Investors’ concerns about the expropriation of assets and interference with the mandate of the South African Reserve Bank are among the reasons the government does not support a proposed amendment to the South African Reserve Bank Act.
The South African Reserve Bank Amendment Bill aims to amend the South African Reserve Bank Act of 1989 to make the state the sole shareholder of the Reserve Bank. The Bill was introduced by Julius Malema, the leader of the Economic Freedom Fighters, in 2018.
The Bill will make the state the owner of the two million shares in the SARB that are privately held, and the Minister of Finance will exercise the rights of those private shareholders.
The Bill will also change the SARB’s governance arrangements such that the minister will appoint all the directors of the SARB’s board from a list confirmed by a panel. The minister will also appoint the bank’s auditors.
The National Assembly’s Standing Committee on Finance yesterday held hearings on the Amendment Bill.
The Congress of South African Trade Unions supported the Bill as a step towards economic sovereignty and addressing socio-economic imbalances. It argued that private ownership of SARB is an outlier internationally and misaligned with the public interest.
Cosatu, represented by Tony Ehrenreich, criticised the Reserve Bank for its conservative approach to the repo rate and for not adequately overseeing the banks’ market conduct and preventing illicit financial outflows.
The Institute of Race Relations warned against nationalisation of the SARB, given the poor mismanagement of many state-owned enterprises and state capture. It argued that the current hybrid ownership model has worked well in controlling inflation and maintaining monetary stability.
The Institute’s Gabriel Crouse said the Bill would undermine property rights, erode investor confidence, and lead to an outflow of capital.
National Treasury’s deputy director-general for tax and financial sector policy, Christopher Axelson, told the committee that full state ownership of the SARB might be desirable, but it will potentially have cost implications and require significant trade-offs. These include the negative impact on investment and economic growth, and concerns about the impact on the SARB’s independence. “Those perceptions are important,” he said.
“At the moment, we’re stuck in a low-growth trap. There are still fiscal challenges. We’re trying to stabilise debt. So, why risk both additional fiscal costs and reductions in investment or slowing growth even more? The governance arrangements could also be weaker, and it may negatively impact the independence of the SARB, so we don’t support the Bill.”
Rights of private shareholders
One of Treasury’s main concerns with the Bill are the implications for the rights of the current private shareholders.
Axelson said the Bill does not explain how the privately owned shares will be converted to state ownership.
It would be “a forced takeover of those SARB shares like an expropriation of those shares”, he said. “The Bill does not say how the state should fund those shares, and it simply assumes it can be expropriated.”
Of the two million ordinary shares, about 12.65% are held by foreign nationals, who do not have voting rights.
Expropriating these foreign shareholders would go against the country’s bilateral investment treaties, “and they would take South Africa to an international court, to get reparations or payment of damages for the expropriation of those shares, which would also have quite a negative impact in terms of the investment signal that we are trying to send”, Axelson said.
In addition, if the shareholders do have to be compensated, money would have to be appropriated from the fiscus, which would require a Money Bill that only the Minister of Finance could introduce.
Concerns about expropriation
The government is also concerned about the constitutionality of the Bill despite the provisions of the Expropriation Act, Axelson said.
Section 25 of the Constitution permits expropriation, but it is subject to agreed compensation or approved by court, and the amount of compensation must be just and equitable, and it must include a consideration of market value. “The current Bill doesn’t take this into account,” Axelson said.
Expropriating the SARB’s shareholders could lead to concerns among investors about what other assets the government might expropriate.
“If we are prepared to expropriate shares of private shareholders within the SARB, as well as foreign shareholders, does that mean that we will start expropriating further? Those are the concerns that we are generally worried about.”
He said investors’ concerns about expropriation might have an impact on the economy and investment.
Changing the SARB’s mandate?
The SARB is a public institution that was established in terms of the Constitution. Its primary objective is to protect the value of the currency in the interest of balanced and sustainable economic growth.
Although the Bill does not directly change the SARB’s mandate or independence, Axelson said, “there is no comfort that the current and future investors and savers won’t see this as a first step towards changing the mandate of the Reserve Bank”.
The SARB is “an incredibly important institution, and any changes to its mandate, any changes in terms of political interference, can have very large market swings”, he said.
“When we look at other countries and what they do in terms of the influence that is put upon their governors or the mandates of other central banks, it has very large repercussions for their currencies and investments. So, we are always very sensitive about what we do with the SA Reserve Bank about their independence and about any perceptions in terms of their independence.”
Implications for governance
The current ownership structure does not have an impact on the SARB’s mandate and independence and changing that structure will not change how the government interacts with the central bank, Axelson said.
The shareholders do not have any impact on the mandate or the policy operation of the SARB, but they do have some rights in terms of, for example, choosing the auditors and voting on some of the directors.
He said there are limitations on the owners of the two million ordinary shares. A single shareholder cannot hold more than 10 000 shares, and a shareholder has one vote per 200 shares that are held. Shareholders and their associates cannot create groups that aggregate those votes.
The rationale for the private shareholding was to introduce greater public interaction into the corporate governance of the SARB.
Axelson said the government thinks the Amendment Bill will weaken the SARB’s governance, and it might lead to operational interference.
Currently, the powers of the SARB’s board of are limited to corporate governance. All the other powers under the SARB Act that are not linked to corporate governance lie with the governor and the three deputy governors, whose decision-making powers include the application of monetary policy within the SARB.
The President appoints eight of the SARB’s 15 directors – the governor, the three deputy governors, and four other directors – and the shareholders appoint seven.
Axelson said the appointment of the seven directors who are appointed by the shareholders is subject to confirmation. Nominations are put forward by a panel, which consists of the governor, a retired judge, one other person who is determined by the governor, as well as three representatives from the National Economic Development and Labour Council. The shareholders appoint the directors from the nominees.
