SA’s gold and forex reserves not free money – economist

Finance Minister Enoch Godongwana was widely expected to announce in his Budget 2024 speech that the country will dip into its gold and forex reserves, but experts warn that government must remember this is not free money and must be used wisely and responsibly.

The minister said government had decided to introduce a reform of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA), an account held at the Reserve Bank which captures gains and losses on the country’s foreign currency reserve transactions.

“Simply put: if the rand strengthens against the US dollar and other reserve currencies, the account balance declines, and vice versa,” Godongwana said. “The account balance has grown to over R500 billion over the years because the rand has depreciated over time.

“A new settlement arrangement is being introduced that will reduce government borrowing and improve the Reserve Bank’s equity position.

“We will draw down R150 billion of the GFECRA balance once we have ensured that sufficient buffers are available to absorb exchange rate swings and the solvency of the Reserve Bank is not compromised.”

Wayne Duvenage, chief executive of the Organisation Undoing Tax Abuse (Outa), says Cabinet’s decision to raid R150 billion of surplus “paper profits” within the GFECRA may provide some breathing space.

He warns this is not a sustainable strategy but rather a clear sign of a desperate finance minister looking into every corner for funds to stop the bleeding.

“The GFECRA Defrayal Adjustment Bill shows the R150 billion [of the R500 billion in the fund] will be drawn down over three years,” says Duvenage.

“The Bill does not limit the drawdowns to those three years but permits drawdowns ‘in any financial year following the 2024-25 financial year’.

“This money is not being used to pay for infrastructure or to pay off debt, but rather to reduce the amount of borrowing needed.

“The Bill gives broad terms for the use of the funds for the contingency reserve, through the National Treasury vote. This is not ideal.”

Maarten Ackerman, chief economist at Citadel, says this once-off solution will free up more money to slow down the need to keep on borrowing more.

“We expected a GFECRA reform and are relieved to see it is not being used for short-term expenditures, but rather on bringing down government debt.

“The market is also relieved to see the government is prudent by only tapping into part of these reserves. “However, I would caution that this is not free money.

“I also do not think it will make as big a difference to our fiscal situation longer-term as the government wants us to believe. It is a bit like losing weight from a once-off occurrence like getting sick, not from taking on a healthier lifestyle.”

Godongwana announced a net reduction of R80.6 billion in noninterest expenditure was being implemented over the medium term, which usually means three to five years.

At the same time, revenue has been revised up by R45.6 billion over the medium term, relative to 2023 medium-term budget policy statement, he says.

“The GFECRA reforms, combined with various spending increases for climate change mitigation, policing, health care, teachers’ salaries and more, has brought government gross borrowing requirement down from R457.7 billion in 2024-25 to R428.5 billion in 2026-27.”

Godongwana said the deficit will begin to improve from 2024-25 to an estimated 4.5% of gross domestic product (GDP), reaching 3.3% by 2026-27, while debt will peak at 75.3% of GDP in 2025-26.

This money is not being used to pay for infrastructure