South Africa may have to crack open the vault

 ·15 Feb 2024

South Africa desperately needs money and may turn to the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to offset its fiscal deficit.

In its South Africa Outlook report for 2024, Standard Chartered’s chief Economist for Africa, Razia Khan, said that the government’s fiscal deficit is expected to reach 4.9% (4.2% previously) in the 2024 financial year (FY24) and reach 4.2% (4.0% previously) in FY25.

Khan said that there has been a slower consolidation path than previously outlined, with lower-than-expected mining revenue, the effect of an earlier public-sector wage agreement, and higher debt service costs largely defining the widening in FY24.

Despite being an election year, the government has pledged to contain spending by cutting expenditure by R85 billion in the medium term as it reconfigures the function of the state.

However, Khan said there is little room for spending cuts, with concerns over government service delivery – or the lack thereof – intensifying.

Primary fiscal surpluses are scheduled over the medium term to stabilise debt levels. National Treasury said that the failure to front-load fiscal consolidation would require an even larger primary fiscal surplus in the future.

Near-term fiscal concerns could be mitigated by consultation between the South African Reserve Bank (SARB) and National Treasury on the use of GFECRA to offset the fiscal deficit.

“The SARB’s GFECRA is currently treated as a contingent asset of the state, and the value of its unrealised gains helps to reduce net debt levels,” Khan said.

“Hedge funds and civil society economists have argued that South Africa does not need excessive reserves and could use at least a proportion of GFECRA gains either to reduce debt or as revenue (this would involve selling the underlying asset in order to realise notional gains).”

“The SARB argues that R100 billion of the current R497 billion in the GFECRA tends to be impacted by market volatility and running down the country’s reserve buffers at a time of heightened uncertainty may not be the best strategy.”

Nevertheless, as SOE bailouts are rising and there needs to be further investment in infrastructure to boost growth, the debate on partial use of the GFECRA is expected to gather pace.

Speaking to Business Day, National Treasury said that there would be an announcement on the GFECRA in next week’s budget. 

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