By Redge Nkosi
The kerfuffle around the manipulation of the rand and the subsequent admission of collusion by some local and foreign banks has, understandably, excited considerable attention. South Africa deserves a clear explanation on the matter.
The matter has spawned two main debates: the first revolves around the fairness or unfairness of the imposed fine for the admission of guilt and potential penalties for those who may be found guilty in this and subsequent cases. The second is about the damage such malpractices inflict on society and the economy generally.
While these two issues are weighty, the more profound ones related to policy are relegated, or ignored. As one can guess, the shocking silence of the Treasury and the SA Reserve Bank (SARB) begs a question. A fundamental question is about how the current macroeconomic policy positively serves the country and the political economy of South Africa’s development.
First, banking is a public good. It, therefore, behoves the state to assure its citizens that this public good is enjoyed by all without prejudice of sorts, including the manipulation of the currency whose effects can result in unnecessary macroeconomic imbalances. Indeed, it is in this context that one of the government’s key policies is the protection of the value of its currency, the rand. As a state organ, the SARB is thus charged with this policy.
Private institutions licensed by the state to carry on this vital public good (banking) cannot, therefore, assume practices that are inconsistent with public good. Banks must, however, necessarily make a profit from rendering a service of this public good for which all manner of backing is given to them by the state for delivering it.
If, as is the case, the power of banks comes from their public backing which comes with the licence, this raises the fundamental question of why the state should let banks get away with using their privileged positions as a basis for making bets (currency manipulations, etc.) where the rewards are privatised and losses socialised (meaning incurred by the economy as a whole).
The difficulty is that money/banking is not understood by most economists (99.8%), let alone the broader public. Hence even the notion that banking is a public good is alien to economists, especially those trained in neo-classical (neo-liberal) economics. Most of these man government offices, including the SARB, producing policy that is at permanent tension with the ideals as those well laid out in the Reconstruction and Development Programme (RDP) of the 1990s.
With the currency manipulation first surfacing in late 2001, this was a sufficient warning shot about what was to come and about the poor nature of the late 1990s and early 2000s policies (including the GEAR and inflation targeting). These then should have long prompted a raft of policy changes both for onshore and offshore foreign exchange markets on the one hand and a relook at the liberalisation of the capital account as well as the liberalisation of the capital markets on the other.
Associated with the above is the bogus notion, so well advanced by the SARB, that the country needs savings for investment and, therefore, growth. Out of this economics arises the need to open the capital account so as to allow hot money to flow into and out of the country on the understanding that such money will help grow the economy. The manipulation of the currency (foreign exchange markets) rests on this pillar.
The now silent SARB, which is charged with protecting the stability of the currency, alongside the now reluctant and silent Treasury can only sit on the fence in regard to this topical currency manipulation matter, instead of mulling an epochal change to their defunct policies and their lax approach to monitoring foreign exchange markets.
Yet, the SARB is fully aware that foreign exchange trading, more so the offshore market, is more linked to financial motives than to trade in goods and services and therefore the need to watch over such trades should be more pronounced. These offshore markets have a significant influence over the price discovery process in exchange rates, in those markets that are more difficult than onshore centres for the SARB to monitor.
And as such the SARB may, as its excuse, say that offshore foreign exchange markets are hard to monitor (it has little jurisdiction). While this may sound plausible, it would be entirely unhelpful for South Africa. If we can’t monitor some markets, then let us pull out of out them, and onshore the foreign exchange trading which can easily be monitored by the Bank. Alternatively, the Bank should nominate or encourage domestic firms to play a greater role in offshore markets through which it can increase its surveillance capabilities. There are other ways in which the Bank can access market intelligence data from as wide a source as possible. There can, therefore, be no excuse.
It is thus not enough for the SARB to tell us that the Department of Trade and Industry’s Competition Commission is the competent authority to investigate the collusion. With information readily available from the Bank, we should not have to wait several years to finalise this case. And since the Bank monitors the onshore markets (this is a definite), assuming it does not monitor the offshore one, it must come clean as to what the onshore market players did and did not do.
Similarly, as the ANC secretary-general remarked, the Treasury must step up and clear the air around this matter, of course within the appropriate bounds as the issue is before the courts. South Africa deserves to know what set of actions were put in place to further protect the rand since the 2001 event, and after the later manipulations took place. Would a review of the licence be a necessary option?
With money/banking a public good, a systemic overhaul seems only decent given the many challenges, social and economic, South Africa faces.
The current currency manipulation scandal provides an excellent opportunity to overhaul the financial system in South Africa, and with it our defunct macroeconomic policy imposed by foreign institutions. And with so many grey areas within the global financial architecture, an opportunity to exploit them so as to contest financial globalisation, which is wrecking this economy is certainly possible. The starting point, however, is the nationalisation of money, and indeed the SARB.
Misguided noises about the cost of nationalising the SARB that are so rampant in the media and elsewhere are a mere reflection of the incompetence in monetary science. Behind these noises are neo-colonial interests whose primary motive is to continually spread fear so as to maintain their exploitation of this land, and its people. As of now, however, the country awaits a briefing from the SARB and the Treasury on this matter.
Watch Redge Nkosi speak more about the matter in an interview with SABC:
Redge Nkosi (@redgenkosi) is the executive director and research head for Money, Banking and Macroeconomics at Firstsource Money and a founding executive member of the London-based Monetary Reform International.