Godongwana’s R150 billion dip into forex reserves – what it means for South Africa
At the 2024 budget speech, Finance Minister Enoch Godongwana announced that the country would tap into R150 billion worth of the country’s gold and forex reserves over the next three years, but questions remain about what exactly this means.
While some experts applauded the decision as a means to limit government borrowing, they also urged caution, saying that the money needs to be protected and contained at all costs – because higher expenditure risks draining the much-needed funds.
What is the account?
South African Reserve Bank (SARB) holds the majority of its assets in the Gold and Foreign Exchange Contingency Reserve Account (GFECRA). The pool of funds sits at R507.3 billion as of last January 2024.
Chief economist at Investec, Annabel Bishop, noted that the money sits unused at the SARB and essentially ‘belongs’ to the National Treasury.
When the rand exchange rate against the US dollar and other reserve currencies strengthens, the account balance declines, and the National Treasury will be responsible for replenishing the GFECRA, said Bishop.
As such, it has been “eyed by some political factions calling for the nationalisation” of the reserve bank – as by international comparative standards, the profits of the GFECRA account are very large.
South Africa’s debt problems
South Africa currently has R5.1 trillion in gross loan debt, projected to rise to R6.2 trillion in 2026/27.
The yield on South Africa’s ten-year government bond has risen above 11%, with other bonds increasingly expensive to borrow.
As a result, a large part of the government’s spending is dedicated to paying off debts.
“South Africa’s budget deficit – the mismatch between tax revenue and government spending – last year was -4.7% of GDP. Excluding servicing cost – ie, the primary balance – the deficit is eroded to 0% of GDP, showing how high debt servicing costs are,” said Bishop.
“These figures would be higher without the planned drawdown of R150 billion of South Africa’s GFECRA,” she added.
What will the money be spent on?
Bishop said concerns about the large withdrawal centre around what the funds will ultimately be used for.
Some expect it to be spent on current expenditures such as higher public sector wages, as well as pressures to expand social grants, which has gained focus amongst the ANC election promises.
Others hope that it will be used to pay off debt.
Bishop said that using the funds to pay off debt is the most likely avenue – but even this comes with the caveat that it is only a temporary measure in a weak economy.
Debt is likely just to creep up again if tax revenues undershoot and the GFECRA cannot be quickly replenished.
Despite this, temporarily using some of the funding to service debt could have positive outcomes.
Using a portion of valuation gains in the GFECRA could see projected debt-service costs decline by R30.2 billion over the 2024 Medium Term Expenditure Framework period, said Bishop.
She explained that another positive outcome would reduce political pressure for the nationalisation of the Reserve Bank – which has been a highly controversial proposal in the past.
The ideal would be for South Africa to eventually have strong economic growth and lift revenues naturally and eventually eliminate the budget deficit, Bishop said, “so the GFECRA would not be needed to be used.”
However, this is not the case.
“At close to 8% of GDP, the GFECRA needs to be protected, even if this means a transfer to National Treasury; expenditure should be contained, and this is a weakness in the budget – the GFECRA funds transfer risks being eaten up by higher expenditure,” Bishop said.
Read: Godongwana grabs R150 billion from South Africa’s forex reserves
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