Factors Affecting Cash Demand in South Africa

Physical cash remains a critical component of payment systems worldwide due to its accessibility, liquidity, anonymity, and role in promoting financial inclusion and resilience during systemic shocks. Despite rapid digitalisation, cash retains its relevance in economies such as South Africa, where it supports both formal and informal market activity. Understanding the determinants of cash demand is therefore essential for managing operational and policy risks faced by central banks. This study examines the factors influencing cash demand in South Africa and their implications for the South African Reserve Bank’s (SARB) currency management and risk mitigation strategies. Using a Vector Error Correction Model (VECM), Impulse Response Functions (IRFs), and advanced forecasting techniques, the analysis integrates key macroeconomic and technological variables, including GDP, interest rates, mobile penetration, ATMs, EFTs, and tax ratios. The study also benchmarks its results against international empirical evidence to contextualise South Africa’s evolving cash dynamics. The results highlight the significant impact of payment technology, especially mobile banking, on reducing cash usage. While ATMs and bank branches still support cash demand to some extent, the growing preference for digital transactions, notably through EFTs and mobile platforms, is reshaping financial behaviour. Macroeconomic variables like GDP and interest rates continue to influence demand, but their role is increasingly mediated by digital adoption. The forecasting analysis reveals that neural network models, particularly NNETAR, outperform traditional linear models (like VECM and Exponential Smoothing), especially over longer horizons. These models better capture non-linearities and evolve structural dynamics in cash usage. These insights hold material implications for SARB’s operational and financial risk frameworks. As cash demand becomes more unpredictable and technology-driven, adaptive forecasting and policy strategies are required to ensure efficient currency management and financial system stability.