Government only delaying fiscal cliff by tapping R500 billion forex reserves

The government’s withdrawal of R150 billion from the gold and forex reserves account will only delay the country hitting a fiscal cliff as it is not tied to a credible plan to stimulate economic growth and structurally reduce government spending. 

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 (GFECRA), 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Technically, R250 billion will be withdrawn from the account, but R100 billion will be allocated to protect the Reserve Bank’s balance sheet from losses.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, analysts at Stanlib are concerned about any serious plan to reduce spending to sustainable levels and grow the economy. 

While using the gold and forex reserves will allow the government to achieve a more sustainable debt path, it poses some risk to its debt-reduction efforts. 

Since the funds will be used to reduce domestic financing requirements, this move gives the government room to continue spending with less concern about the unsustainability of the debt trajectory. 

In other words, the government may avoid making the tough decisions needed to rein in expenditure, causing the spending ceiling to grow further without pressure from high debt levels, Stanlib said. 

Furthermore, while the debt reduction is a welcome step, it is a concern that none of the funds have been allocated towards growth-generating projects. 

Instead, the government uses an asset to facilitate ongoing expenditure rather than grow the economy. 

In effect, this could just delay the inevitable – unsustainable debt levels in a perpetually low economic growth environment, resulting in a fiscal crisis. 

Enoch Godongwana
Finance Minister Enoch Godongwana

Standard Bank’s head of macroeconomic research for South Africa, Elna Moolman, had concerns about another aspect of the government’s withdrawal from the reserves – the lack of legislation governing withdrawals. 

While the withdrawal will help the country’s finances, the lack of laws governing the process and using 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. 


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