Finance Minister Enoch Godongwana. Photo: Dwayne Senior/Getty Images
Discussions about tapping the R507 billion Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to rein in public borrowing started in the first half of last year, according to treasury director general Duncan Pieterse.
Despite Finance Minister Enoch Godongwana’s quip that Pieterse went from knowing barely anything about the contingency account to being an expert in a matter of months, it seems the treasury has been thinking about ways to draw from it for some time now.
The pair participated in a post-budget event hosted by Rand Merchant Bank on Thursday, where one of the hottest topics was the treasury’s somewhat surprising decision to draw R150 billion from the reserve to pay down the state’s ballooning debt.
“The conversations started in the first half of last year. And the conversations started where they are supposed to start, which is at something called the standing committee on banking and financial markets,” Pieterse noted.
He served on the committee — which is a joint forum between the treasury and the Reserve Bank — in his previous capacity as the treasury’s head of assets and liabilities.
“So, that was in the first half of last year. We started the discussion there with technical inputs from the Reserve Bank and technical inputs from ourselves,” Pieterse added.
“At that point we also agreed that, given the complexity of this issue, we would also pull in a team from the IMF’s [International Monetary Fund] capital markets division to have a look at this — and to have a look at, in particular, global best practices in how other countries manage this.”
The treasury’s announcement of the R150 billion drawdown — complemented by another R100 billion withdrawal to be placed into a contingency account at the Reserve Bank to insulate it against currency swings — followed lobbying from progressive think tanks and labour.
In September, the IInstitute for Economic Justice (IEJ) published a policy brief noting “a completely costless” way of dealing with the budget mismatch would be to draw down on GFECRA, which the think-tank described as “somewhat obscure”.
The IEJ recommended that the government use the GFECRA surplus to close revenue and expenditure gaps. It added that the remainder of the reserve would be drawn down on to finance development priorities, possibly by making an allocation to a dedicated ring-fenced fund for stipulated use.
The IEJ’s proposal drew criticism from some parties, who warned that following this path could have negative consequences.
Reserve Bank governorLesetja Kganyago was quizzed about the idea in November, following the monetary policy committee’s interest rate announcement.
“The issue is not that simple,” Kganyago told journalists.
“And the notion that thinks there is some pot of gold hidden in the Reserve Bank — and that all that is needed is to figure out how to get into that pot of gold and bingo our problems are solved — is very, very simplistic.
“At worst, it is actually very reckless in terms of policy.”
But this year’s budget document noted that, considering the account is now larger than any plausible losses on foreign exchange reserves from rand appreciation, the fact that money hasn’t already been paid to the treasury is something of an anomaly.
In his budget speech on Wednesday, Godongwana noted: “Ultimately, we are bringing South Africa closer to our peers and ensuring alignment to international best practice.”
On the Monday before the budget, Investec chief economist Annabel Bishop noted that worries around drawing down on GFECRA centred around how the funds would be used — that is whether they would go towards paying for a higher public sector wage bill, versus reducing debt, which seems to be considered the more sensible option.
After Godongwana’s speech, Bishop noted that the government’s use of GFECRA has reined in most of the fiscal slippage flagged in the medium-term budget policy statement, allowing the state to run a primary budget surplus instead.
“Overall, the budget is better than expected, with the most made of a difficult environment,” she added.
In a separate note, Bishop added the caveat that, while using the reserve to reduce debt was the most likely avenue, it was also only 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”.
During Thursday’s discussion, Rand Merchant Bank chief economist Isaah Mhlanga said the treasury’s GFECRA decision came as a bit of a surprise.
“We have been talking to clients offshore, globally. We’ve been trying to figure out when GFECRA was going to be tapped.
“The second question was how big the quantum would be … R150 billion was quite substantial,” he said.
“The intention, which is quite clear from the budget, is to reduce debt service costs, which is the right thing to do.
“The other option would have been to use that to solve our infrastructure problems but we can’t get an immediate benefit out of that because it takes time to lift economic growth.
“So, it is sensible to reduce debt service costs.”
In the wake of the announcement, others agreed that the treasury had chosen a sensible path.
Sanlam Investments chief economist Arthur Kamp, called the decision “prudent”, for example.