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Kganyago spells out dual mandate issue

HILARY JOFFE ● Joffe is editor-at-large.

Asked about proposals to change the Reserve Bank ’ s mandate last week, governor Lesetja Kganyago deflected the question, as he usually does. Ask the president not the Bank, he said. It was for the people of SA to change the Bank’s mandate should they wish to do so, not the Bank.

Then, also as usual, he addressed the question anyway, in his typically robust style. First, if politicians want the Bank to have a dual mandate like the US Federal Reserve, one that requires it to target both price stability and employment, they would have to give it the tools to target unemployment. In other words, the governor was suggesting, the Bank would have to be able to intervene in labour market policy.

One wonders what the governing ANC and its alliance partners in the trade unions might think of that. The Bank might well insist on labour market reforms the partners would not like if it were required to target “maximum sustainable employment” like the Reserve Bank of New Zealand.

Kganyago also pointed out that about the only central banks that have such dual mandates are in the US and New Zealand — where the employment target is coming under fire. It was the first country to introduce what we now know as inflation targeting almost three decades ago, and the government of former Labour prime minister Jacinda Ardern added employment to the central bank’s mandate in 2018 as part of its commitment to improve people’s lives.

However, a cost-of-living crisis saw her support in the polls plummet over the past year, a big factor in her recent shock resignation. Opposition politicians have been quick to promise they will get rid of the employment target if they win the next election, blaming it for the central bank’s too-slow response to inflation and the price spiral that has resulted.

Ardern and her policies can hardly be blamed for the postCovid supply chain crises or the Russia-Ukraine war, which have caused prices and inflation rates to spike globally. But curbing those spikes is what central banks have to do, and interest rates are the only, rather blunt, weapon they have at their disposal.

In practice, central banks with employment mandates do not have a numerical target as they do with price stability. Rather, they proceed in much the way our own central bank and others use economic growth targets and assess where the economy is relative to where it should be so that they can calibrate monetary policy accordingly.

Broadly speaking, if the economy is overheating relative to its capacity that is bad for inflation, and interest rates might need to be increased to combat it. If the economy has plenty of slack there is not much price pressure and there may be scope for rate cuts. But how to measure this? Central bankers talk about various exotic measures such as natural real rates. The easiest is what they call the potential growth rate. That is the rate of growth the economy can sustain over time, given its current structure, without causing inflation.

In SA’s case, the potential growth rate is now tragically low, because the economy’s capacity to produce is constrained by power shortages and logistics issues, and by years of underinvestment. Last week the Bank cut its estimate of SA’s potential growth rate to zero for this year. That means if the economy grows even as minimally as the 0.3% the Bank expects, it is still growing faster than it theoretically can. In central banker language, the “output gap” is still positive.

That suggests monetary policy is not too tight and it is too soon to cut interest rates. We could get higher potential and actual economic growth if we got more reliable electricity and trains and government delivered on other reform promises. Evidently, the Bank does not see that happening in a hurry. Nor, as Kganyago might say, does it have the instruments to make that happen, even if it is mandated by the constitution to seek price stability “in the interests of balanced and sustainable growth”.

How might an employment mandate look? The Bank would presumably have to estimate the structural rate of unemployment in SA and monitor how the actual rate compared. This “employment gap” would then also guide its monetary policy decisions.

Juggling employment, growth and price stability objectives would be a challenge for our clever central bankers, but it is unlikely that the jobs outcome would be much different. Sadly, SA’s estimated structural rate of unemployment is now probably well into the 30% range. Even the latest unemployment rate of 32.9% might not necessarily signal slack in the economy; a drop of a few basis points is hardly a guide to monetary policy. Nor would it be realistic to set any kind of numerical target. A point many have missed is that SA simply does not have the frequent, reliable labour market statistics the Fed or Reserve Bank of New Zealand depend on. Our statistics are quarterly, not monthly. And with fewer than 40% of adult South Africans in paid employment, each quarter’s unemployment rate does not necessarily reflect the state of the economy. It also depends on whether people look for jobs or give up.

Added to this are question marks over the numbers themselves, which Covid-19 showed were sensitive to survey methods. When Stats SA had to switch from face-to-face interviews to telephonic ones at the start of the lockdown, the response rate dropped enough to make the data unreliable. We may never know whether we really lost 2-million jobs at the height of the pandemic, or gained 1.5-million jobs last year.

The broad trends are right; the precise numbers are not. The economic modelling that goes into monetary policy decisions needs precision, whatever the mandate.

There is a tendency to look to functional institutions such as the Bank, courts or competition authorities to achieve policy goals the rest of our dysfunctional government cannot. But the bottom line is we are a low-growth, lowinvestment economy with a dysfunctional labour market. It is hard to see how tweaking the Bank’s mandate would make much difference to jobs — but easy to see how it could damage the Bank’s credibility in financial markets.

THE BANK MIGHT INSIST ON LABOUR MARKET REFORMS TO TARGET MAXIMUM EMPLOYMENT

IT IS HARD TO SEE WHAT DIFFERENCE TWEAKING THE BANK ’ S MANDATE WOULD MAKE

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2023-02-03T08:00:00.0000000Z

2023-02-03T08:00:00.0000000Z

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