South African Monetary Policy:

Targeting inflation by any means necessary

The second largest of South Africa’s labor federations, FEDUSA has involved itself in advocating for the interests of workers not only in the workplace but in broader society as well. FEDUSA along with other labor federations has openly voiced its disagreements with South African monetary policy.  Citing personal tax cuts unveiled in Minister of Finance Trevor Manuel's new budget that were followed by interest rate hikes implemented by Reserve Bank Governor Tito Mboweni, FEDUSA has demanded that monetary and fiscal policy “complement each other with the aim of boosting economic growth and job creation.”eq1 Specifically, it objected to Mboweni’s plans to raise interest rates as a means of targeting inflation.eq2 eq3 FEDUSA contends that because current inflation is not demand driven, raising the rate of interest will do nothing to curb it.  Rather, both FEDUSA and COSATU point to the greed of profit-seeking food distributors and retailers as the real culprit.eq4 eq5  And since wages are not the cause of— but rather a reaction to— rising prices, both labor federations agree that cutting into them by raising interest rates in an attempt to reduce inflation will only add to the plight of South Africa’s working poor.eq6 Unions argue that inflation began skyrocketing before wages were increased out of necessity and that government deregulation of agricultural prices is the reason why inflation began to and continues to rise. 

The Reserve Bank and certain other economists see the inflation crisis through a different lens however.  According Mboweni, it is precisely because unions successfully lobbied for a nine percent wage increase for public servants last May that inflation—especially of food prices—has been on the rise.  As far back as 1999 economists began issuing warnings about the potentially adverse effects that successful wage negotiations on the part of unions might have for the South African economy and inflation in particular.  Because productivity was not necessarily increasing with wages, they asserted that further advances in technology and reducing the workforce would be the only way for producers to limit inflation.eq7   However at the time these warnings were issued prices were steadily falling.  Since then inflation for the CPI (Consumer Price Index) has soared as high as 15 percent and is currently fluctuating between 11 and 13 percent, still economists are worrying about the profitability of doing business in South Africa and unions continue to remind the government and employers that many workers remain in poverty.eq8 eq9

The volatility of the rand over the last few years seems to be to blame for these apparent inconsistencies.  After the currency crisis of 1998, violent struggles over land in Zimabawe were the first identifiable sources of external social conflict to adversely affect the performance of the rand, as the issue of land reform   remains a lingering point of contention for many South Africans.eq10  With the majority of the land and resources in the country being controlled by the white minority and political power now resting in the hands of a Black majority, the stage is set for the same kind of upheaval that is now going on in Zimbabwe to play out in South Africa.eq11  Such is what many investors expected and feared when the situation in Zimbabwe started heating up in 2000, and as a result, foreign investments in South Africa took a serious blow.  The decline had residual effects on the value of the rand, as it weakened considerably against the dollar and had depreciated 15 percent by May of that year.[eq12

The prices of South African products headed south as a result of the currency’s depreciation, which was good for the mining industry as their exports were now less expensive and more appealing than those of their competitors.eq13  Of course, as demand for South African products began to rise, so did their prices.  Inflation was again on the rise but the Reserve Bank was determined to maintain control of the situation. In August CPIX was at 6% and South Africa seemed to be on track for meeting its inflation target for the year and businesses were optimistic about their potential for growth and profitability in the future. 

The events of September 11^th did not at first dampen that outlook.  In fact, one day after the attacks South Africa’s Minister of Finance said in a public address that he did not believe the weakening of the rand immediately following the attacks to be a direct result of those events nor did he believe that the attacks would have any significant effect on the value of South Africa’s currency.eq14 His optimism proved to be misplaced, as just two days before the attacks it was expected that the Reserve Bank would announce interest rate cuts at one of their two scheduled meetings that week.eq15  Those rates would prove to be along time coming, what the Reserve Bank did instead was an about face as it steadily increased interest rates in the months that followed. 

Soon after it became clear that there would indeed be international fallout from the events of September 11^th, Mboweni acknowledged that while inflation caused by war in oil producing would be unavoidable, it would not deter his attempts to meet inflation targets. eq16 eq17 Of course this meant that the only recourse available would be to raise interest rates, and Mboweni was immediately warned against doing so by observers who instead advised that the targets be suspended.eq18  But, the Reserve Bank remained committed to inflation targeting and seemed constantly to be defending itself and its decisions to raise interest rates.  In the end, the rand would depreciate 40 percent against the dollar during 2001 and earn the position of the worst performing currency in the world.eq19

The Reserve Bank seems to blind to the adverse effects of its policymaking on the social fabric of South Africa, as it is driven by a desire to promote investment and currency growth by any means necessary.   In order to prevent currency speculation in foreign exchange markets the Reserve Bank has tightened its reporting procedures for bureaus of exchange so much so that Western Union has opted to cut back 90% of its operations in the country.eq20 Such cutbacks spell disaster for poor South Africans who depend on remittances from family in other countries to survive.  From a practical economic standpoint, it would serve to reason that eliminating secure and legal ways to exchange currency only makes the black market more appealing and the rand weaker. 

Meeting target inflation, maintaining price stability, and economic growth are the only concerns of the Reserve Bank.  Of course that is what a Reserve Bank is supposed to be working towards, but can it do so and still expect solidarity from the people and sustained productivity from workers.  Mboweni stated plainly that he is “not responsible for the subsequent interest rate hikes as well as the cost of living” when he clearly is.eq21  If the high cost of food is a result of inflation that the Reserve Bank is mandated to control, how then can the Bank’s Governor claim innocence when overall prices rose 18.1 percent last year with grain prices up by 44 percent, meat by up to 25 percent and vegetables by up to 17 percent?eq22  How can people be expected to work and maintain the levels of productivity conducive to economic growth when they are starving? They cannot and they will not.  Therefore, when the average low-income household spends more than fifty percent of its already limited income on inflation driven food, quality of life is the responsibility of the Reserve Bank.

Because the Reserve makes clear its total disregard for the social consequences of its policymaking does not mean that it is not also playing both sides of the fence.  Mboweni has also called for the public to unite with the goals of the Reserve Bank in order to better the country.  He admitted that perhaps his use of and reliance on inflation targets was premature, but did so in a way that scapegoated the public for the previous years targeting failure saying that, "because we don't have a substantial “buy-in” [on the targets by the public], people act as if we don't have an inflation target."eq23 

It remains unclear what Mboweni is willing to do to get the public to “buy in” on inflation targets, but it is clear that showing total disregard for them has not put the country in a position to make measurable economic gains.  The country is the midst of social crises that require the help of the government to be remedied.  AIDS has reached epidemic proportions in the region and many of those infected cannot afford adequate healthcare.  Only recently have employers such as Anglo American stepped in to provide treatment to workers.eq24  Still, the government is not in a position to provide education, counseling or treatment to those in need because the economy is performing so poorly.  And because the economy is performing poorly it has become a top priority, as it should well be. However, it seems as though government officials still have not realized that no matter what they do to the help the rand, if they do not first help their people there will be no country to invest in.  South Africa will continue to spiral downward if its citizens are left to fend for themselves.