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Finance minister Enoch Godongwana was widely expected to announce in his Budget 2024 speech that the country will dip into its gold and forex reserves, but the experts warns that government must remember that this is not free money and must be used wisely and responsibly.
The minister said government decided to introduce a reform of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA), an account held at the Reserve Bank that captures gains and losses on the country’s foreign currency reserve transactions.
“Simply put: if the Rand strengthens against the US Dollar and other reserve currencies, the account balance declines and vice versa. The account balance has grown to over R500 billion over the years because the Rand has depreciated over time. A new settlement arrangement is being introduced that will reduce government borrowing and improve the Reserve Bank’s equity position,” he said.
“We will draw down R150 billion 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.”
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Wayne Duvenage, CEO of Outa, says cabinet’s decision to raid R150 billion of surplus “paper profits” within the GFECRA may provide some breathing space, but warns that this is not a sustainable strategy but rather a clear sign of a desperate finance minister looking into every corner for funds to stop the bleeding.
“The GFECRA Defrayal Adjustment Bill shows that the R150 billion (of the R500 billion in the fund) will be drawn down over three years. The bill does not limit the drawdowns to those three years but permits drawdowns ‘in any financial year following the 2024/25 financial year’.
“This money is not being used to pay for infrastructure or to pay off debt, but rather to reduce the amount of borrowing needed. The bill gives broad terms for the use of the funds for the contingency reserve, through the National Treasury vote. This is not ideal.”
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Maarten Ackerman, chief economist at Citadel, says dipping into our gold and forex reserves is a once-off solution that will free up more money to slow down the need to keep on borrowing more.
“We expected a GFECRA reform and are relieved to see that it is not being used for short-term expenditures, but rather on bringing down government debt. The market is also relieved to see that the government is prudent by only tapping into part of these reserves.
“However, I would caution that this is not free money. I also do not think it will make as big a difference to our fiscal situation longer-term as the government wants us to believe. It is a bit like losing weight from a once-off occurrence like getting sick, not from taking on a healthier lifestyle.”
Godongwana announced that a net reduction of R80.6 billion in non-interest expenditure was being implemented over the medium term, which usually means three to five years. At the same time, revenue has been revised up by R45.6 billion over the medium-term, relative to 2023 Medium Term Budget Policy Statement, he says.
“The GFECRA reforms, combined with various spending increases for climate change mitigation, policing, healthcare, teachers’ salaries and more, has brought the national government gross borrowing requirement down from R457.7 billion in 2024/25 to R428.5 billion in 2026/27.”
Godongwana said the deficit will begin to improve from 2024/2025 to an estimated 4.5% of gross domestic product (GDP), reaching 3.3% by 2026/2027 while debt will peak at 75.3% of GDP in 2025/2026.
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Joon Chong, partner at Webber Wentzel says the proposed amendments to the GFECRA and the R2 billion grant for smart prepaid meters showcase the government’s willingness to leverage innovative financial instruments and technology to address infrastructural challenges.
“However, the legality and effectiveness of these measures will depend on their meticulous design and implementation, adhering to strict legal frameworks and ensuring accountability.”
North-West University Business School economist Prof Raymond Parsons warns that if South Africa is now to draw down from the GFECRA, the proceeds must be used wisely and responsibly.
“Inevitably, unless there are strong guardrails and safeguards to guarantee better control of a vulnerable fiscal situation, a number of negative consequences will emerge on both the external and internal fronts that would be very economically damaging to South Africa.”
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Busi Mavuso, CEO of Business Leadership South Africa (BLSA), says reforming GFECRA was another weapon in Godongwana’s arsenal to control debt.
“While it is concerning that government has to resort to this to relieve pressure on its finances, it was important that it be done with strict and credible conditions that make clear that the function of foreign reserves is to protect the country from international crises and maintain its credibility in the international financial system.”
She also warned that government must not regard it as a free money pot for government bailouts.
Elna Moolman, head of South African macroeconomic research at Standard Bank South Africa, says government decided to make a larger, immediate withdrawal from the GFECRA than generally expected.
“This is reducing government’s borrowing requirement and therefore its debt burden. However, it was disappointing that only guiding principles on how the funds will be used were provided in the Budget, with only an undertaking that it will eventually be ‘formalised through legislation’.
“The guiding principles in the Budget are pragmatic, but we would have preferred the GFECRA only being used once its use is legislated, to ensure that future use will remain prudent.”
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Jurgen Eckmann, wealth manager at Consult by Momentum says while the Budget Speech was thin on detail, the announcement of the GFECRA Adjustment Bill is potentially another double-edged sword.
“Not only are we tapping into money that is generated as a direct result of our rand depreciating, but we are also spending this money to make ends meet, not to invest in the growth of our economy. It can be likened to dipping into your retirement savings to pay for a holiday before you retire. Helpful in the short term but with severe long-term implications.”
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