Warning over South Africa’s R500 billion ‘money pot’

 ·19 Feb 2024

Economists and business leaders are urging caution if the National Treasury intends to tap South Africa’s foreign exchange reserves to boost the country’s finances, saying that if it’s done, it needs to be done right.

As the 2024 Budget Speech draws closer, there is increased speculation that Finance Minister Enoch Godongwana may turn to the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to plug South Africa’s growing budget deficit.

The R500 billion reserve, managed by the South African Reserve Bank (SARB), is made up of gold and foreign exchange reserves and kept as a contingency tool to ensure stability in financial markets or meet any unexpected economic challenges.

However, while economists have been pointing to the reserve since mid-2023 as a possible means to ease the budget deficit, this comes with the important warning that it needs to be used to address South Africa’s growing debt – and not to fund more government spending.

According to Business Leadership South Africa (BLSA) chief executive Busi Mavuso, if the National Treasury uses the reserve, it must come with strict conditions.

“It is not a free money pot for government bailouts,” she said.

“If (the reserve is used) it must be with strict and credible conditions that make clear that the function of foreign reserves is to protect the country from international crises and maintain its credibility in the international financial system.”

This was also emphasised by Standard Chartered’s chief Economist for Africa, Razia Khan, who said that use of the fund should go towards paying off debt.

Speaking to BusinessLive, Absa senior economist Peter Worthington, shared similar sentiments, saying that if the reserve is used, the market will likely only see it as a net positive if the fund is tapped “conservatively” and does not leave the SARB in a more volatile position in the long run.

It will also only be positive if the proceeds are used to replace expensive borrowing – and not boost government spending, which is already too high, he said.

South Africa’s fiscal deficit is expected to reach 4.9% in the 2024 financial year (from previous projections of 4.2%) and is only anticipated reach 4.2% (4.0% previously) in FY25.

The key drivers behind the poor outlook for the deficit boil down to the fact that the country is simply not bringing in enough revenue – with tax collections expected to fall short by close to R100 billion versus 2023 projections (R40 billion from MTBPS projections) – while government spending expands.

With 2024 being an election year, there are doubts that Godongwana can effectively rein in government spending, hence the focus on contingency plans, including the use of the GFECRA.

Godongwana will present the 2024 budget on Wednesday (21 February).

Read: Godongwana can’t save the day for South Africa: expert

Show comments
Subscribe to our daily newsletter