Reserve Bank could ‘print money’ to plug South Africa’s budget gap – but it’s complicated

 ·24 Nov 2023

South African Reserve Bank governor Lesetja Kganyago provided some insights into discussions with National Treasury on how the latter could use the country’s Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to plug the budget gap.

The central bank oversees the GFECRA on behalf of the Treasury. The account contains unrealised profit or losses on the reserves that are incurred due to exchange-rate fluctuations and any gains or losses accrue to the government. 

In the early 2000s, Treasury paid more than R28 billion over four fiscal years to the central bank to defray a loss on the account.

There have been growing calls from economists, academics, civil society organizations and the Institute for Economic Justice, an economic think tank, for the Treasury to use the account to avoid budget cuts.

The move would have to be done in collaboration with the central bank, which has warned against it as contingency reserves are seen as a buffer for extreme currency shocks.

The central bank confirmed that it is in talks with the National Treasury to find a way to tap this contingency reserve to fund the country’s growing budget deficit.

“We are engaged with the Treasury,” Governor Lesetja Kganyago told reporters on Thursday after the monetary policy committee held rates steady.

“We have also bought in international expertise to engage on these matters,” including on how to deal with the capital position of the bank, he said.

The two institutions are ironing out how much the withdrawal could be, over what length of time and the cost involved for the central bank. The value of the reserves is currently R497 billion, Kganyago said.

He declined to name the outside advisers or say when a decision would be made. 

He did spell out that it was a complicated issue because the profit on the reserves is on paper, changing from month to month, and realizing it would mean selling part of the reserves and potentially unnerving investors. 

“The issue is not that simple,” he said.

Printing money

According to Kim Silberman, Economist and Macro Strategist at Matrix Fund Managers, the profits on gold and foreign exchange reserves can be utilised by National Treasury either by selling the reserves or by keeping the reserves and printing money.

“It’s not often that a central banker utters the words ‘printing money’ as a realistic option,” Silberman said.

“In the event that the SARB prints money equating to a portion of the profits of SA’s gold and foreign exchange reserves, this would need to be sterilised, or drained from circulation. This would mean the SARB would pay interest at the repo rate.”

The risk highlighted by the governor was that it would need to recoup that interest from National Treasury, which is already cash-strapped.

“Essentially, borrowing at the repo rate would be cheap funding for the Treasury, but it should be seen as additional debt, not a ‘magic pot of gold at the SARB’.”

With Bloomberg

Read: Relief for South Africa as Reserve Bank holds interest rates

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