The publication of a report by the Public Protector of South Africa has reopened debates about the independence of the SA Reserve Bank from political interference and its focus on a clear objective, namely an inflation target. The SA Reserve Bank has independence in terms of the South African Constitution (sections 223 to 225) and the mandate of the central bank is clearly demarcated in those sections of the Constitution. The central bank must protect the value of the rand and South Africa's policy of inflation targeting is the way in which this constitutional mandate is discharged.
The Office of the Public Protector is also created in terms of the South African Constitution. In an investigation into financial assistance granted to a commercial bank by the central bank, the Public Protector saw fit to recommend a constitutional mandate change for the SA Reserve Bank.
We, therefore, have the strange situation where one creature of the Constitution (the Public Protector) undermines the constitutional independence of another (the SA Reserve Bank). The result is legal action by the central bank against the Public Protector. The SA Reserve Bank has no option but to institute this legal action, as the Public Protector's recommendations may not be ignored and the Public Protector saw fit to recommend another mandate for the central bank.
It is not immediately obvious who the Public Protector consulted before making this questionable recommendation, sufficient to say that it is a very unsound recommendation.
The independence of the SA Reserve Bank was indeed under threat in the 1980s when the central bank followed political instructions on the level of interest rates. Central bank independence has been restored very successively since 1989 and is jealously guarded by successive governors of the central bank. The independence of the SA Reserve Bank is also guarded in the Constitution, as is the mandate of the central bank.
The importance of maintaining the independence of the SA Reserve Bank is evident from its record in containing inflation. For the period 1981 to 1989, the average annual rate of inflation in South Africa was 14.7 percent. This caused considerable hardship for South Africans, many of them poor, who had to battle to stay ahead of rapidly increasing prices.
The independence from political interference in the SA Reserve Bank is one of the cornerstones of our democracy.
With an independent central bank and no political interference in the affairs of the SA Reserve Bank, the level of South African inflation declined considerably. South Africa uses an inflation target for policy purposes since 2002, and over this period the average rate of inflation was 5.8 percent per annum. The advantages of a central bank free from political interference, therefore, speak for itself, as is evident from lower inflation.
It is unclear which agenda the Public Protector follows in meddling in matters outside her mandate. Clearly, it does not serve the best interests of all South Africans if some institutions created in terms of the Constitution (in this case the Public Protector) start to meddle in the affairs of other institutions with a mandate given by the very same Constitution.
The independence from political interference in the SA Reserve Bank is one of the cornerstones of our democracy. Without this independence, all South Africans will be worse off. But it raises another question: Can the Public Protector, well knowing that her recommendations cannot be ignored, continue on this path and make findings on the mandates of all other South African institutions created in terms of the Constitution, for instance, the Auditor-General or the South African Human Rights Commission?
In this instance, the legal action of the SA Reserve Bank against the Public Protector to protect the independence of the central bank might be timely action ensuring the independence of all other South African institutions created in terms of the Constitution.