Reserve Bank’s R500 billion pot of gold

The government’s plan to tap the Reserve Bank’s R500 billion Gold and Foreign Exchange Contingency Reserve Account (GFECRA) is fraught with danger and is not a silver bullet for the country’s poor financial health. 

This is feedback from Professor Stan du Plessis of the Bureau of Economic Research (BER), which recently released a research note on the GFECRA and the government’s plans to tap it. 

Reforming the GFECRA will enable the government to use the reserve promises to reduce the government’s borrowing requirement, limit the sales of forex reserves, and strengthen the Reserve Bank’s equity position. 

Du Plessis said these are all desirable outcomes but come with serious concerns and should not set a future precedent of using these reserves to bolster the government’s financial position. 

The GFECRA was introduced in 1989 to manage the fluctuations in the value of the Reserve Bank’s gold and foreign exchange accounts. 

Any profits and losses on these accounts belong to the government despite them being reported on in the bank’s financial statements. 

For the foreign exchange reserves, the relationship between the Treasury and the SARB is like that between a customer and a bank. The Treasury holds the forex reserves in deposit with the SARB. 

This deposit is an asset on the government’s balance sheet and a liability on the Reserve Bank’s. 

The complexity arises from these reserves being denominated in US dollars while the Reserve Bank’s balance sheet is consolidated in rands. This makes the gains on these reserves difficult to realise and transfer to the National Treasury.

Currently, the GFECRA is worth just over R500 billion, but this value can only be realised by selling the underlying assets, gold or forex, at a particular market rate

The value of this account over the past seven years is shown in the graph below. 

In its 2024/2025 Budget, the government claimed that the GFECRA would allow it to reduce debt without any increased costs or risks. Du Plessis said this is not true. 

If the R150 billion the government wants from the account is raised by selling forex reserves, confidence in South Africa will be undermined as these reserves are a vital buffer against external shocks. 

This will also negatively impact the country’s sovereign credit rating, but this effect may be negated by the government’s improved financial health following the debt reduction. 

Another way the GFECRA can be tapped is to split it into three ‘buckets’. 

• The first bucket will “retain sufficient funds to absorb exchange rate swings”. This is a noble objective, but it is unclear how such a limit would be determined – especially when the currency at stake is as volatile as the rand. 
• The second bucket, intended to ensure “the central bank’s solvency and to pay sterilisation costs to neutralise the interest rate impact,” raises questions about how this will be achieved. 
• The third bucket emerges as a residual from the GFECRA minus buckets one and two, and it is from this third bucket that the Treasury can withdraw from the SARB without concern. 

While this would be extremely technical and difficult, it could work as planned. However, Du Plessis said even if it does, there are still significant risks. 

Chief among these is a sharp increase in inflation as, over three years, around R150 billion of liquidity will be injected into the financial system and the broader economy. 

This would have the same effect on inflation as any other increase in government spending that does not come with increased tax revenue.

Furthermore, with this cash injected into the financial system, banks may increase their lending appetite – fuelling spending and inflation. 

The rand may also be weakened by this as financial institutions may rebalance their portfolios away from volatile assets in South Africa that can be directly impacted by a unilateral political decision. 

All of these effects will result in higher inflation in South Africa. This would force the Reserve Bank to keep monetary policy tight and perhaps even raise interest rates. 

Thus, the cost of tapping the GFECRA is not significantly lower than other funding options as the risks associated with it are just of a different form than raising debt by issuing government bonds, for example. 

The relative cost of ways in which the government can finance its operations is shown in the graph below.