Focus on growth in Reserve Bank’s mandate to help protect the rand

Most meaningful impact for any policy intervention is one felt through high unemployment, inequality and poverty

The phrase “in the interest of balanced and sustainable growth” is found in section 224 of the constitution, which deals with the mandate of the Reserve Bank. A dictionary check shows that “in the interest of” means “for the sake of” or “to achieve”. In the case of our central bank, the activity required to achieve balanced and sustainable growth is the protection of the rand. This means protecting the rand is not done for its own sake. In the SA context this makes sense, because a stable rand amid low or no economic growth, high unemployment, high inequality and high poverty does not mean much to the majority. In fact, the most meaningful impact for any economic policy intervention is one felt through these socioeconomic indicators.

Balanced economic growth generally means that the primary, secondary and tertiary (services) sectors of the economy grow harmoniously. From 1960 to 2021 the rate of change in the value add from the primary sector of the SA economy to overall economic growth has trended mostly sideways. The rates of change in value add from the secondary and tertiary sectors have trended downwards.

Our growth is therefore not balanced. If the macroeconomic and sector policies deployed since 1994 were fully effective there should have been a decisive upward change in the trajectory of all three sectors from about 1996.

Sustainable economic growth refers to economic development that responds to societal needs while sustaining natural resources and the environment. Judging by the social, economic and ecological calamities we have been facing over time in SA, it is safe to conclude that our growth path is unsustainable.

So, instead of embarking on unhelpful conversations, the right questions must be asked. For example, the question about who owns the central bank deprives us of an opportunity to ask the more relevant question of whether the actions of the Reserve Bank are in the interest of balanced and sustainable growth. And if so, why is that fact not obvious in the monetary policy statements, which at times read like the decision should be to reduce, not raise, interest rates?

TRANSMISSION LAGS

The global pace of monetary policy tightening in 2022 left question marks about the understanding and interpretation of the transmission mechanism of monetary policy and its lags. In the early 2000s, the sequence of events triggered by monetary policy actions were explained in terms of transmission channels and lags. Transmission channels such as credit, asset prices, market interest rates, the exchange rate of the rand or a combination, were deliberate.

Transmission lags were understood to be long. It would be interesting to see whether monetary policy action now has completely disconnected from transmission channels and lags. How does one read the global monetary policy impact in an environment where the policy stance is informed by a rapidly shifting economic environment and the policy rate adjustment itself is super fluid?

This question of whether actions are in the interest of balanced and sustainable growth is even more relevant to economic agents, especially public sector ones. The actions of elected and employed officials, government departments and public entities should, for example, always be tested against this question.

Whether it is undertaking actions on the future of energy, making decisions on administered prices or setting up institutions to respond to socioeconomic challenges, the question should always be: “Are the actions undertaken with the aim of achieving balanced and sustainable growth?”

SOCIAL DISCONTENT

This is especially important now because outside sustained economic growth, brewing social discontent from all the unresolved socioeconomic ills could prove fatal. Invariably, the starting point towards sustained economic growth is repairing existing, and building new, infrastructure as the basis for economic growth.

The SA Institution of Civil Engineering 2022 infrastructure report card, one of the most comprehensive reference documents for the state of infrastructure in SA, stated that infrastructure is not coping with demand, is poorly maintained and is practically at risk of failure. This means the investment scope is enormous.

In fact, forthcoming research work at the Development Bank of Southern Africa (DBSA) to quantify sectoral maintenance and new build infrastructure financing needs based on growth and population projections confirms this investment opportunity. Thus far, the bank has completed four of eight envisaged studies — including infrastructure for downstream water, transport, basic education as well as technical vocational education & training. The four studies alone show that the financing need for these infrastructure sets in SA between now and 2030 is R4.9-trillion to R6.1-trillion.

The espoused 2018 principles around the economics of the new dawn, namely heightened accountability, economic renewal, systematic coordination, improved collaboration, rejection of corruption and active citizenry, remain relevant now. But as suggested then, the difference between getting these principles to work and sliding deeper into dysfunctionality will be determined by how well the public sector leads the process.

At the heart of this leadership exercise is building functional institutions and courageous leadership. In this regard, building around existing effective institutions is far more useful than creating new ones. There is nothing wrong with responding to immediate economic challenges, but sustained economic growth requires longterm interventions.

It is an open secret that the opportunity to reorganise the public sector was missed in 2018. Strictly speaking, public activities can be organised around no more than five key areas: policy and monitoring, budgeting and funding, economic regulation, sector plans implementation and public administration.

The inability to co-ordinate the public sector effectively leads to policy incoherence, and deepens weak economic growth as well as persisting inequality and poverty.

The solutions are all around us, and embarking on the path to recovery is in our hands. But we must all act now in line with our respective responsibilities.