South Africa is grappling with pressing financial needs and could turn to its Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to alleviate its fiscal deficit.
According to Standard Chartered’s chief Economist for Africa, Razia Khan, the government’s fiscal deficit is projected to expand to 4.9% in the 2024 financial year (FY24), up from 4.2%, and subsequently decrease to 4.2% in FY25.
Factors contributing to this widening deficit include lower-than-anticipated mining revenue, the impact of an earlier public-sector wage agreement, and increased debt service costs, as outlined in the South Africa Outlook report for 2024.
Despite promises to curb spending, with plans to cut expenditures by R85 billion in the medium term, the government faces constraints due to concerns over service delivery and the necessity of state function reconfiguration.
Efforts to stabilize debt levels entail scheduled primary fiscal surpluses over the medium term. The failure to expedite fiscal consolidation may necessitate even larger surpluses in the future, according to the National Treasury.
One potential solution involves leveraging the GFECRA to offset the fiscal deficit, a move subject to consultation between the South African Reserve Bank (SARB) and the National Treasury.
The GFECRA, currently considered a contingent asset of the state, contributes to reducing net debt levels through unrealized gains. Suggestions have been made to utilize a portion of GFECRA gains to reduce debt or as revenue, albeit this would involve selling underlying assets to realize notional gains.
While hedge funds and civil society economists advocate for tapping into reserves, the SARB cautions against depleting reserve buffers amidst market volatility, particularly with heightened uncertainty.
However, with rising State-Owned Enterprise (SOE) bailouts and a need for increased infrastructure investment to stimulate growth, discussions around the partial use of GFECRA are gaining momentum.
National Treasury has indicated that an announcement regarding the GFECRA will be made in the upcoming budget release, underscoring the significance of this potential policy decision in addressing South Africa’s fiscal challenges.
