At the start of June, the South African Reserve Bank (SARB) commenced its 12‑week transition to a new monetary policy implementation framework.
The amendments to the framework are largely technical in nature and are set to change how monetary policy is implemented in South Africa, say legal experts at Werkmsnas.
Historically, the SARB implemented the shortage or classical cash reserve system for implementing monetary policy – known as the ‘scarce-reserves framework’.
This ensured that there was a shortage of cash reserves in the market and that a limited amount of cash reserves were available to commercial banks.
Commercial banks were thus required to source additional cash reserves from the SARB at the repurchase (repo) rate and which in turn ensured that the interest rate on such cash reserves was equal to the policy rate.
“We understand that the scarce-reserve framework worked relatively well in South Africa up until the director-general of the World Health Organisation characterised Covid-19 as a pandemic on 11 March 2020 and South Africa declared the outbreak of Covid-19 in South Africa a national disaster,” Werksmans said.
“During the pandemic, the SARB implemented measures to relieve the liquidity squeeze that the Pandemic placed on commercial banks and noted in the latter half of 2020 that liquidity in the market had largely normalised, save in relation to the money-markets, where the liquidity shortage was consistently smaller than it was before the start of the pandemic.”
On investigation, the SARB determined that South Africa’s structural liquidity surplus had built up over time resulting in the scarce-reserve framework being ‘difficult and costly to operate’ and that the ‘tiered-floor’ system would be a better and more cost-efficient, monetary policy implementation framework for South Africa.
What is the tiered-floor system?
Under the tiered-floor system, the SARB will provide a surplus of cash reserves to satisfy commercial banks’ demand for cash reserves and will place quotas on all commercial banks:
- Limiting the amount of cash reserves that they’re able to deposit with the SARB and earn interest (at the repo rate) on;
- Preventing the hoarding of cash reserves.
“By introducing quotas to the tiered-floor system, the SARB hopes to encourage commercial banks to lend some of their excess cash reserves to other commercial banks thereby alleviating the pressure on the SARB as sole liquidity provider.”
Whilst South Africa is the first emerging market to adopt the tiered-floor framework, the system is not a new concept, and has been successfully implemented in several first-world countries, such as New Zealand and Norway, Werkmsans said. It added that the system has proven to have been effective at stabilising commercial banks’ demands for cash reserves.
“The SARB expects that the implementation of the tiered-floor S-system (with quotas) will ‘provide the SARB with a resilient and efficient framework for implementing monetary policy in South Africa’, and encourage commercial banks to deposit cash reserves with the SARB, as opposed to requiring the SARB to provide liquidity to commercial banks.”
- Commentary by Natalie Scott (director) and Kyra South (senior associate) at Werksmans.