Big Reserve Bank nationalisation lie

Nationalising the Reserve Bank would not affect South Africa’s monetary policy, as the bank’s ownership does not impact its mandate, policy stance, or makeup. 

This is feedback from former Deputy Governor of the Reserve Bank, Kuben Naidoo, who outlined some of the issues with nationalisation and why it won’t work in a recent webinar with Efficient Wealth. 

The Reserve Bank’s independence has come under increasing pressure in recent years as it tightened monetary policy to combat inflation. 

Elements of the then-ruling ANC believed high interest rates were holding back economic growth and a post-pandemic recovery. 

In particular, Governor Lesetja Kganyago was criticized by the ruling party as it became increasingly critical of the Reserve Bank’s monetary policy. 

Kganyago also commented that the government is to blame for elevated inflation and, thus, higher interest rates through above-inflation price hikes for administered services. 

This culminated in ANC secretary general Fikile Mbalula calling for the Finance Minister to pressure the Reserve Bank to refrain from further interest rate hikes in July last year. 

There were also numerous calls at the time from the ANC and other political parties for the bank’s mandate to be changed to consider employment in a similar fashion to the US Federal Reserve. 

Some even made calls for the Reserve Bank to be completely nationalised and for the government to take over monetary policy. 

Particular focus was paid to the Reserve Bank’s 800 private shareholders, which include some of the country’s biggest banks and wealthy individuals. 

It also has shareholders from Germany, France, the United Kingdom, and Norway. The Reserve Bank is one of only nine central banks with private shareholders. 

A mistake by those calling for nationalisation, Naidoo said, is that they assume these shareholders influence the bank’s operations. 

The shareholders have no rights or involvement in determining monetary policy, financial stability policy or regulation and supervision of the financial sector. 

Their rights are limited to considering the SARB’s annual financial statements, electing seven of the non-executive directors of the Board of Directors, appointing external auditors and approving their remuneration.

There is no significant financial gain from being a shareholder of the SARB. By law, shareholders are entitled to a maximum dividend of 10 cents per share annually paid from the accumulated reserves.

“My personal view is that nationalisation will make absolutely no difference. The ownership of the bank doesn’t matter at all,” Naidoo said. 

To illustrate his point, Naidoo explained how the Reserve Bank came to have private shareholders and why it maintains this structure today. 

When the Reserve Bank was created in 1921, it had two major problems. Firstly, the government had to capitalise on the bank, and they had to compensate commercial banks for taking away their right to produce currency. 

The government at the time did not have the money to offer cash as compensation while capitalising the bank. 

Thus, they offered banks and private individuals shares in the Reserve Bank to give it cash to operate and compensate commercial banks for taking away the right to produce currency. 

Naidoo said this was common for central banks when starting up, with many having private shareholders. What is unique about the Reserve Bank is that it has kept this structure. 

After WWII, governments stepped in to capitalise their central banks after they took massive losses from funding the war effort. Private shareholders were not prepared to do this, given the capital needed. 

“Effectively, the governments liquidated those banks and took out the private shareholders. The government then put in the capital,” Naidoo said.  

South Africa was one of the seven countries in which this did not occur. Naidoo said it did not happen in South Africa because it was not necessary, the Reserve Bank did not fund the war effort in a significant way. 

Naidoo then explained that these private shareholders do not have any say in how the bank is run and do not influence monetary policy. 

Rather, its operations are guided by its mandate, which is set out in the Constitution. The bank’s independence is enshrined in law and cannot be changed without a two-thirds vote in favour in Parliament. 

“Whether we take out those shareholders or not, it’s going to make no difference to the functioning of the bank. No difference. The functioning of the bank is set in law.” 

Naidoo also said that these private shareholders do not really profit from their shareholding in the bank as dividends are capped at 10c per share. 

“In a normal year, the bank will make a R23 billion profit of which we pay a grand total of R200,000 to the shareholders. The rest of the money goes back to the government.”

The money goes back to the government either directly through a dividend payment or indirectly through tax. 

Private shareholders only really play a role in the formation of the board of the Reserve Bank which plays a vital fiduciary role. 

They elect seven of the fifteen members of the board every year at the bank’s annual general meeting. This still leaves the government with a majority on the board. 

The board is only there to perform fiduciary duties. “They are really there to see that I don’t steal and to see that Lesetja does not give the printing contract to his cousin.” 

“It is an important board, but it plays no role in monetary policy, interest rate setting, or the regulation of the financial sector,” Naidoo said.