Rédaction Africa Links 24 with Tim Cohen
Published on 2024-02-21 18:30:31
It’s always a good feeling when the government aligns with your views, even though there may not always be a direct correlation. In December, there was a suggestion for the government to tap into the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) funds, and it seems that this idea was not unique as most left-wing economists also supported it. Their inclination towards increasing government spending is akin to a bacon lover always wanting more bacon.
On the other hand, centrist economists seemed non-committal on the matter, which may have given the Treasury the confidence to proceed without facing too much pushback from the markets. The GFECRA may sound technical, but its purpose is quite simple – the South African Reserve Bank holds a reserve in foreign currency markets to mitigate the risk of sudden demands for foreign currency that could destabilize the rand’s value.
The Reserve Bank learned this lesson during the 1998 emerging markets crisis, where defending the rand without sufficient reserves proved to be a poor decision. In 2003, the Reserve Bank sought financial support from the government to rectify the situation, leading to a significant injection of funds. Since then, the Reserve Bank has been gradually building up the reserve, which currently stands at around R500 billion, a substantial increase from R65 billion in 2012.
The recent decision to settle a portion of the valuation gains from the GFECRA and transfer it to the Treasury will help reduce government debt. The reduction may not have a significant impact given the massive debt requirements, but it will slightly lower the debt-to-GDP ratio. This move is also beneficial for the Reserve Bank as it lowers the likelihood of dipping into the contingency reserve.
While this financial maneuver may seem like clever accounting, it doesn’t address South Africa’s fundamental issue of needing substantial economic growth. The budget lacks a comprehensive growth strategy, highlighting the urgent need for a plan to stimulate economic development.
In conclusion, the government’s decision to tap into the GFECRA funds to reduce debt may have short-term benefits, but the overarching problem of economic stagnation looms large. A robust growth strategy is imperative to ensure long-term sustainability and prosperity for South Africa.
Read the original article on Daily Maverick
