Treasury to tap into foreign exchange account to reduce debt service costs

Acombination of high debt servicing costs and a higher budget deficit has led to the introduction of a new reform of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA).

The reform is aimed at mitigating fiscal risks by reducing government borrowing in the medium-term and will allow government to draw down from its GFECRA held at the Reserve Bank.

This was announced by Finance Minister Enoch Godongwana during the tabling of the 2024 Budget Speech held in Cape Town in February.

The GFECRA is a Reserve Bank held account which captures gains and losses on South Africa’s foreign currency reserve transactions and the account has grown to more than R500 billion.

“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,” he said.

The draw down is expected to result in a decline of some R30.2 billion in government debt servicing costs over the 2024 Medium Term Expenditure Framework (MTEF).

Godongwana explained that national government debt is expected to peak at some 75.3% of the Gross Domestic Product (GDP) in 2025/26 with 2023/24’s budget deficit estimated to worsen to 4.9 % of GDP.

Debt-service costs in 2023/24 have been revised higher, by R15.7 billion to R356 billion.

The Minister said this will require that government stick to its fiscal goals with cuts in expenditure reaching more than R80 billion.

“Debt-service costs will absorb more than 20 % of revenue. To put this into perspective, spending on debt-service costs is greater than the respective budgets of social protection, health, or peace and security.

“A net reduction of R80.6 billion in non-interest expenditure is being implemented over the medium-term. At the same time, revenue has been revised up by R45.6 billion over the mediumterm, relative to [the] 2023 MTBPS [Medium Term Budget Policy Statement]. [This is why] we have taken the decision to introduce a reform…GFECRA,” he said.