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Bank guarantee scheme to bridge finance the economy

28 April 2020 Author :  

Many businesses have had cash flows substantially diminished because of the lockdown and wider economic disruption from Covid-19. These businesses, that would be viable were it not for Covid-19, require urgent funding to bridge them to the other side of the crisis. Failure to support them will lead to widespread business liquidations and staff layoffs and trigger wider distress in their supply chains. This will cause a permanent loss in output that will make the post Covid-19 recovery slower and reduce potential long-term GDP.

As part of their economic responses to the crisis, many countries have turned to their banking sectors as part of the solution. South Africa benefits from a well-developed financial system and efficient banking sector. Credit penetration accords with that of developed markets and banks already operate large commercial loan books. They are well positioned to manage the administration and vetting of a large scheme to extend bridging finance.

This paper advocates for the introduction of a guarantee scheme to effectively enable to banking sector to undertake largescale lending to bridge finance companies through the crisis. We propose that the scheme initially target lending volumes of R200bn, using a combination of funding from the SA Reserve Bank and a guarantee fund that accesses grants and concessionary funding. This approach is the least fiscally harmful mechanism for a guarantee scheme that we can determine. Strict conditions must apply to banks in using the mechanism to prevent any abuse or unintended consequences.

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