Understanding the GFECRA outlined in Budget 2024: Funds must be protected

Minister of Finance, Enoch Godongwana, presenting his Budget Speech 2024 in Parliament, in Cape Town this week. Photo: Ayanda Ndamane / Independent Newspapers

Minister of Finance, Enoch Godongwana, presenting his Budget Speech 2024 in Parliament, in Cape Town this week. Photo: Ayanda Ndamane / Independent Newspapers

Published Feb 23, 2024


By Annabel Bishop

South Africa’s gold and foreign exchange reserves account (GFECRA) contains the majority of South Africa’s Reserve Bank (SARB) assets and, consequently, has been eyed by some political factions calling for the nationalisation of the SA Reserve Bank (SARB).

The GFECRA is a pool of funds, tallied at R500 billion, which does not earn any interest and is liquidity that the SARB is not able to use, accumulating as a result of currency movements, and in other countries is transferred to their national treasuries.

Furthermore, the lost opportunity costs of the GFECRA makes it expensive to fund. That is, the money sits unused at the SARB, essentially “belongs” to the National Treasury, who is already borrowing at very high interest rates above 10%.

High debt costs

This as South Africa’s benchmark (10-year) government bond has seen its yield above 11% and move higher at points, and other bonds have even higher borrowing costs, with debt servicing costs taking up a huge chunk of government expenditure.

South Africa’s budget deficit, the mismatch between tax revenue and government spending, last year was -4.7% of gross domestic product (GDP), while excluding servicing cost, the deficit is eroded to 0% of GDP, showing how high debt servicing costs are.

Currently, South Africa has R5.1 trillion in gross loan debt, projected to rise to R6.2trl in 2026/27, these figures would be higher without the planned draw-down of R150 billion of SA’s GFECRA, which is in line with international practices.

However, it is important to note that when the rand exchange rate against the US dollar and other reserve currencies strengthens, the account balance declines and National Treasury will be responsible for replenishing the GFECRA.

Substantial rand appreciation can see marked losses on the GFECRA, which will then be for National Treasury’s account with the requirement to replenish eventually if this persists. Dipping into the GFECRA must, therefore, be done with great caution.

However, given political risk it’s probably better to use some of the GFECRA to reduce debt before the multi-party coalition government that is likely after the election, when Parliament votes could see the GFECRA diverted less usefully elsewhere.

Reserve Bank and politics

By international comparative standards, the profits of the GFECRA account is very large and attracts interest from those seeking to nationalise the funds via nationalisation of the SARB to get to the funds, as stated in some political parties’ manifestos.

With the SARB and National Treasury having indicted prior to the Budget that they are likely to follow international standard, and utilise some of the funds in the GFECRA, worries were centred around what it would be spent on.

Indeed, concerns centred around the funds being used for current expenditure such as higher public sector wages. Pressure also comes from expanding social grants which has gained focus amongst the ANC election promises.

However, using the GFECRA to reduce debt was the most likely avenue, but is also a temporary measure in a weak economy, with debt likely to just creep up again if tax revenues undershoot, and the GFECRA cannot be quickly replenished.

But using a portion of valuation gains in the GFECRA does see projected debt-service costs decline by R30.2bn over the 2024 Medium-Term Expenditure Framework period compared with the 2023 Medium-Term Budget Policy Statement estimate, and so is a positive outcome.

It’s also a positive outcome as it reduces political pressure for SARB nationalisation. Indeed, it’s likely the government will use more than the GFECRA planned use in the Budget of R100bn in 2024/25 and R25bn in the next two years.

Clearly the best outcome would be to have strong South African economic growth of 5% year on year.

However, this is not the case, and instead South Africa risks losing its GFECRA R500bn in a poorly chosen multiparty coalition government, should the ANC see its majority fall to near 40% or worse.

At close to 8% of GDP the GFECRA needs to be protected, even if this means a transfer to the National Treasury.

However, expenditure should be contained and this is a weakness in the Budget - the GFECRA funds transfer risks being eaten up by higher expenditure.

Annabel Bishop, is the chief economist at Investec.