SOUTH AFRICA’S RESERVE BANK AS WE KNOW IT

By Sylvester Raraza

Email: sylvesterraraza@gmail.com

Twitter: @Sylvester_tut



SARB building in Pretoria | Image: Moneyweb

World War I caused global financial uncertainty, monetary conditions that were crippling world economies and it shrunk domestic and international wealth. These are consequences of wars. To try and cushion South Africa from the effects of World War I, the Colonial rulers of South Africa (Great Britain) at the time founded the central bank in 1921.

20th century South Africa’s financial system comprised of banknotes that commercial banks issued to members of the public along with gold to back the notes up. South Africa has always been a minerals rich country, so when the price of gold in the United Kingdom climbed, revenue could be made by people who had capital by converting banknotes into gold in the country and sell the gold in London.

But doing this meant that commercial banks in South Africa had to purchase gold for re-import at an even steeper prices from London, than the price initially set when they converted their bank notes to gold, and consequently, those trading in banknotes for gold were operating at a loss. This system prompted commercial banks to request that government release them from the obligation of converting banknotes into gold on demand.

South Africa, through the central bank, introduced the rand currency on the 14th of February 1961, and the country’s rulers during this time (Prime Minister Hendrik Verwoerd and the National Party leadership) were preparing South Africa’s departure from the Commonwealth nations to become a republic. Around this time, South Africa was at the height of a separatist government of Apartheid.

The mid-1980s saw continued resistance against Apartheid South Africa within the country and internationally, this forced the government to introduce exchange controls in response to crippling capital outflows which came from debt default and economic sanctions imposed by countries opposed to Apartheid, trading partners and prominent business entities.

The exchange control system that was set up was implemented through a rand dual system, which meant setting one exchange rate for current account payments for residents and another rate for capital accounts payments for non-residents. As a result of this type of exchange control system by the central bank, foreign investments in South Africa could only be sold for financial rand, causing a hindrance to outflow of money from the country. But the dual rand system was scrapped in 1995.

The South African Reserve Bank’s litmus test since our democratic dispensation, came in 2008 during the global financial crises. Economies around the world suffered heavy financial losses, resulting in job losses, debt and people’s houses being repossessed. SARB responded to this global crisis by cutting the repurchase rate by an astounding 650 basis points between November 2008 to November 2010, in an effort to protect locals from economic hardships of the time. The 2008 crises led to the central bank’s razor sharp focus on financial stability objectives.

The South African Reserve Bank again stepped up to the party, amidst the 2020 Covid-19 pandemic and the subsequent global financial stress, cushioning the country’s financial and inflation stability by cutting the repurchase rate by 225 basis points in the first four months of the year. To ensure the smooth functioning of the financial system, the central bank of South Africa further introduced prudent liquidity measures to protect our economy and the citizenry.

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