Tapping R500 billion forex reserves will only delay fiscal cliff

If the National Treasury dips into the Reserve Bank’s R497 billion gold and forex reserves, it will only delay South Africa hitting a fiscal cliff as government spending continues to outstrip revenue. 

This is feedback from Standard Bank’s head of South African economic research, Elna Moolman, who said there is no silver bullet for the country’s fiscal woes. 

National Treasury has previously said it plans on withdrawing as much as half of the contingency reserves to help reduce the government’s debt load or fund public-sector wages.

The two institutions have been in talks with development finance agencies about establishing best practices and ensuring sufficient buffers remain in place to guard against potential exogenous shocks.

The Reserve Bank oversees the Gold & Foreign Exchange Contingency Reserve Account (GFECRA) on behalf of the Treasury.

The account contains unrealised profit or losses on the reserves that are incurred due to exchange-rate fluctuations. Any gains or losses accrue to the government. 

Details of the withdrawal are expected to be finalised in the Budget Speech this week.

The withdrawal is being considered as South Africa prepares for elections and when public finances are under significant strain.

The government is collecting less revenue because an energy shortage and logistics constraints are curtailing mining and other companies’ profitability. 

At the same time, the state is facing rising debt-service costs and a growing civil-servant wage bill.

Moolman said Standard Bank expects the budget deficit to deepen less than economists think, although the deficit will still worsen the state’s financial health. 

The government may initiate a gradual drawdown of the gold and forex reserves to reduce the state’s debt burden. 

However, limited resources present no long-term fix for the country’s deteriorating finances. 

“Without the spending discipline and growth-lifting reforms that we assume are underway, employing the GFECRA would merely be delaying a fiscal cliff,” Moolman said. 

Moolman urged the National Treasury and the Reserve Bank to ensure strict rules define the size of the withdrawal from the account and the use of the funds. 

Heading for a fiscal cliff

Citadel chief economist, Maarten Ackerman

National Treasury expects the government to have a R330 billion deficit at the end of the current financial year. 

This was revealed by the National Treasury when it released data outlining the government’s revenue, spending, and borrowing for December 2023. 

For the year-to-date, the government has already overspent its income by R292.58 billion, leading it to estimate a full-year budget deficit of just over R330 billion. 

The government will have to issue more debt and add to its already unsustainable debt pile to finance this deficit. 

Some economists are concerned that South Africa will soon enter a debt spiral as the government has already begun to issue new debt to pay off existing debt. 

However, Citadel chief economist Maarten Ackerman said South Africa has not yet entered a debt spiral, but avoiding it will require making tough choices. 

Ackerman said a country typically enters a debt spiral when its debt-to-GDP ratio reaches 90%. South Africa’s currently sits at 77%. 

He was still deeply concerned about the announcement that the government’s debt as a percentage of the size of the economy is expected to increase to 77%. 

A study by the World Bank shows that countries whose debt exceeds 77% as a percentage of GDP for prolonged periods experience significant slowdowns in economic growth.

Ackerman said this is something the country cannot afford, given its already stagnant economy. 

“The budget has two sides, revenue and expenses, and we know that in the current situation, we are faced with a concerning budget deficit because the government is spending too much,” Ackerman said. 

“Given local structural issues and external factors like the commodities cycle and South Africa not getting the tax revenue we hoped for, the right message would have been austerity and cutting back.”

“Some of this has been mentioned, but unfortunately, the current government has not demonstrated that they can cut back on expenses – especially not ahead of the upcoming elections.” 

Ackerman said the government needed to focus more sharply on growing the economy faster, which would have allowed them to collect more taxes and could have provided the revenue needed to fix the budget shortfall.


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