South Africa to tap Gold, currency reserves to curb runaway debt

By Ntando Thukwana and S’thembile Cele

South Africa’s cash-strapped Finance Minister Enoch Godongwana tapped the country’s gold and foreign-exchange reserves to steady its eye-watering debt, while boosting spending on teachers, nurses and welfare in a critical election year.

Enoch Godongwana, South Africa’s finance minister.

In his last budget before the May 29 vote, in which the ruling African National Congress risks losing its national majority for the first time since 1994, Godongwana will restructure reserves held at the central bank to free up 150 billion rand ($7.9 billion) over three years.

The account, known as the Gold and Foreign Exchange Contingency Reserve Account, showed paper profits of 507.3 billion rand as of last month — a massive increase from the 1.8 billion rand in 2006 that reflects the South African currency’s slump in value against the dollar.

Technically, 250 billion rand will be withdrawn from GFECRA. But 100 billion rand will be allocated to protect the central bank’s balance sheet from losses, although it will be returned to the government over time as the central bank generates its own buffer. The remaining 250 billion rand will still be earmarked to shield the country’s reserves from currency losses.

The design is aimed at reassuring investors that the funds are being used wisely and that the reserves wouldn’t be plundered for voter-pleasing budget giveaways.

Central bank Governor Lesetja Kganyago told reporters ahead of the budget speech on Wednesday that the actual reserves wouldn’t be sold to raise the funds for Treasury. Rather, the central bank will create a new liability which it will then need to service.

The move will immediately ease pressure on South Africa’s precarious public finances and avoid a debt blowout.

Debt Peak

The Treasury sees debt-service costs declining by 30 billion rand 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, it said.

Use of the funds will be earmarked to tackle debt and borrowing, guided by a framework still being hammered out with the central bank to prevent ad-hoc decisions and ensure transparency.

Tapping the reserves helps President Cyril Ramaphosa project a measure of fiscal probity while avoiding cuts to popular spending programs in an election year.

Opinion polls show support for the ANC dipping below 50%, which would force it to form a coalition with smaller parties to remain in power.

The budget allocates 33.6 billion rand toward funding contentious 350-rand monthly stipends that were introduced as a temporary measure to cushion the vulnerable from the fallout of the coronavirus pandemic. Godongwana, who previously committed to an extension until March 2025, made provisional allocations for it for two more years, pending a decision on how it would be funded. It allotted 35.1 billion rand and 36.7 billion rand for the 2026 and 2027 financial years, respectively.

Ramaphosa last month said there is a case for the grant to be made permanent, even with South Africa’s fiscal risks, stressing a complete overhaul of the country’s social welfare system is needed.

No additional money was set aside to help troubled state logistics company Transnet SOC. Ltd. or to fund a national health insurance plan. 

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