Reserve Bank’s 125-tonne pot of gold

The South African Reserve Bank (SARB) holds 125 tonnes of gold, which is part of the reserve account the government hopes to tap to settle its debts. Many experts say this plan carries significant risks.

The latest data from the World Gold Council revealed that the SARB held 125.4 tonnes of gold as of May 2024, constituting 15.2% of its total foreign reserves.

These foreign reserves made headlines at the start of this year when Finance Minister Enoch Godongwana announced in the February Budget 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 in January 2024.

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. 

Technically, the government will withdraw R250 billion 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 that the reserves will not be plundered for voter-pleasing budget giveaways.

The government explained that it needed to tap these funds to reduce its borrowing requirement, limit the sales of forex reserves, and strengthen the Reserve Bank’s equity position. 

The Treasury sees debt-service costs declining by R30 billion over the medium term as a result. Debt as a share of the overall economy is now seen peaking at 75.3% in 2025/26, down from 77.7% estimated in November.

However, several critics have said this solution is not the silver bullet the government believes it to be.

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

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 the government’s improved financial health may negate this effect 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. 

Even though this could be highly technical and challenging, it might be successful as planned. However, Du Plessis said that even if successful, there are still significant risks.

One major risk is a significant increase in inflation, as approximately R150 billion of liquidity will be pumped into the financial system and the broader economy over three years. 

This injection could lead to the same inflationary impact as any other increase in government spending without a corresponding rise in tax revenue. 

Moreover, with this influx of cash into the financial system, banks might become more inclined to lend, leading to increased spending and inflation. 

The rand could also weaken because financial institutions may adjust their portfolios away from volatile assets in South Africa that could be directly affected by a unilateral political decision. 

These effects would result in higher inflation in South Africa, potentially necessitating the Reserve Bank to maintain a tight monetary policy and possibly even raise interest rates. 

Therefore, the cost of utilising the GFECRA is not significantly lower than other funding options, as the associated risks are simply different from those of raising debt through issuing government bonds, for example.