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How successful has the reserve bank been in achieving it’s own stated goals?
Let’s quickly assess it:
Goal: Restore the gold standard
Assessment: Quote from the internal SARB report on SARB history: “Owing to increased capital outflows in December 1932, South Africa abandoned the gold standard on 28 December 1932.”
Goal: To issue banknotes for only 25 years
Assessment: The SARB has continued to issue banknotes for 90 years +.
Goal: Monetary stability and balanced economic growth (SOUTH AFRICAN RESERVE BANK ACT 90 OF 1989)
Assessment (Jun 1989 to Dec 1993): Monetary stability – M3 growth (61%) | Standard deviation of y/y M3 growth (12.8 percentage points) | % of time y/y M3 growth outside 1 Standard Deviation from Mean (40%). Balanced Growth – Average q/q annualised GDP growth (-0.2%) | Q/q ann. GDP growth Low (-4.6% in Q3 1992), High (5.9% in Q3 1993) | % time spent in official recession (87%).
Goal: Protect the internal and external value of the currency (rand) in the interest of balanced and sustainable economic growth in the Republic of South Africa (Constitution Act No. 200 of 1993).
Assessment (Dec 1993-Jun 1996): External Currency Value – Nominal Trade Weighted rand declined 25%. Internal Currency Value – CPI and PPI increased 23%. Balanced and Sustainable Growth – Standard deviation of q/q ann. GDP growth (2.7 percentage points) | Q/q ann. GDP growth Low (-0.6% in Q1 1994), High (7.7% in Q2 1996).
Goal: Protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic (Constitution Act No. 108 of 1996).
Assessment (Jun 1996 to Jan 2000): Value of the Currency – Nominal Trade Weighted rand declined 22.4% | CPI and PPI increased 25% and 24%. Balanced and Sustainable Growth – Avg q/q ann. GDP growth 2.1% (below long term trend) | Q/q ann. GDP growth Low (-0.9% in Q3 1998), High (4.6% in Q3 1996).
Goal: The achievement and maintenance of Financial Stability.
Assessment (2000-2004): Rand crisis in 2001/02 | Prime rate spiked 400bp in 2002 | CPI inflation crisis 2002/03 (y/y CPI averaged 11% from May’02 to Apr’03) | Mini economic downturn 2002/03 | Tech stock crash 2000/01.
Goal: The achievement and maintenance of Price Stability.
Assessment (Jan 2005-present): CPI inflation 51% | PPI inflation 66% | PPI y/y up 20% in Aug 2008, then fell by 4% in Aug 2009 | JSE All Share index inflation 178%, including 50% market price crash in 2008/09 | Gold price inflation 481% | Petrol price inflation 150% | Inflation crisis in 2008.
Goal: CPI inflation target of 3-6% y/y
Assessment (2002-present): % of time spent outside inflation target (65%) | % of time spent above 7% and below 2% (42%) | % of time spent above 8% and below 1% (32%) | % of time CPI inflation more than 1 standard deviation from the target midpoint of 4.5% (31%) | Maximum consecutive period within target range (20 months).
Not only has the Reserve Bank failed at each one of its core missions, but also its core mission has become increasingly vague and poorly defined. This makes sense, since the SARB is trying to settle on a definition that it cannot be judged to have failed on. The trend is away from sound money toward monetary chaos, a task at which the SARB will very likely succeed!
Take a look at the slide from soundness to chaos:
1921: Restore the Gold Standard at a fixed parity – institute sound money
1989: Monetary Stability – protect the value of money
1993: Protect Internal and External value of the currency – protect the relative value of money
1996: Protect the value of the currency – vague commitment to protect relative value of the money
2000: Achieve Financial Stability – no commitment to protect the value of money
2002: Inflation target 3-6% – officially sanctioning the destruction of the value of money.
A poor record indeed.