Earlier this week, the ANC essentially told everyone that it would be nationalising the South African Reserve Bank. Everyone (and the Rand) is concerned. And we should be very concerned. But not about the ‘nationalisation of the SARB’.
Because the SARB is already nationalised.
The non-ownership structure of the SARB
Here’s the relevant section from the SARB’s website (as at July 2017 – it may change):
When the Bank was established in 1921, the majority of central banks worldwide had private shareholders (or ‘stockholders’ as they were occasionally called). A similar structure was introduced in South Africa.
Internationally, however, this approach has changed since the 1930s. Nationalisation of central banks during the period of economic hardship in the midst of the Great Depression commenced with the nationalisation of the central banks of New Zealand in 1935 and Denmark in 1936. After World War II in the wake of state ownership of key industries in numerous countries nationalisation of central banks continued.
The structure of shareholding in the Bank has however not been amended since its inception and it is a juristic person in terms of its own Act. The South African Reserve Bank and seven other central banks (Belgium, Greece, Italy, Japan, Switzerland, Turkey and US) have shareholders other than the governments of their respective countries.
Today the Bank has more than 660 shareholders and its shares are traded on an Over- the-Counter Share Transfer Facility market (OTCSTF market) co-ordinated within the Reserve Bank. Except for the provision of the SA Reserve Bank Act that no shareholder shall hold, or hold in aggregate with his, her or its associates, more than 10 000 shares of the total number of 2 000 000 issued shares, there is no limitation on shareholding.
After allowing for certain provisions, payment of company tax on profits, transfers to reserves and dividend payments of not more than 10 cents per share to shareholders, the surplus of the Bank’s earnings is paid to the Government. The Bank’s operations are therefore not driven by a profit motive, but by serving the best interests of all the people in South Africa.
The Bank was delisted from the JSE Securities Exchange South Africa on 2 May 2002 and a live trading facility for its shares introduced on 1 October 2005. The live trading facility operates in terms of the OTCSTF rules. As such, it is not an on screen trading facility, but rather operates by means of postal, facsimile, hand delivery or e-mail communication only.
- The private ownership structure is, indeed, an ‘anomaly’*; and
*Although I think that being in the same boat as the Federal Reserve and the Bank of Japan puts the SARB is some fairly solid company.
- The shareholders are not entitled to the bank’s profits (other than that 10 cents per share). The real profit is paid over to the State.
- The shareholders have no say in the operations of the SARB; and
- The key appointments are made by the State apparatus.
The truth is: these shareholders are not owners. Even in the Reserve Bank’s financial reports, these shareholders are treated as a minority (or “Non-controlling interest”).
So ‘nationalising’ the shares would basically acknowledge what is already de facto the case.
What is concerning then?
The problem is the trend, right? If the ownership of the SARB is essentially a meaningless footnote, then why bother with it.
And it’s even more concerning in the light of a recent report from the Public Protector. But first:
s224 of the South African Constitution
The ownership of the SARB is irrelevant today because the central bank’s independence is constitutional.
s224 of the Constitution reads:
224. Primary object:
(1) The primary object of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic.
(2) The South African Reserve Bank, in pursuit of its primary object, must perform its functions independently and without fear, favour or prejudice, but there must be regular consultation between the Bank and the Cabinet member responsible for national financial matters.
The text of the constitution was approved by the Constitutional Court in 1996, and took effect on 4 February 1997.
I mention those dates because the Public Protector recently released a report on lifeboat line of credit/”gift” that was extended by the SARB to Bankrop Limited (which would eventually become ABSA) in 1985. Between 1985 and 1995 (when the transaction concluded), this line of credit went through multiple restructurings. And essentially, there is some dispute about what was repaid, and the interest rates that were charged, etc.
In the findings of that ruling, which related to a transaction that was initiated more than a decade before the current Constitution was even drafted, and ended before the current Constitution was even in effect, the Public Protector directed that Parliament begin the process of amending s224 of the Constitution.
Which cannot be at fault here, because it did not exist at any time during the existence of the disputed ‘lifeboat’.
But that has not stopped the Public Protector. Her required amendment (which comes from that report):
224. Primary object:
(1) The primary object of the South African Reserve Bank is
to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic to promote balanced and sustainable economic growth in the Republic, while ensuring that the socio-economic well-being of the citizens are protected;
(2) The South African Reserve Bank, in pursuit of its primary object, must perform its functions independently and without fear, favour or prejudice, but there must be regular consultation between the Bank and
the Cabinet member responsible for national financial matters Parliament to achieve meaningful socio-economic transformation.
The Independence of Central Banks
Here is why Central Banks are meant to be independent:
- They have access to the printing presses.
- Traditionally, when they start involving themselves in fiscal activities, you get hyperinflation.
- Because it is all too easy for governments to ‘tax’ their people by simply confiscating the purchasing power from their bank accounts with printed money.
- In order to preserve the value of the currency*, you make sure the Central Bank that prints it does not fall under the direct control of politicians.
*which, btw, is a pre-condition of socio-economic well-being. Just ask any citizen in a country where the value of the currency is actively unpreserved.
To be clear:
- Central Banks are independent;
- So that they cannot be forced to use their monetary powers to enforce and/or fund fiscal policies.
The Public Protector, in her wisdom, has directed that the Constitution be amended such that:
- The Central Bank will remain independent; but
- It will be constitutionally-required to enforce the fiscal policies of “meaningful socio-economic transformation”.
At which point: what does it matter if it’s independent?