THE Gold and Foreign Exchange Contingency Reserve Account (GFECRA) held at the South African Reserve Bank (SARB) will be tapped to reduce government’s borrowing requirements and ease the debt service burden.
The GFECRA captures valuation gains on South Africa’s foreign exchange reserves as the rand has moved from R10/US$1 in 2014 to R19/US$1 currently.
This has meant that the GFECRA balance has grown from R1.8 billion in March 2006 to R507.3bn in January 2024.
Previously, these gains or losses were not settled but were reflected as assets or liabilities on the financial statements of the National Treasury and the SARB.
The GFECRA was created to insulate the SARB’s profit-and-loss statement from currency swings, as the valuation losses were charged to the National Treasury.
The Treasury has now decided that the GFECRA is now larger than any plausible losses on foreign exchange reserves from rand appreciation.
The Treasury now wants to utilise any “excess” funds once a proposed settlement agreement has been formalised between the National Treasury and the SARB.
The net effect of the agreement is that the mobilisation of the funds will be to reduce government borrowing by R150bn and improve the SARB’s equity position by R100bn. These adjustments will take South Africa closer to other countries’ norms.
The agreement will allocate funds across three “buckets”.
The first bucket, GFECRA, will retain sufficient funds of more than R250bn to absorb exchange rate swings. Failure to retain funds in the GFECRA would create an obligation for the National Treasury to cover exchange rate losses.
The second bucket will be the creation of a R100bn SARB contingency reserve that will ensure the SARB’s solvency and to pay sterilisation costs to neutralise the interest rate impact.
The third bucket will see R150bn distributed to the National Treasury in three tranches to reduce the government’s borrowing requirement.
The first tranche of R100bn will be allocated in the 2024/25 fiscal year and then R25bn each in the following two fiscal years.
The National Treasury stressed that the agreement was informed by principles developed in consultation between the National Treasury, the SARB and international experts.
This meant that SARB’s solvency should not be undermined by any GFECRA distribution, which in practical terms implies that the SARB should not suffer sustained negative equity.
In addition, there should be no sales of foreign exchange reserves to realise GFECRA gains if such reserves are below estimated adequacy levels and there should be no distribution of unrealised GFECRA balances that could plausibly be unwound by future rand appreciation.
Any GFECRA distributions should be governed by a framework that rules out ad hoc decisions. The agreement should be public to ensure transparency and should be used to reduce government borrowing.
The medium-term gross borrowing requirement, therefore, will be R196bn lower than projected in the 2023 Medium-Term Budget Policy Statement, mainly due to the agreement between the SARB and National Treasury.
That will also reduce the amount allocated to service debt, allowing more funds to be used for other purposes.
BUSINESS REPORT