DAAN STEENKAMP: Time to reform Reserve Bank governance

The SA Reserve Bank is extraordinarily independent. Operational independence is a good thing in areas such as monetary policy, where it supports the achievement of low and stable inflation without political meddling. However, the Bank’s unelected officials wield powers that affect everyone in our society, so mechanisms that ensure democratic credibility are important for managing the tension between independence and accountability.

The Bank aligns with best practice in having its independence enshrined in the law, while providing disclosure via reporting to parliament and publishing reports that explain its monetary policy and financial stability decisions. It also publishes financial and annual reports. But the Bank stands out for its private ownership structure, its ability to set its own budget, a lack of clear procedures around governor appointments and dismissals, and limited oversight arrangements in some policy areas.

The Bank is not unique in its budgetary autonomy or ownership structure, but these create symbolic challenges. Additional oversight and accountability mechanisms would strengthen the foundation for its mandate and public trust.

One area where greater transparency is needed is the determination of the Bank’s budget and how it spends it. The Bank is funded through its seigniorage revenues from money creation and the reserve requirements it imposes on banks, as well as income on managing assets on behalf of the government.

One thing that is unusual about the Bank is how little of the money it produces is transferred back to the government. The US Federal Reserve, one of the other remaining privately owned central banks, transfers profits amounting to almost 0.5% of GDP to the US government each year. The Bank did not transfer any income to the government in 2010-19 and has not transferred any income since 2021.

In most countries the government has some periodic say over the central bank’s budget. In SA the government does not. The consequence has been that the Bank has avoided the belt tightening the rest of the public sector has been subject to since the global financial crisis. The Bank now stands out globally for how large its budget and staff costs are compared with the size of SA’s population and its budget, respectively.

One thing that is unusual about the Bank is how little of the money it produces is transferred back to the government.

This raises questions around the institution’s commitment to its inflation target and means it has more resources than the public institutions that provide oversight of it. Since 2002 the Bank’s average wages grew at 8.3% per year (or 8.7% if benefits are included) while headline consumer price index (CPI) inflation averaged about 5.5%. Most recently, governor Lesetja Kganyago received an annual increase of 10.2%. Fast wage growth has led to the average salary at the Bank being almost double the latest available figures for average salaries at the National Treasury. 

While the Bank’s expenditure has been growing rapidly, its traditional seigniorage revenues have been under pressure. The ongoing decline in notes and coins in circulation means that since 2023 new currency issuance costs have exceeded the nominal value of new cash in circulation for the same year. This suggests that since 2023 the Bank’s expenses consumed all of the seigniorage revenues from its monopoly over money production.

This means the unremunerated reserve requirement has played a bigger role in sustaining the Bank’s seigniorage revenues. The Bank requires registered banks to keep 2.5% of their liabilities with it, without receiving interest. We estimate that over the past year the opportunity cost to banks has been about R12.5bn (about 5% of banks’ average monthly net interest income).

The Bank does not publish seigniorage data, but we estimate that these have been about R80bn (before production and distribution costs) since 2008. This is lower than the total implied revenues from unremunerated reserves, which we estimate have been about R100bn. To put this into perspective, the Bank’s annual income is more than the government spends on provincial public transport.   

Given the recent shift to a surplus-based monetary policy implementation framework, unremunerated reserves are no longer required to create a liquidity shortage in the banking system for the Bank to ensure influence over interest rates. The decline in its cash seigniorage is one reason the Bank may be reluctant to remove unremunerated reserve requirements, even if they are no longer required under the new policy implementation framework. 

As we saw happen last year, the Bank’s Gold and Foreign Exchange Contingency Reserve Account creates political pressure for unrealised foreign exchange profits to be monetised and used for other government purposes.

Reforming the Bank’s foreign reserve management policy is long overdue given the nation’s deteriorating sovereign financial position. We estimate that the Bank’s approach is equivalent to a half percentage point of GDP annual insurance policy for SA Inc. Evaluating whether this offers value for money or not, and whether the Bank is doing a good job stewarding SA’s reserve portfolio, is impossible given the limited information the Bank publishes about its balance sheet management activities. 

There are other areas where greater transparency would strengthen public accountability. Take the Prudential Authority as an example. It collects but does not publish institution-level regulatory compliance data, constraining market discipline of noncompliant institutions. Reviews that include substantive stakeholder engagement of SA’s financial surveillance and exchange control regulations are also past due. 

Transparency and governance frameworks are crucial for ensuring unelected technocrats are held accountable. The Phala Phala saga raised questions not only about political entanglement of the Bank but also the consistency of its policy enforcement. Likewise, the recent high court ruling that the Bank abused its exchange control powers in its treatment of Ibex/Steinhoff raises alarm about overreach by the Bank and highlights the need for reform of exchange control and financial surveillance regulations and operational procedures.

Transparency and governance frameworks are crucial for ensuring unelected technocrats are held accountable.

Bank governance relies on oversight by a board of directors that includes seven appointed by the president and four elected by the Bank’s private shareholders. The public biographies of several of the directors do not show substantial technical expertise in the core policy focus areas of the central bank. Unlike the boards of several leading central banks, the Bank board does not publish oversight reports evaluating policy effectiveness and compliance in any detail.

The Bank also stands out for having an executive-led governor appointment process. The governor and deputies are appointed by the president in consultation with the finance minister, but the criteria for appointments are not public, nor are dismissal protections clearly defined.

The adoption of inflation targeting in SA with a committee-based decision-making process and disclosure of forecasts and judgments reflects an appreciation that public confidence depends on transparency and governance arrangements. Given the extraordinary power wielded by the Bank’s governors, governance arrangements are crucial to protect the public against the possibility of poor decisions from inexperienced or rogue governors in future. 

Reform to the appointment process to make it more transparent, regular oversight reports and external reviews of funding, policy implementation and framework compliance, would strengthen public confidence that the Bank is discharging its responsibilities competently and advancing policy in the broader interest of SA society. 

Many have worried that legislative reform of the Bank’s private ownership structure and governance arrangements could see the institution's mandate also being revised. The existence of the government of national unity mitigates these risks somewhat. It also creates the opportunity to align the Bank’s governance and accountability arrangements more fully with leading inflation targeters. 

• Dr Steenkamp is CEO of Codera Analytics and a research fellow with the economics department at Stellenbosch University.