South Africa taps reserves to tackle debt

Minister of Finance Enoch Godongwana delivered his Budget speech on Wednesday. Picture: Leon Lestrade/Independent Newspapers

Minister of Finance Enoch Godongwana delivered his Budget speech on Wednesday. Picture: Leon Lestrade/Independent Newspapers

Published Feb 22, 2024


Finance Minister Enoch Godongwana on Wednesday delivered a fiscally responsible election Budget, which will see the government lessening its borrowing requirements this year through a R150 billion drawdown from the contingency reserves for the first time in 20 years.

Tapping into the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) had been a dominant theme ahead of the Budget speech.

According to the Treasury, the last settlement of this kind was done in 2003.

Tabling the 2024 Budget on Wednesday, Godongwana announced that the National Treasury would dip into the GFECRA, which had a balance of R507.3bn last month, in a bid to reduce the country’s ballooning debt service costs.

He said they could do so because the GFECRA was “now larger than any plausible losses on foreign exchange reserves from rand appreciation”.

This is essentially the unrealised profits on South Africa’s gold and foreign exchange reserves, typically from rand depreciation over time.

The government plans to use R100bn from the GFECRA in the 2024/25 fiscal year, and R25bn in each of the 2025/26 and 2026/27 years, lowering the government’s debt trajectory and borrowing requirements.

“We will draw down R150bn of the GFECRA balance once we have ensured that sufficient buffers are available to absorb exchange rate swings and the solvency of the Reserve Bank is not compromised.”

The unpopular decision to go for the drawdown is expected to result in a decline of some R30.2bn in government debt servicing costs over the 2024 Medium-Term Expenditure Framework.

SA Reserve Bank governor Lesetja Kganyago assured the public that the actual reserves would not be liquidated to raise funds for the Treasury, but instead, the central bank would generate a new liability, which it would then need to service.

Dr Sanele Gumede, from the School of Accounting, Economics and Finance at the University of KwaZulu-Natal, said it was concerning that the government was using a reserve fund to settle debt.

“We have to think about the future of our youth. What will be left for them if reserve funds are being used now?”

Professor Bonke Dumisa, an independent economic analyst, said it did not make sense to take funds from a reserve account to deal with operational issues.

Professor Raymond Parsons, from the North-West University Business School, said that the R150bn should be responsibly used.

Parsons added that economic growth in South Africa had also been too low for too long.

EY Africa chief economist Angelika Goliger said: “As this is only a temporary measure, use of the GFECRA needs to be coupled with managing key expenditure risks going forward and strong economic growth to drive revenue.”

Meanwhile, Godongwana allocated R33.6bn to extend the Social Relief of Distress (SRD) grant until March next year, with provisional allocations of R35.1bn and R36.7bn for the 2026 and 2027 financial years, respectively, pending a decision on how it would be funded.

He added that work was under way to improve the SRD grant by April this year.

He also announced increases to the social grants to keep pace with inflation.

The old age pensioners’, disability and care dependency grants were increased by R100. The foster care grant was increased by R50. The child support grant was increased by R20.

Isobel Frye, director of the Social Policy Initiative, said they were concerned that social grants increases were not in line with inflation Evashnee Naidu, the KZN provincial director of the Black Sash, said: “We had hoped to hear an increase to all social grants aligned with the inflation rate and increase in the child support grant increased to the Food Poverty Line of R760. The minister did not meet any of these demands.”

Dick Forslund, from the Alternative Information and Development Centre said the big concern with the improvement of the SRD grant was a change in the eligibility.

“We don’t want to see less people benefiting.”

The Budget also made provision for job creation initiatives.

Some R61.4bn was allocated for employment programmes over the next three years.

About R7.4bn has been identified for the Presidential Employment Initiative.

A total of R765bn was allocated to the peace and security cluster.

Godongwana said 60% of the government’s non-interest spending was being directed to the social wage, such as on education, health and safety.

The Mercury

Related Topics:

Enoch GodongwanaBudget