Concerns surround Godongwana’s R150 billion forex reserves lifeline

The government’s withdrawal of R150 billion from the gold and forex reserves account without formalising how it will be used is concerning as it opens the funds up to abuse. 

This is feedback from Standard Bank’s head of macroeconomic research for South Africa, Elna Moolman, who praised the Finance Minister’s Budget despite her concerns about the use of the forex reserves. 

Finance Minister Enoch Godongwana announced during the Budget Speech that the National Treasury will restructure reserves held at the Reserve Bank to free up R150 billion over three years.

The account, known as the Gold and Foreign Exchange Contingency Reserve Account, showed paper profits of R507.3 billion as of last month. 

Technically, R250 billion will be withdrawn from the account, but R100 billion will be allocated to protect the Reserve Bank’s balance sheet from losses.

This is meant to reassure investors that the funds are being used wisely and the reserves won’t be plundered for voter-pleasing budget giveaways.

However, Moolman cautioned against thinking too optimistically about the government withdrawing billions of rands from the account without any laws governing the process. 

“The government will make a larger, immediate withdrawal from the Gold and Foreign Exchange Contingency Reserve Account than generally expected,” Moolman said. 

She explained this would reduce the government’s borrowing requirement and, therefore, its debt burden.

While this will help the country’s finances, the lack of laws governing the process and the use of these funds opens it up to potential abuse. 

“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’ve preferred the account only to be used once its use is legislated to ensure that future use will remain prudent.” 

Moolman warned before the Budget Speech that tapping the reserves would only serve to delay South Africa hitting a fiscal cliff if fiscal policy was not reformed. 

She explained that a pot of limited resources presents no long-term fix for the country’s deteriorating finances. 

“Without the spending discipline and growth-lifting reforms that we assume are underway, withdrawing from the reserves 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.