The National Treasury will tap the Gold & Foreign Exchange Contingency Reserve Account (GFECRA) by drawing down R150bn to reduce borrowing costs, finance minister Enoch Godongwana said on Wednesday.
“We will draw down R150bn of the GFECRA balance once we have ensured that sufficient buffers are available to absorb exchange rate swings and the solvency of the Reserve Bank is not compromised,” Godongwana said as he delivered the last budget of the sixth administration.
Debt is the biggest threat to South Africa’s fiscal stability. The GFECRA contains the unrealised profits or losses incurred by the Bank on the country’s foreign exchange reserve holdings arising from changes in the value of the rand. Any net profit or loss in the GFECRA accrues to the government in terms of the South African Reserve Bank Act.
After many years of rand depreciation, the GFECRA now contains R506bn.
In most other countries, the central bank pays over some or all of the net profits earned as a result of valuation adjustments to their treasury once a year. In South Africa this hasn’t happened, as per an agreement between the Bank and the Treasury. The two have now agreed on an arrangement that would reduce government borrowing and bolster the Bank’s equity position.
Treasury director-general Duncan Pieterse told journalists there was no link between the drawdown and spending; instead, the money would be used by the Treasury to bring down debt service costs, which currently absorb 20% of government revenue. Pieterse said R250bn would be drawn from the account, with R150bn being used to service debt and R100bn going back to the Bank as a contingency to protect its solvency.
Godongwana submitted a bill amending legislation covering the account, the Gold & Foreign Exchange Contingency Reserve Account Account Adjustment Bill.
As predicted, it was a budget of austerity and prudence. “Our challenge … is that the size of the pie is not growing fast enough to meet our developmental needs. As such, our fiscal strategy supports economic growth and reduces risks to the economy while ensuring fiscal sustainability.”
That GFECRA funds will be used to reduce debt will be welcome news to the market — debt service costs in 2023/2024 increased by R15.7bn to R356bn. Servicing debt costs more than the state’s spending on social protection, health and peace and security, Godongwana said.
“A net reduction of R80.6bn in non-interest expenditure is being implemented over the medium term. At the same time, revenue has been revised up by R45.6bn over the medium term, relative to the 2023 MTBPS [medium-term budget policy statement]. And we have taken a decision to introduce a reform of the GFECRA,” Godongwana said.
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