Answer to Question #130395 in Macroeconomics for Mcedisi

Question

During this COVID‐19 pandemic, the South African Reserve Bank (SARB) plays a crucial role in maintaining financial stability.

Describe the roles that the SARB can play to ensure the objective of financial stability is met.

Answer 1

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The COVID-19 pandemic has spread globally, with wide-ranging and deep social and economic effects. The South Africa Reserve Bank has a major role to play in managing the financial stability of the country. This can be a achieved through the following considerations;

• Avail additional liquidity to the banking sector-Since the economy has slowed down due to the pandemic, the banking sector should be assigned with additional finances to ensure a smooth functional of the financial markets.This can be achieved through the SARB increasing the size of the repo facilities and also by purchasing the government bonds.

• Financial stability can also be achieved through reducing the repo rate( rate at which the South African Reserve Bank lends money to commercial banks in the event of any shortfall of funds, to control inflation). The SARB rate was 6.5%, which has now been revised to 3.75% which is a measure to cushion the economy against the financial stress. The reduced repo rate will make it easier for borrowers to meet their financial obligations.

•  Implement a loan guarantee scheme for small and medium-sized enterprises. Since the SMES play a major role in contributing to the GDP, they should be facilitated with funds to be used for operational expenses such as salaries, rent and lease agreements, and contracts with suppliers.

• Setup regulatory relief measures and guidance to banks in managing the crisis. This can be achieved through bodies like the Prudential Authority supporting banks in responding to the needs of their customers. This support can take the form of regulatory relief measures and guidance to banks in managing the crisis. The relief measures include capital relief on restructured loans that were in good standing before the COVID-19 crisis, a lower liquidity coverage ratio and lower capital requirements.