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By Hlengani Mathebula | Mar 02, 2010 | COMMENTS [ 0 ]

CHRISTOPHER Malikane, an associate professor of economics at the University of the Witwatersrand, has succeeded admirably in building a castle out of hot air, (Nationalise it, Sowetan, February 15).

CHRISTOPHER Malikane, an associate professor of economics at the University of the Witwatersrand, has succeeded admirably in building a castle out of hot air, (Nationalise it, Sowetan, February 15).

In the article Malikane explains the circumstances that led to the creation of the South African Reserve Bank (SARB).

This I have no beef with. But he then goes on to argue that the government must buy out the private shareholders of the Reserve Bank as well the country's commercial banks.

"The benefit of transferring ownership of commercial banks to the people as a whole is that, firstly, most public debt will be abolished overnight because the government cannot owe itself," Malikane wrote.

"This will free us up to pursue developmental imperatives. Secondly, the democratic government will have control over where credit is allocated."

On the face of it the argument sounds solid, but if interrogated a bit deeper it comes short.

Malikane has allowed his ideology to run ahead of the facts. Clearly, he works off the assumption that commercial banks own the bulk of the government debt. That's not true. Of the country's long-term debt - bonds - outstanding as of March 31 2009, 38,5percent was owned by the Public Investment Corporation on behalf of the Government Employees Pension Fund, 45percent was held by other institutional investors including pension funds and insurance companies.

Banks only owned R57,7billion, or 14,2percent of the R405,5billion worth of government bonds issued, according to the December 2009 Quarterly Bulletin of the SARB.

This figure excludes borrowings by local governments and state-owned enterprises such as Eskom and Transnet.

These numbers show up Malikane's argument for what it is: hot air.

In SAfm's After 8 debate on February 16, Malikane took his argument further, saying that the Reserve Bank had been "sidelined as a lender to government".

A central bank can only lend money to a government through one mechanism and that is to print money to finance government expenditure.

The history of economic management of countries is littered with examples of the socio-economic havoc wreaked by the pursuit of such a policy.

Our neighbour, Zimbabwe, is one recent example. There President Robert Mugabe leaned on Central Bank governor Gideon Gono to print more Zimbabwean dollars to finance his political dreams.

We know what happened. The value of the Zimbabwean dollar went south, leading to hyper inflation.

The country's economy collapsed, unemployment shot through the roof and ordinary Zimbabweans risked life and limb crossing the border into South Africa in search of jobs and food.

At one point it was cheaper to use the Zimbabwean dollar notes as toilet paper than to buy real toilet paper.

Now Malikane advocates that South Africa should go down the same path as Zimbabwe.

As Finance Minister Pravin Gordhan said in his budget speech, a credible monetary policy framework that focuses on managing inflation is crucial to reducing long term borrowing costs and providing confidence about the future.

"These are necessary to stimulate investment, employment and competitiveness - particularly among exporters and import-competing industries. At present our level of inflation is higher than that of our trading partners, which lowers our competitiveness," Gordhan said. "Low and stable inflation is also essential to protect the living standards of workers and the poor."

Protecting the living standards of the workers and the poor is clearly not part of Malikane's policy armoury. Nor was it Mugabe's.

In the SAfm debate, Malikane reiterated his argument that the Reserve Bank is not under the control of the government.

Once again Malikane ignores the facts. Though the bank has private shareholders, their rights are so circumscribed by the SA Reserve Bank Act that they cannot be said to be in control of the bank.

What the Malikanes of this world have failed to grasp is that central banks are entrusted with the guardianship of the buying power of their country's currency.

"Central banks are credible when market actors and the public trust central bankers to act to uphold their promise to maintain the purchasing power of the money they issue," writes Rodney Bruce Hall in his book, Central banking as Global Governance: Constructing Financial Credibility. Hall is a university lecturer in international political economy at Oxford University.

"In our contemporary era of fiat money in which we lack a capacity to measure the value of money against an external standard - such as gold or some other valuable commodity in limited supply - all money is fiat money," he adds. "Money's value is stipulated by fiat, and the central bank explicitly and implicitly pledges to maintain that fiat value. Thus money is a promise."

It's a promise that all responsible citizens ought to ensure that their Reserve Bank lives up to. A central bank that prints money to finance government expenditure, as the Zimbabwe did in recent years, breaches its promise to the public.

l The writer is the non-executive director of Vuma Reputation Management, chairperson of Black Business Executive Circle and former managing executive of Absa Private Bank. He writes in his personal capacity


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