Government should tap R497 billion forex reserves – Izak Odendaal

The government should withdraw around R100 billion from the Reserve Bank’s R497 billion gold and forex reserves to pay down long-term debt and reduce its debt-servicing costs. 

This is the view of Old Mutual Wealth investment strategist Izak Odendaal, who outlined the government’s precarious financial position and advocated for responsible withdrawal from the forex reserves. 

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 future 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 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.

Odendaal said it is a regular practice in other parts of the world to transfer gains from gold and forex accounts held by the central bank to the government. 

“In a nutshell, it would be beneficial to realise some of the gains – perhaps around R100 billion – but there are complexities,” he said. 

The reserves could be used to pay down long-term debt, which would, in turn, reduce the government’s interest burden. 

This would free up additional spending on more productive budget items and potentially stimulate economic growth if done well. 

Using the reserves to plug a short-term deficit would not be beneficial as all that would do is temporarily patch over the government’s spending and not solve any long-term fiscal problems. 

Withdrawing funds from the reserves would involve selling down forex reserves, and by the IMF’s estimates, South Africa’s forex reserves are already on the low side. 

Odendaal called on the National Treasury to be clear about the amount withdrawn, how it would be withdrawn, and maintain the Reserve Bank’s operational independence. 

“Communication will have to be key, reiterating that the Reserve Bank’s operational independence remains intact, transfers will be done transparently, in a rules-based manner and that the proceeds will be used for a specific goal, such as paying off debt.”

He also cautioned that while it can help lower the debt burden, it is not a silver bullet. The only real long-term solution to the country’s deteriorating financial health is to cut government spending and grow the economy. 


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