Why we should not nationalise the Reserve Bank

It might just strengthen demands for further nationalisation

Imagine I establish a company and make you the following proposition: you can buy shares in my company, but you have almost no say in its management. On top of this, you can't earn much more than a 3% nominal return per year on your investment. Any profit the company makes beyond that is paid to someone else.

This would sound like a foolish idea to any investor. It would make more sense to put your money in a savings account, for example, where the return is higher and the risk is lower.

Yet, this is precisely how the shares of the South African Reserve Bank (SARB) operate. Each share earns a predetermined 10c return. With shares trading around R3 per share (when available), the yield is a meagre 3.3%. All additional profits earned by the Reserve Bank are transferred to the National Treasury. Shareholders also have no influence over the Bank's mandate; the primary objective – to protect the value of the Rand for the benefit of balanced and sustainable economic growth and financial stability – and the institution's independence are protected by law – the South African Reserve Bank Act 90 of 1989.

The Reserve Bank's two million shares are thus a very poor investment. There are currently around 750 investors, each owning a maximum of 10,000 shares. So why does anyone invest in this?

One reason is that they anticipate the Reserve Bank will be nationalised sometime soon. While the total value of the shares is not much more than R6 million (2 million at R3 per share), the Reserve Bank is naturally 'worth' more than this. It is a full shareholder of the South African Mint, the institution that prints cash. It stores the country's gold reserves, currently 125 tons valued at an estimated R90 billion. And it also holds physical and financial assets worth several hundred billion rand. A nationalisation exercise could mean private shareholders demand a share of these assets. Someone who bought 100 shares at R3 each could, if the courts agree with this revaluation of the Reserve Bank's value, walk away with a considerable sum.

It is highly unlikely that the courts will consent to such a revaluation, but rest assured that the current shareholders will do everything they can to make a strong case for it. The best the government can hope for – if they decide to nationalise the Reserve Bank – is a protracted lawsuit they ultimately win.

But this is not the only, or even the most important, reason why nationalisation would not be a good idea. I do not doubt that populist leaders supporting nationalisation will use the Reserve Bank as an example of a 'successful' nationalisation exercise. Look, they'll say, the Reserve Bank was nationalised and there was almost no negative impact on the economy. So why stop there? First National Bank, Standard Bank, Absa, Nedbank and Capitec would be next in their sights, followed by the mines, farms, and cell phone towers.

This is why the nationalisation debate is so heated. There's no reason for the Reserve Bank to be privately owned; on the contrary, the requirement for an annual shareholders' meeting where people with strange ideas hang out gives the Reserve Bank management unnecessary extra work. Most countries' central banks are fully state-owned. When Finance Minister Tito Mboweni earlier this week questioned the ANC's policy in favour of nationalisation on Twitter, many commentators pointed this out to him.

However, the pitfalls lie in the process of nationalisation. First, shareholders could demand much more than their shares are worth. Second, nationalisation could provide the spark for the populists to launch further nationalisation attempts. Both could have disastrous consequences. It would be better for the government to tolerate the harmless shareholders and populists screaming from the sidelines, rather than giving these opportunists the chance to realise their wild ideas.

An edited version of this piece appeared in Afrikaans in Rapport on 19 January 2020. ChatGPT translated this piece in May 2023. Image created by Midjourney v5.1.