How South Africa’s R500 billion ‘waterfall’ fund will work
National Treasury has outlined the changes it wants to make to the Gold and Foreign Contingency Reserve Account (GFECRA) through the GFECRA Defrayal Amendment Bill – which will not only allow it to tap into the fund now and in the future, but also change the entire framework of the reserve going forward.
As announced in the 2024 budget, National Treasury will tap into the South African Reserve Bank’s GFECRA to access R150 billion in funding. The fund is currently valued at around R500 billion, with the effective “withdrawal” from the fund being R250 billion, where R100 billion will be pumped back in as a contingency fund.
To initiate this whole process, the finance department aims to introduce new laws that will change the entire structure of the reserve, effectively splitting it into three pools of funds – one of which will be accessible by the Treasury.
Briefing the Standing Committee on Appropriations, Treasury said that this ‘waterfall’ structure would ensure that the Reserve Bank always have a buffer to protect it from any shocks in the market; there will be adequate contingencies so the central bank won’t have to worry about funding; and any ‘excess’ can be fed to National Treasury, where it is owed.
“Under the old GFECRA settlement framework, most amounts that entered GFECRA went unsettled, and so the account grew steadily larger as a result of currency depreciation,” said Treasury.
“Under the new framework, by contrast, GFECRA balances are distributed, in a ‘waterfall’ arrangement, to three ‘pools’,” it said.
Treasury explained that the three pools would function as follows:
Pool 1 – R250 billion
The first pool is labelled as the ‘GFECRA buffer’ and is being set at R250 billion.
This is a backup fund that plans to absorb any substantial rand appreciation shocks without causing negative balances.
“By minimising risks that the GFECRA account turns negative, this buffer will help protect NT from having to be paid out to the account to make it positive again,” said Treasury.
Pool 2 – R100 billion
Once the first pool is sufficiently filled, any additional funds will be directed towards the second pool, which is the contingency reserve buffer managed by SARB.
This buffer/second pool will receive R100 billion “to protect the SARB’s policy solvency, defined as the flexibility to pursue mandates without concern for the financial position,” said Treasury.
Treasury said that it would be replenished from excess GFECRA balances when available and is meant to be large enough to last through extended periods when these top-up funds from GFECRA are not available.
Pool 3 – R150 billion
Announced in the 2024 budget, the National Treasury will receive R150 billion that will be used to reduce the government’s borrowing.
R100 billion will be utilised in 2024/25, R25 billion in 2025/26 and R25 billion in 2026/27.
“As a result, debt service costs will reduce by R30.2 billion over the medium-term, which is accompanied by a reduction in the growth in the stock of debt,” said Treasury.
Liquidity management costs of these payouts are expected to be around R8 billion in 2024, R10 billion in 2025 and R12 billion in 2026.
What guides this new framework?
According to the National Treasury, under the proposed framework, there are several key restrictions:
- The GFECRA balance settlement cannot affect the solvency of the SARB;
- No sale of foreign exchange reserves can be made to realize GFECRA gains if the reserves are below the estimated adequacy levels;
- Settlement of unrealized balances on the GFECRA that could be reversed by future currency reversals is prohibited;
- The credit balance settlement on the GFECRA will be used to reduce government borrowing;
- Future GFECRA fund settlements will be governed by an agreement and a relevant schedule.
Read: Godongwana’s R150 billion dip into forex reserves – what it means for South Africa