GILAD ISAACS: Nothing fanciful about the GFECRA option

There has been much discussion about the R459bn that has accrued in the South African Reserve Bank’s gold and foreign exchange contingency reserve account (GFECRA). 

Last month, the Institute for Economic Justice (IEJ), and more than 100 policy experts and civil society organisations, proposed measures to address South Africa’s budget deficit, including leveraging the GFECRA. This, we believe, would have a less detrimental impact on growth than the indiscriminate budget cuts proposed by the National Treasury.

The most detailed interrogation of this proposal was made in the FM (“Is there a R459bn pot of gold at the end of SA’s rainbow?” October 19). Unfortunately, much of this seemed aimed at closing ranks around the Treasury, rather than exploring the idea.

Here, we address those misconceptions:

1. GFECRA’s balance shouldn’t be used

It’s true that GFECRA represents both “realised” and “unrealised” profits from changes in the value of foreign exchange and gold reserves. But it doesn’t follow that because a portion of these are “unrealised”, that the government shouldn’t ask for what it is owed.

Suppose your bank was legally bound to credit you, based on changes in the value of its underlying assets. Suppose that credit grew very large and you wanted to draw on a portion of it. But suppose your bank said: “Well, we know you’re entitled to it, but we’d have to raise funds to credit you and we don’t want to.”

Should that doom your entitlement? Of course not. And in the FM article, both Krutham MD Peter Attard Montalto and the Bank’s deputy governor Rashad Cassim concede it’s possible to draw on this account. 

2. We believe we’ve found a magic pot of money

The FM article implies that proponents of using the GFECRA surplus believe they have found a “pot” or “stockpile” of money. This is a distortion. Both the IEJ and signatories to the open letter are at pains to not imply this, and refer to “drawing down on” the balance within the account. 

We also do not propose anything like exhausting the account. We accept that maintaining a buffer against future (unlikely) significant exchange rate appreciations, while bolstering the Bank’s balance sheet, is appropriate. But we’re talking about a revenue shortfall of R52.4bn and a GFECRA balance of R459bn.

3. We’d need to sell foreign exchange reserves 

Sanlam group economist Arthur Kamp says, in the FM article, that he “doesn’t think it’s a good idea to sell foreign exchange reserves to realise GFECRA gains”.

This creates the impression that this is what would need to be done. But, as Attard Montalto and Cassim concede, this isn’t necessary. Funds could be raised in numerous other ways.

4. The law bars the government from drawing on the GFECRA

Attard Montalto says accessing the funds requires amending the Reserve Bank Act. Yet that act sets out clearly how profits from GFECRA — established under section 28 — could be used by the government. 

That section says GFECRA is “managed by the Bank on behalf of the Treasury”, and any credit balance “shall accrue to the government as a profit and shall be for the benefit of the State Revenue Fund”.

The state may access “any such profit” at any time that the “Treasury and the Bank may deem desirable”.

Equally, any loss on that account “shall be carried forward in the GFECRA until the Treasury and the Bank deem it desirable to settle the outstanding balance”. Such losses were settled without fuss in 2002/2003 — the Treasury paid R28bn into the account over four years. 

If there’s a legal opinion showing how the process is more complex than the Treasury simply insisting on getting funds that belong to it, it hasn’t been presented.

5. This is a ‘slippery slope’

It’s clear the real issue isn’t technical or legal; it’s political. 

Essentially, the argument here is that because politicians can’t be trusted to spend wisely, the Treasury and the Bank should conspire to keep funds out of their hands. While we must stridently oppose the wasteful spending that does occur, it is profoundly cynical to try to force the government to implement austerity by denying it funds that belong to it. 

The GFECRA isn’t a silver bullet for South Africa’s deep economic and social crises, which require  broader reforms and economic expansion. But this is perfectly compatible with a prudent use of government funds. Indeed, carefully deploying public funds is vital for economic growth.

Painting this as a “fanciful solution” that “provides only a temporary distraction” — as the FM article does — is a poetic sleight of hand, which doesn’t engage with the merits but only discredits a position at odds with that of the Treasury.

*Isaacs is executive director at the Institute of Economic Justice, and an economist at Wits University