South Africa will probably go into the Guinness book of records as the only country to have had three finance ministers in one week. The position of Finance Minister had controversially passed through three pairs of hands in four days. Only Israel holds the record for cabinet ministers resigning within six months or less from the date of their appointment. South Africa therefore has set a record which is unlikely to be replicated anywhere on the globe in our life time. Last Wednesday, Nhlanhla Nene was fired. On Thursday, David van Rooyen was sworn in. By Sunday, van Rooyen was out and Pravin Gordhan returned to the post he had held previously. The rapid succession of finance ministers caused the South African currency to plummet. On Monday, Gordhan, who was finance minister from 2009 to 2014, reassured the nation that the economy will be steadied.
In this disquisition, I will not dwell on the nitty-gritty of why President Jacob Zuma made those “sets” of unprecedented decisions, but rather I will expend my energies on the impact that such actions or inactions have on the financial markets at a time when the economies of most commodity export-based economies (including Zambia) are facing economic challenges.
In parliamentary democracies, individual ministers play the central role in policy formulation and implementation. Policymaking success therefore requires that governing parties assign well-qualified individuals to key cabinet posts, and that these ministers remain in office long enough to do their jobs effectively. If ministers are incompetent or if competent ministers are removed from office before they have an opportunity to make an impact on their departments, it will be difficult for governing majorities to develop and implement their preferred policy programs. Besides, shuffling cabinet ministers sends wrong signals to foreign investors, cooperating partners, and the financial markets. The quality of policymaking processes should therefore be influenced by turnover among ministers, which can impede the accumulation of experience necessary for effective governance.
At one extreme, if ministers in key portfolios were replaced daily, it would be impossible for parties to achieve their policy objectives. But changes in ministers are not always a bad thing. At the other extreme, if ministers were never replaced, regardless of their performance, this should hardly be viewed as good for democracy because democracy embraces gradual change.
In fact, turnover as observed by Dewan and Dowding (2005) can help governments improve the public’s confidence in their performance and can serve as a tool to control the ministers responsible for the most powerful and organizationally-complex departments such as the Ministries of Finance. Turnover can reflect the need for innovation and renewal in policymaking or it can reflect underlying conflict and instability. Hence, the relationship between turnover and political performance should depend crucially on the underlying causes of turnover.
Late last Wednesday, when Zuma fired finance minister Nhlanhla Nene after just 19 months in the position, the currency dropped to 15 rands to the dollar. The next day the rand slumped even further to 16 rands to the dollar. South Africa’s economy was already troubled. Just a week before, ratings agency Fitch downgraded the country to BBB-. Standard & Poor maintained South Africa’s BBB- foreign currency credit rating, but revised the outlook to negative. The country had narrowly missed entering a recession with less than 1 percent growth, said Statistics South Africa.
Fast forward and back home, there have been calls at least from a reasonable cross section of society to fire, disdain, demote, remove, change, or dismiss our Finance Minister Alexander Bwalya Chikwanda, fondly known as ABC for reasons best known to the petitioners. Minister Chikwanda was appointed to the helm of Finance in 2011 and he has presided over the Treasury since then and has seen the Kwacha annihilated by the economic elements under his watch.
Zambia is rated B by Fitch rating agency. This rate is one grade shy of –B which means substantial risk of default by the country. The immediate interpretation is that Zambia can no longer access cheap loans on the international capital markets because of the perception of default hovering over her. Considering the fragility of the Kwacha on the heels of weak economic fundamentals, would it be a wise decision to go the Zuma route? Your guess is as good as mine. With inflation spiraling at 19.5% (November, 2015), a dollar pegged at K11.06, any rumoured turnover at the apex of the Finance Ministry would definitely trigger negative speculation and an argument can be put across that things would become worse than they are now. The prospects then for Zambia would become grim and we would probably end up in a recession with negative growth.
But what does it take to have a competent, qualified and effective Minister of Finance? The Ministry of Finance is a financially sensitive ministry which should not be compared to an ordinary ministry such as Ministry of “Chikulu Bwacha” or “Kuti Buti Bwacha”. Markets are instantaneously reactive to such changes due to uncertainty in policy direction, cut deals and assurances that incumbent ministers of Finance make to big business and any uncertainty can easily lead to capital flight with devastating consequences to the local currency and economy in general, not mentioning the likelihood of unemployment as a consequence.
In his study of the turnover of key finance personalities in developing and developed economies, Professor Guillermo Vuletin (2012) made a stunning conclusion based on his extensive study on what causes the Ministers of Finance to be fired and the subsequent impact on the financial markets and economy in general. His conclusion was stark that Finance Minister turnover generates a lot of volatility, even in developing countries where markets are not so sophisticated.
On average, MOF turnover is relatively similar between advanced and emerging economies, except developing economies have a higher replacement rate for finance ministers relative to advanced economies during years in which there is no presidential turnover. Greece has the highest mean ministry of Finance turnover, while China has the lowest.
The same political variables affect both developed and emerging economies. However, the economic variables of importance differ. Inflation matters more for the Ministry of Finance turnover in advanced economies—in keeping with the view of finance ministries as having a role of “economic stewards,” while default episodes and changes in RGDP (real gross domestic product) matter in emerging economies.
The role and influence of the Finance Minister within the cabinet are discussed with increasing prominence in the theoretical literature on the political economy of budget deficits. It is generally assumed that the spending ministers can enhance their reputation purely with new or more extensive expenditure programs, whereas it is the sole interest of the Finance Minister to balance the budget.
From the extensive discussion above, it is apparent that removal of a minister finance of any country, worse still in unclear circumstances can have a devastating effect on the economy. The Greek example is a case in point. And now the record-breaking South African saga is beyond belief.
By Sidney Kawimbe
The author is a lecturer in Finance and Financial Risk Management