developmental objectives which must be factored in when designing an implementation framework.
Second, SA’s economy is highly financialised and de-industrialising fast as a consequence of both Treasury and SARB’s policies. An implementation framework that is blind to these realities fails an elemental test. Therefore enriching the framework with elements that de-financialise and industrialise the economy should be a key plunk. But this requires that SARB abandon its fear of balance sheet expansion but also broaden its focus beyond money – meaning the various subsets of instruments on the liability side of its balance sheet.
I would further propose that instead of SARB maintaining the outdated required reserves regulatory regime, which is a relic of the gold standard era and defunct theories, SA should abolish it and replace it with new reserves instruments that are consistent with the post 2007/8 crisis monetary policy trajectory, which involves the asset side of the balance sheet.
While these technical details can’t be found in mainstream economic textbooks, merely copying framework approaches that are inconsistent with our domestic realities is highly unfortunate. The highly arcane nature of this work should have been the more the reason the SARB should have engaged what it calls “proponents of QE” with technical nous on the matter.
Indeed, as Dr Pali Lehohla correctly questions SARB’s process in his December 12 opinion, “Is SARB’s consultation a farce?” he states that “the SARB cannot claim not to know local experts and protagonists on this subject. These local experts should have been invited as part of the consultative process that produced the paper that has now been placed before us, sadly already with a preferred or taken position.”
South Africa finds itself in this economic mess largely because of the copying and pasting of unsuited foreign-based frameworks, including our macroeconomic framework whose outcomes are so unambiguous: shocking unemployment, high poverty, financialisation of the economy, high price structure of the economy, de-industrialisation, poor economic growth and many others.
What the proposed reform of the monetary policy implementation framework begs is not just the tinkering of South Africa’s limited interest rate policy approach to monetary policy, rather the total overhaul of the entire defunct macroeconomic policy framework South Africa labours under and whose intellectual foundations were brought down by the 2007/8 crisis.
Redge Nkosi is an executive director at Firstsource Money and founding executive board member of the London-based Monetary Reform International. @redgenkosi.
*The views expressed here are not necessarily those of IOL or of title sites.
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