• SA Reserve Bank Governor Lesetja Kganyago says central banks contribute to growth by ensuring financial and price stability.
• Kganyago, during the Reserve Bank's annual general meeting, commented on a range of issues including its response to the Covid-19 pandemic.
• One of these responses - the loan-guarantee scheme - has seen an uptake of 26%, but small and medium businesses have been reluctant to take on more debt, says Kganyago.

Dealing with the poverty and the unemployment challenge requires "sustainably high" economic growth, according to SA Reserve Bank (SARB) Governor Lesetja Kganyago.

The governor was speaking during SARB's 101st annual general meeting, held online, on Friday. He fielded questions on various issues, including the bank's response to the Covid-19 pandemic.

These included a question on whether the bank could do more to help reduce levels of poverty in the country.

To this, Kganyago responded that the bank has a particular remit - which is to ensure price stability in the interest of balanced and sustainable growth.

"You can't deal with poverty outside of growth. Central banks do contribute to growth, by ensuring that there is financial and price stability," he said. Raising the potential growth rate of the economy, however, calls for structural reforms, he said.

"Those reforms are in the hands of government and its various departments," he said.

In ensuring price stability, the bank aims for low and stable inflation targeted between a range of 3% and 6%. South Africa's inflation spiked to a 30-month high of 5.2% in May. The Reserve Bank, in its annual report, indicated that inflation is not guaranteed to stay low, and risks such as low economic growth and rand depreciation remain. However, the bank expects inflation to remain around the midpoint of the target range until the end of 2023.

Maintaining price stability protects the purchasing power and living standards of South Africans and reduced uncertainty in the economy - providing an environment that enables "sustainable and balanced" economic growth and employment creation, according to the bank's annual report. It also supports trust in the value of the rand, creating a favourable environment that encourages investment and which would increase productivity.

Similarly, maintaining a stable and safe financial system provides a foundation for sustainable growth and development and employment creation, the report highlighted.

• READ | Interest rates unchanged, as Reserve Bank flags impact of unrest on recovery

In response to the Covid-19 pandemic, the bank implemented a number of measures - such as slashing the repo rate by 275 basis points between March 2020 and July 2020, to 3.5% - an all-time low. The prime rate of 7% is at a 54-year low.

The low rates have increased household demand for credit, according to the Reserve Bank. Data show that mortgage applications and grants are now at ten-year highs.

"Low short-term rates are also supporting corporates through this period of stress, while allowing government to fund spending via cheap short-term debt. Household debt also decreased for the first time since 2002," the report read.

Small business support

The Reserve Bank has partnered with National Treasury and the Banking Association of South Africa to establish the government loan-guarantee scheme. Since 19 June 2021, about R18.4 billion in loans, or 26% of the scheme, had been approved by banks to support small businesses affected by the pandemic and associated lockdown restrictions.

Kganyago noted the criticisms against the scheme. These include that lending requirements were stringent. "... the loan-guarantee scheme was a backstop for cases where the commercial banking sector was unable to provide credit relief to borrowers due to high credit risk," he said.

Kganyago added that small and medium enterprises have also been reluctant to take on more debt - given that the economic environment has been affected by "deteriorating confidence, a sluggish recovery and heightened economic uncertainty".

• READ | Loan guarantee scheme demand falls despite enduring lockdown

Deputy Reserve Bank Governor Kuben Naidoo highlighted that the bank had a "facilitating role" in the development of the scheme and that National Treasury and commercial banks took on the financial risk.

"[Commercial] banks did support their clients through loans, rescheduled loans and payment holidays. This was largely done on their own balance sheet. The risk sharing arrangement in the loan guarantee scheme was one where the banks took on the first loss- up to 8.5% on the total amounts lent - beyond this Treasury would stand guarantee for the loan," said Naidoo.

"In our view, the scheme has played a positive role. We would have liked to have played a bigger role. But it has certainly played a positive role, taken in combination with what else the banks have done to support their customers," he added.

Naidoo said that the financial sector had played a positive role in mitigating the impact of the crisis, unlike in previous crisis - where the financial sector actually contributed to the downturn.

Source: News24