By Mpho Moloi
The National Treasury has released detailed information about the newly established settlement framework for the Gold and Foreign Exchange Contingency Reserve Account (GFECRA). The agreement, signed by Finance Minister Enoch Godongwana and the Governor of the South African Reserve Bank (SARB), Lesetja Kganyago, in June 2024, introduces a three-part allocation of funds aimed at managing South Africa’s exchange rate risks, bolstering the solvency of the SARB, and reducing the government’s borrowing requirements.
This settlement agreement, which was first announced in the 2024 Budget Review, marks a significant shift in how the GFECRA funds are managed. The GFECRA is a crucial mechanism that the Reserve Bank uses to manage fluctuations in the value of South Africa’s foreign exchange reserves. The National Treasury emphasized that this reform will enhance fiscal stability while providing the government with the resources to better manage debt and exchange rate risks.
A New Framework for the GFECRA
The settlement agreement outlines the distribution of R250 billion from the GFECRA, which will be divided into three separate “buckets” of funds. According to National Treasury, the first allocation will remain in the GFECRA to act as a buffer against fluctuations in exchange rates. This is a critical move to avoid future exchange rate losses, which could otherwise result in the National Treasury having to absorb these losses directly.
The second allocation, totalling R100 billion, will be transferred to the SARB’s contingency reserve account. This account serves to ensure the central bank’s solvency and cover the costs associated with sterilisation measures that neutralise the impact of interest rate fluctuations. The Reserve Bank’s sterilisation operations are aimed at managing the supply of money in the economy, a critical factor in controlling inflation and ensuring financial stability.
In its official statement, the National Treasury highlighted the importance of this allocation: “The second bucket, containing R100 billion, will be used by the SARB to maintain its solvency and continue with its sterilisation operations, which are essential for managing the interest rate environment.”
The third bucket of funds, representing R150 billion, will be paid to the National Treasury in tranches over the next three fiscal years: R100 billion in the 2024/25 financial year, R25 billion in 2025/26, and a final R25 billion in 2026/27. These funds will be used to reduce the government’s borrowing needs, helping to slow the growth of South Africa’s national debt.
National Treasury also noted that the settlement agreement allows the government to convert GFECRA investments into cash, which will be deposited into the National Revenue Fund (NRF) – the government’s main bank account – and used to meet financial obligations.
Reducing Government’s Borrowing Requirements
By paying R150 billion over the next three years, the National Treasury aims to significantly reduce the government’s borrowing needs. South Africa has faced mounting debt pressures in recent years, with the national debt exceeding 70% of GDP. The funds from the GFECRA settlement will provide some relief by enabling the government to borrow less on both domestic and international markets.
The reduction in borrowing requirements will also contribute to a slower accumulation of national debt, which could help to stabilise the country’s debt-to-GDP ratio over the medium term. This is a key focus for fiscal policymakers, as South Africa’s credit ratings have been downgraded by international ratings agencies in recent years due to concerns about the sustainability of its debt levels.
“The R150 billion from the GFECRA settlement agreement will be used to reduce the government’s borrowing requirements over the next three years,” the National Treasury said in its statement. “This will have a positive impact on the growth of the national debt, as it will allow the government to finance its operations without increasing its borrowing at the same rate as in previous years.”
Impact on the National Budget
The impact of the GFECRA settlement on the government’s finances was outlined in the 2024 Budget Review. Table 7.2 of the Budget Review, which covers the financing of the national government’s gross borrowing requirements, reflects the cash inflows from the GFECRA settlement as part of the government’s balance sheet.
However, the National Treasury has made it clear that the funds from the GFECRA will not be recorded as government revenue. Instead, they will be treated as a return on investment and recorded as a balance sheet transaction.
This distinction is important because it ensures that the funds are not counted as part of the government’s annual revenue, which could give the misleading impression that the government’s income is higher than it actually is. By treating the funds as a balance sheet transaction, the National Treasury maintains transparency and avoids artificially inflating the government’s financial position.
“The GFECRA distribution will be treated as a balance sheet transaction, not as revenue,” the National Treasury explained. “This ensures that the government’s financial reporting remains accurate and transparent. The funds received from the SARB will be used to reduce the borrowing requirement, not to increase government spending.”
Compliance with Public Finance Legislation
The flow of funds between the SARB, the GFECRA, and the National Treasury is governed by South Africa’s financial laws, particularly the Public Finance Management Act (PFMA) of 1999 and the GFECRA Defrayal Amendment Act of 2024.
According to the National Treasury, compliance with these laws requires that all funds transferred from the SARB to the National Treasury be deposited into the National Revenue Fund. From there, the funds can be withdrawn to meet government obligations, such as the SARB’s contingency reserve account.
The R100 billion transferred to the SARB’s contingency reserve account will not be recorded as revenue for the government. Instead, it will be reflected as a balance sheet transaction, consistent with the requirements of the PFMA and the GFECRA Defrayal Amendment Act.
National Treasury further elaborated on this: “The transfer of funds to the SARB contingency reserve is a balance sheet transaction, not a revenue transaction. The funds are converted into cash in the National Revenue Fund, and the SARB uses this cash to meet its financial obligations, including sterilisation costs.”
This technical approach ensures that the flow of funds between the SARB and the National Treasury complies with both the spirit and the letter of South Africa’s financial laws, while maintaining a clear separation between balance sheet transactions and government revenue.
The Monthly Statement of Revenue, Expenditure, and Borrowing
The financial flows associated with the GFECRA settlement will be recorded in the government’s monthly financial statements, specifically the Statement of National Government’s Revenue, Expenditure, and Borrowing, which is published in terms of Section 32 of the PFMA.
In these monthly statements, the R200 billion received from the SARB is recorded as exchequer revenue – a cash receipt into the National Revenue Fund. The payment of R100 billion to the SARB’s contingency reserve account is recorded as a departmental requisition, reflecting the flow of funds between the National Treasury and the Reserve Bank.
The remaining R100 billion will be used to reduce the government’s borrowing needs, helping to stabilise the country’s finances and reduce the growth of its national debt.
“The GFECRA settlement will be reflected in the government’s monthly financial statements as part of the cash flow position of the government,” the National Treasury said. “This will help to provide transparency and clarity around the flow of funds between the National Treasury and the SARB.”
Long-Term Implications of the GFECRA Settlement
The GFECRA settlement represents a significant step forward in South Africa’s efforts to manage its exchange rate risks and improve fiscal stability. By allocating funds to the SARB’s contingency reserve account, the settlement ensures that the central bank has the resources it needs to manage interest rate fluctuations and stabilise the economy.
At the same time, the R150 billion allocated to the National Treasury over the next three years will provide much-needed relief to the government’s borrowing requirements. This, in turn, will help to slow the growth of South Africa’s national debt and contribute to a more stable fiscal outlook over the medium term.
The National Treasury has indicated that the GFECRA settlement framework will continue to be reflected in future budget documents, including the 2024 Medium Term Budget Policy Statement (MTBPS) and subsequent national budgets.
“This framework represents a sustainable approach to managing South Africa’s exchange rate risks and reducing the government’s borrowing needs,” the National Treasury said. “It will help to ensure that South Africa’s public finances remain on a stable footing in the years to come.”
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