Treasury earmarks contingency reserves for servicing SA’S debt
The Reserve Bank has agreed to release R150bn to the fiscus from funds in the Gold and Foreign Exchange Contingency Reserve Account. But this money pot is not for general consumption measures. By Ray Mahlaka
To avoid a debt blow-out and reverse planned departmental budget cuts, the National Treasury plans to withdraw some of the accumulated funds in the Gold and Foreign Exchange Contingency Reserve Account, which is held by the South African Reserve Bank (SARB).
These funds reflect the losses and profits caused by currency and gold price movements, the latter set in dollars. They are meant to offer a buffer and protection to South Africa against local and external economic shocks.
The funds in the account are worth R506-billion and have grown from R28-billion in 2003. When the rand exchange rate against the US dollar and other currencies strengthens, the value of the funds declines. Conversely, when the rand depreciates, the balance improves.
Because the local currency has weakened significantly against other currencies and the gold price has appreciated, the funds in the account have grown, especially over the past decade.
Other countries have a similar contingency reserve mechanism and the gains are paid from central banks to the fiscus from time to time.
Of the R506-billion, the Treasury plans to draw down about R150-billion directly over the next three years. It will receive distributions of R100-billion in 2024/25, R25-billion in 2025/26 and R25-billion in 2026/27 from the SARB.
An additional R100-billion will be set aside to absorb exchange rate swings, cover costs associated with the transfer and protect the solvency of the SARB. The failure to set aside this money would create an obligation for the Treasury to cover exchange rate losses and result in adverse conditions such as inflation and interest rate pressures.
The accumulated funds are “not free money as there are costs associated” with realising
them, Treasury director-general Duncan Pieterse said during a pre-budget briefing on 21 February.
That the Treasury would take advantage of the funds was broadly expected as the money, though held by the SARB, is seen as part of broader public funds. The process to monetise them will be formalised by legislation tabled in Parliament.
Reducing debt levels
Pieterse said the drawdown from the Gold and Foreign Exchange Contingency Reserve Account will go towards reducing the government’s borrowing costs and not consumption measures such as paying public servant salaries or funding service delivery programmes.
The government’s debt and related costs – such as interest rates – are smothering because they divert funding from crucial service delivery programmes and initiatives to grow the economy and encourage investments in the country. Gross debt has grown from R1.58-trillion in 2013/14 to R5.21-trillion in 2023/24, and it is set to exceed R6-trillion by 2026.
The government’s gross loan debt is at its highest since 1947. However, most of the debt is in local currency, which helps South Africa to avoid a total debt blow-out.
Debt service costs (mainly interest) are set to rise from R356.1-billion in 2023/24 to R440.2-billion in 2026/27. In 2023/24, for the first time since 2000/01, debt service costs absorbed more than 20 cents of every rand collected in revenue.
Pieterse said monetising or realising the funds from the Gold and Foreign Exchange Contingency Reserve Account will result in debt service costs being reduced by R50-billion over the next three years.
If monetising these funds was not an option, he said, the Treasury would have had no option but to raise money or debt by issuing more government bonds at a time when interest rates are high. This would worsen the government’s debt servicing costs.
The Treasury is also finding it difficult to attract lenders that will lend it money with a long-term repayment profile because of the noise around the fiscal crisis, which is making South Africa look like it is at increased risk of defaulting on debt repayments.
Funding other government initiatives
Reducing debt service costs will give the government space to fund other initiatives from its existing funding framework and limit its borrowing just to pay interest on existing debt.
For example, about R58-billion of the spending reductions that were announced in the 2023 Medium-term Budget Policy Statement have been reversed as the government has increased spending for most state departments.
However, most of the additional spending will be allocated to funding the pay of public servants such as teachers, nurses, doctors and the police.
An amount of R251.3-billion has been added to functions such as health, education, peace and security, and social development. This has largely been allocated to funding pay increases for public servants over the next three years.
Set at R754.2-billion in 2024/25, the cost of paying public servants is the single-largest component of government expenditure. It gobbles up 30% of the total expenditure of R2.4-trillion in 2024/25, crowding out spending on capital projects for future growth as well as items that are crucial for service delivery.
The Treasury is also taking a new approach towards containing the cost of paying public servants. For example, it is increasingly asking provincial government departments to accommodate pay increases from their existing budgets, rather than allocating new money to them for
remuneration costs.
Monetising the funds from the account will result in debt service costs being reduced by R50-billion over the
next three years