South Africa’s failed gold rush 

The National Treasury’s use of R150 billion from the Gold and Foreign-Exchange Reserves Account (GFECRA) to bolster the government’s ailing finances is unlikely to have any significant benefit for the country. 

Finance Minister Enoch Godongwana revealed during the February Budget Speech that the government would restructure its reserves held at the Reserve Bank to free up R150 billion in funds over the next three years. 

The account posted paper profits of over R500 billion at the time of the announcement. 

Technically, R250 billion will be withdrawn from the account, but R100 billion will be allocated to protect the Reserve Bank’s balance sheet from losses.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 that the reserves will not be plundered for voter-pleasing budget giveaways.

Over R100 billion has already been transferred to the National Treasury, with R25 billion to be handed over in the next two financial years. 

This move was praised at the time as a way to slow down the growth rate of the government’s debt and thus provide relief in the form of reduced debt-servicing costs in the future. 

The rand strengthened following the announcement, and bond yields declined as it was viewed positively by investors. 

However, Nedbank economist Isaac Matshego said the R150 billion is insignificant in the overall picture of South Africa’s finances. 

In previewing next week’s Medium-Term Budget Policy Statement (MTBPS), Matshego explained that the government’s use of the GFECRA is rather meaningless. 

Given the sheer scale of South Africa’s financial trouble, with government debt standing at around R5.2 trillion and it spending R2.1 trillion a year, R150 billion is a drop in the ocean. 

More importantly, the use of the GFECRA has not been combined with significant progress toward creating a new fiscal anchor. 

The National Treasury has been discussing the implementation of a new fiscal anchor since last year, calling for measures like a debt ceiling, primary balance targets, and stronger budgeting processes. 

However, Matshego said little progress has been made, limiting any potential impact on the government’s overall financial health from tapping the GFECRA. 

Matshego is not the only economist who has raised concerns regarding the government’s use of the GFECRA to bolster its finances. 

Earlier this year, Standard Bank’s head of macroeconomic research, Dr Elna Moolman, said withdrawing funds from the GFECRA without formalising how they will be used opens the account up to abuse. 

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

She explained that the funds from the GFECRA would reduce the government’s borrowing requirement and, therefore, its debt burden.

However, 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’,” she said. 

“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.” 

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,” she said. 

Analysts at Stanlib also raised concerns earlier this year about using the GFECRA without a serious plan to reduce spending and grow the economy. 

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 debt trajectory’s unsustainability. 

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

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

Instead, the government uses the 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.