GILAD ISAACS: Regarding the Gold and Foreign Exchange Contingency Reserve Account

The R459bn owed to the SA government that has accrued in the SA Reserve Bank’s Gold and Foreign Exchange Contingency Reserve Account (GFECRA) has come under the spotlight following proposals made by the Institute for Economic Justice (IEJ) and an open letter signed by more than 100 policy experts and civil society organisations (“Put a stop to planned budget cuts before they harm SA”, October 17).

The letter proposed a range of balanced measures to address the current budget deficit. These would have a less detrimental effect on growth and wellbeing than the indiscriminate budget cuts proposed by the National Treasury. Alongside other measures, the letter and the IEJ argued that leveraging the GFECRA could assist us to address the budget mismatches SA faces.

Subsequently articles by, Claire Bisseker in the Financial Mail, Mamokete Lijane and Peter Bruce in Business Day and Carol Paton on News24 have all weighed in on the matter. Unfortunately, in what appears an attempt to close ranks around the National Treasury’s extreme budget cuts, there has been a misrepresentation of the GFECRA and the IEJ’s assessment thereof, in important respects. The key misrepresentation are as follows: 

The balance represents unrealised profits and therefore should not be utilised 

The authors state, correctly, that the GFECRA represents “unrealised profits” arising from changes in the value of foreign exchange and gold reserves. However, contrary to implications in a number of articles, the IEJ and the open letter do not claim otherwise. It does not follow that because the account balance derives from “unrealised profits” government should not ask for what the Bank itself reports is “owed to the government”.

Suppose your bank was legally bound to credit you based on the change in the value of underlying assets it held. Suppose that credit grew very large and you wanted to draw on a portion of it. And then suppose your bank said: “Well, we know you are entitled to draw from this account, but we’d have to raise liquid funds to credit you and we don’t want to”. This is essentially the position Bisseker (at least), the Bank and private sector analysts are supporting (“Is there a R459bn pot of gold at the end of South Africa’s rainbow?", October 19). 

It is important to emphasise that Rashad Cassim, the Bank’s deputy governor, as well as private sector analysts such as in Krutham MD Peter Attard Montalto, concede that it is possible to draw on this account. Further, it is possible that agreement could be reached for the account itself to bear any cost involved. 

Open letter signatories believe we have found a magic pot of money which we wish to exhaust

One way to discredit those you disagree with is to distort their position. Bruce, Bisseker and Paton all imply that those raising the GFECRA consider this as a “pot” of funds or a “hidden stockpile” of cash (“Beware the spendthrifts eyeing Bank’s pot of gold”, October 26). The implication is that if we wrongly see this as a pot of gold at the end of the rainbow, instead of an account totalling up unrealised profits, then the rest of our analysis cannot be trusted.

Both the IEJ and the open letter were at pains to not make this mistake and repeatedly refer to “drawing down on” the balances accrued within the account, which indicates an amount owed by the Bank to government. This is an appropriate framing, consistent with how the Bank reports the funds.

Further, no-one proposes anything nearing exhausting the account. We accept that maintaining a buffer against future (unlikely) significant exchange rate appreciations, and to bolster the Bank’s balance sheet, is appropriate. But we’re talking about a revenue shortfall of R52.4bn and a balance in the GFECRA of R459bn. 

We would need to sell foreign exchange reserves to unlock the funds 

Curiously, Bisseker reports — unchallenged — that Sanlam group economist Arthur Kamp “doesn’t think it’s a good idea to sell foreign exchange reserves to realise GFECRA gains,” giving the impression that this is what would need to be done. Bruce repeats this, saying “The only way to turn it into real money is to sell the dollars you own for rand”. Strangely, Bruce also seems to imply that drawing on the GFECRA constitutes “printing money” — how it requires both selling reserves but also constitutes printing money is somewhat baffling.

However, Cassim, Lijane and Montalto show why selling reserves is not necessary to unlock the funds. Essentially, the necessary liquidity could be accessed in a range of other ways open to the Bank (“The Reserve Bank has a tempting pot of money”, October 25). 

The law prevents government drawing on the GFECRA 

A number of commentators have implied that drawing on the GFECRA requires amending the law governing the Reserve Bank, or would represent some form of over-reach by National Treasury. Bisseker and Montalto have been most explicit in this regard (“Is there a R459bn pot of gold at the end of South Africa’s rainbow?", October 19). However, this interpretation of the legal framework appears not to follow from the law itself.

By contrast, the Reserve Bank Act reads fairly straightforwardly, setting out that profits from the account can be used by government. The GFECRA is established in Section 28 of the Act and collects funds from gold price movements (the Gold Price Adjustment Account — Section 25), and foreign exchange movements directly, and via contracts (the Foreign Exchange Adjustment Account and Foreign Exchange Contracts Adjustment Account — Section 26 and 27 respectively). Sections 25, 26, and 27 all state clearly that loss or profit from these accounts shall be for government. 

The GFECRA itself is “managed by the Bank on behalf of the Treasury” and Section 28 is worth quoting at length: " (2) (a) Any credit balance on the Gold and Foreign Exchange Contingency Reserve Account shall accrue to the government as a profit and shall be for the benefit of the State Revenue Fund. (b) Any profit referred to in paragraph (a) shall be carried forward in the Gold and Foreign Exchange Contingency Reserve Account, but any such profit, or any part thereof, may, at such times as the Treasury and the Bank may deem desirable, be credited to the State Revenue Fund. 

" (3) (a) Any debit balance on the Gold and Foreign Exchange Contingency Reserve Account shall be a loss for the government and shall be a charge against the State Revenue Fund. (b) Any loss referred to in paragraph (a) shall be carried forward in the Gold and Foreign Exchange Contingency Reserve Account until the Treasury and the Bank deem it desirable to settle the outstanding balance. (c) Any loss referred to in paragraph (a) shall be defrayed from money appropriated by parliament for such purpose.”

Section 2(b) is clear — the profit may be credited to the state. Section 3(c) is equally clear — losses shall be covered by government through funds appropriated by parliament. The latter was done without fuss in 2002/3 via the Gold and Foreign Exchange Contingency Reserve Account Defrayal Act of 2003, and the National Treasury paid R28bn into the account over four years. If credible legal opinions exist that show the legal process is more complex than the National Treasury insisting on receiving funds that belong to it, then those should be shared.

That drawing on reserves to balance budget deficits is an unsustainable strategy or a slippery slope 

As a portion of the funds could be accessed without imperilling the Bank’s balance sheet or requiring difficult legal processes, the real issue is therefore neither technical nor legal but political. Montalto, to his credit, acknowledges this, and Bruce makes a similar point, but the logic is inherently anti-democratic. 

Essentially, the argument goes that because politicians can’t be trusted to spend the funds wisely, the National Treasury and Reserve Bank should conspire to keep these funds out of the hands of their colleagues. Whatever we think of government’s current spending habits — and the IEJ has been unequivocal that wasteful spending is occurring and must stop — to support the position that we wish to deny government funds that belong to it to force its hand to implement austerity is profoundly cynical.

The IEJ, and the open letter, do not present the GFECRA as a silver bullet to SA’s deep economic and social crises. For this, both advance a broader set of reforms and the need for economic expansion. However, this is perfectly compatible with the prudent use of government funds, including drawing from the GFECRA credit. Indeed, carefully deploying public funds is essential to achieving the economic growth we seem to all agree is essential.   

The IEJ, open letter signatories and all the commentators mentioned here seem to agree on the fact that to achieve sustainable debt growth is necessary, the cost of borrowing is too high, and a review of spending is needed. These views should not, however, be advanced in seeming opposition to, in Bisseker’s words, “fanciful solutions” (that is, drawing on the GFECRA) that “provide only a temporary distraction” or, in Bruce’s terms, “a free lunch”. 

Caricaturing those who propose using the GFECRA as part of a comprehensive strategy in this way is a poetic sleight of hand, meant not to foster public debate but to discredit positions that are at odds with those of the National Treasury.

• Dr Isaacs is executive director at the Institute For Economic Justice.