THE INDEPENDENCE OF THE SOUTHAFRICAN RESERVE BANK

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Inflation targeting by the South African Reserve Bank

The mainstream of experts in this area is in agreement that curbing inflation is not the only macroeconomic variable used to maintain growth and sustainable economy. However, they also recognize that it remains one of the major aspects of economic and financial stability. This is why many countries attach great importance on that. For example, the agreement between the Government of New Zealand and the Reserve Bank of New Zealand is premised on inflation targeting. Similarly, the granting of independence to the Bundesbank was an attempt to fight against hyperinflation, which prevailed in the country.
Furthermore, experts are also unanimous that inflation is a wild animal to be tamed by all means. Since central banks are generally entrusted with the carrying out of this task, it is therefore the duty of every governor with his or her team to meet the primary objective of their respective institutions. In this regard, in the context of the SARB, it was declared that ‘within the framework of its anti inflationary strategy, the Bank has continued its practice of setting year to year target, now called guidelines’.132 Although these guidelines were informal in their nature, it appears that ‘South Africa formally adopted an inflation target monetary policy on February 2000 when the Minister of Finance announced an inflation of three to six percent to be achieved by 2002’.133
The same source reveals that ‘this came as a result of a creeping inflation and an increase in external deficits that were to be brought under control through restrictive monetary policy’.134 Even though this was a political statement, and not a legal enactment, nevertheless, it has had a positive impact at international level because currently ‘South Africa is categorized as an inflation targeting country135 and listed among the countries with full-fledged inflation policies’.136

Financing of deficit by the South African Reserve Bank

Financing deficit of governments by central banks has always been a vexed issue, some experts consider that it should be prohibited at all cost, others estimate that it should be tolerated, but their common view is that it should preferably be avoided or in the event of extreme necessity, when other means have proved impossible, it should be strictly regulated. Within the framework of the South Africa Reserve Bank, it was said that the adoption of a more market oriented approach in implementing monetary policy in the 1980s led to the extensive use of public debt management by the Bank in close cooperation with the Treasury.137
In this connection, it was also declared that the objective of debt management operations is to finance “the so called “deficit before borrowing and debt repayment” of the Exchequer in a non-inflationary manner, as well as to exert better control over liquidity in the economy.138
However, it is convenient to make it clear that funding deficit does not necessarily mean printing money because the general observation is that monetisation of government debt occurs when any deficit in a government budget is funded directly (normally by printing money) by the central bank. A deficit itselfdoes not therefore imply monetisation of government debt. For example, the central bank may use its reserves or recommend recourse to other means of outsourcing of the required funds to plug the shortage.
In addition, the South African Reserve Bank holds current accounts for State departments and other government bodies and institutions.139 In this capacity, ‘it operates as a commercial bank for the State and its agencies. Instruments of payment from those institutions are collected and honoured by the Bank. The Bank grants loans and advances to the State’.140 It derives this power from s 10(f) of the South Africa Reserve Bank Act. Furthermore, the South African Reserve Bank acts as an agent and an advisor to the government.141
One of the ways often suggested is the raising of money in the open market; this practice entails the buying and the selling of government securities by the Reserve Bank in the open market at the Bank’s discretion in order to regulate the money supply or pattern of the interest rate. Therefore, it is expected that if the situation of funding deficit could arise, the Bank would be in a better position to advise the government to adopt proper financial structural adjustments in this sector.
It is further explained that these transactions are called open market operations because the Bank is prepared to deal with any interested party.143 Although these transactions are generally [emphasis added] undertaken to achieve long term monetary objectives, a secondary objective may be to iron out temporary money market fluctuations caused for example, by agricultural crop financing, tax payment to the Exchequer or change in the net gold and other foreign reserves.144

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CHAPTER ONE
1.1 A BRIEF HISTORY OFMONEY AND CENTRAL BANKING.
1.1.1 Role of money in society.
1.1.2 Emergence of central banking
CHAPTER TWO
2.1 THEORY ON THE INDEPENDENCE OF CENTRAL BANKS.
2.1.1 Hallmark of central bank independence
2.1.2 Separation of duties of governments and central banks.
2.1.3 Central bank independence with economic ideologies
2.1.4 The Bundesbank
2.1.5 The Reserve Bank of New Zealand
2.1.6 The European Central Bank .
CHAPTER THREE
3.1 THE INDEPENDENCE OF THE SOUTHAFRICAN RESERVE BANK
3.1.1 Brief overview of historical evolution
3.1.2 Creation of the South African Reserve Bank
3.1.3 Mission, Powers and functions of the SARB
3.1.3.1 Mission
3.1.3.2 Powers and Functions
3.1.4 The structure of the South African Reserve Bank
3.1.5 Administration of the Bank
3.1.6 Tenure and conditions of office of directors
3.1.7 Financial control and cooperation with the Minister of Finance
3.1.8 Inflation targeting by the South African Reserve Bank
3.1.9 Financing of deficit by the South African Reserve Bank.
3.1.10 External Cooperation and debt management
3.1.11 The Financial and Fiscal Commission
3.1.12 Accountability and transparency
3.1.12.1 Accountability.
3.1.13 Transparency
Conclusion
Appendix One: List of main abbreviations used in the work
Bibliography .