The Institute for Economic Justice (IEJ) proposed in September that the government utilise some of the R497bn balance in the gold and foreign exchange contingency reserve account (Gfecra) to support key areas of spending. This elicited sharp opposition from the business media and Reserve Bank officials.
Three months later, the National Treasury and Bank governor Lesetja Kganyago seemed to have conceded that the Gfecra balances should be tapped. This is welcome, given the moral and legal imperative to use available resources to advance development, realise rights, and reduce suffering.
The key question now becomes how, and on what, to spend the funds.
The Gfecra records realised and unrealised profits and losses from changes in the value of the Bank’s gold, forward exchange contracts and foreign exchange reserves. The funds belong to the state and can be transferred to the national revenue fund.
The IEJ believes that most of the R497bn should be carefully deployed to boost desperately needed development and inclusive growth (leaving some in the account as a buffer). Deploying these funds should not serve as a cover for ongoing budget cuts elsewhere. Four priority areas stand out.
• Urgent investment in key state entities
Critical state entities are underfunded and hobbled with unsustainable debt repayments, eating away at funds needed for investment and infrastructure upgrades. For Eskom, this literally interferes with keeping the lights on. Transnet is on a similar path.
• Debt relief is essential
For Eskom, the 2023 national budget took steps in this direction, announcing relief of R254bn over the medium term. This has been bogged down in negotiations, with most of the relief not actually constituting debt write-offs for Eskom. Strict conditionalities have been attached, through which the Treasury wants to drive privatisation and exercise veto power over energy policy.
Further scope exists to tackle Eskom’s current R423bn debt. This would mean renegotiating the terms of debt (interest rates and payment periods) held by the private sector, transferring the full debt to the state or a special purpose vehicle, and utilising the Gfecra, together with already allocated funds, to cover debt service and repayment costs in full.
• New capital expenditure
Transnet’s failing freight rail and the inefficiency in the country’s ports are key economic challenges. The Treasury estimates that rail inefficiencies cost the economy R411bn in 2022.
While Transnet has initiated a five-year capital programme of R122.7bn, of which R23bn is for infrastructure, this is unlikely to be enough to address infrastructure and maintenance backlogs. Eskom should serve as a cautionary tale about funding such investment through taking on debt.
The government could, therefore, utilise the Gfecra to bolster infrastructure, providing Transnet with a capital injection to support maintenance and investment. This will have a positive impact on other sectors of the economy, such as manufacturing and retail trade, and boost exports.
Investment in passenger rail transport through the Passenger Rail Agency of South Africa is another possibility. This is critical for bringing down the cost of commuting for poor and working class communities.
• Boost targeted social expenditure: the social relief of distress grant (SRD) as a pathway to a basic income grant (BIG).
Utilising the Gfecra for critical social expenditure is another avenue. Just-published modelling shows that a South African BIG would lower poverty, boost consumption and help grow the economy.
Though the existing SRD grant is widely considered to lay the basis for a BIG, Treasury has gradually strangled it in an attempt to choke a BIG.
The SRD has remained at R350 since 2020 and its budget was cut from R44bn in 2022/2023 to R36bn in 2023/2024, with a proposed R33bn for 2024/2025. Due to restrictive criteria and administrative barriers, the number of beneficiaries has been deliberately reduced from a peak of 10.9-million in March 2022 to about 8.7-million at the end of 2023. The 2024 budget allocation provides for fewer than 8-million beneficiaries a month. This unjustifiable exclusion and retrogression has elicited a court challenge from IEJ, #PayTheGrants and the Socio-Economic Rights Institute.
With no clear plans for the SRD grant beyond 2025, the Treasury is also attempting to play a permanent BIG off against other social programmes, or suggest it necessitates a hike in VAT. This should not, and need not, be the case.
In addition to existing allocations, Gfecra funds could be ring-fenced to fund a three-year transition period from the SRD to a BIG. This should ensure an SRD grant at the level of the food poverty line in 2024 and 2025, with everyone of working age below the poverty line covered, while a BIG and appropriate funding mechanisms are put in place. The child support grant should also maintain parity with the SRD to make sure children and their carers are not left behind. This would fulfil the constitutional obligation to progressively realise the right to social assistance amid growing hunger and exclusion.
• Expand developmental financing
A perennial problem with development financing in South Africa — whether through the Industrial Development Corp, the Development Bank of Southern Africa or other developmental agencies targeting small businesses, priority sectors and historically disadvantaged communities — has been the need for these entities to raise funds from private capital markets. This limits their ability to lend at low interest rates as they need to make a sufficient profit to cover costs and repay their own creditors.
This is in sharp contrast to, for instance, the Brazilian Development Bank, which received significant subsidised credit and successfully drove a range of industrialisation projects, particularly between 2007 and 2015.
The Gfecra funds could, therefore, serve as an initial basis for capitalising development financing or, perhaps, a sovereign wealth fund. Sovereign wealth funds have been instrumental in driving investment towards national priorities.
For these purposes the balances within the Gfecra must be complemented by other sources of financing, including additional subsidised credit from the Bank.
Such an approach would serve the dual objectives of channelling financing into priority sectors — in the context of a distorted financial sector that skews funding towards big established monopoly (often extractive) sectors, speculation, real estate, and services — and providing credit or capital on affordable terms in a high-interest rate environment.
• Prudence and boldness
The Gfecra balances are no panacea for South Africa’s ailing economy. They are also not the only public funds that must be mobilised — further billions in untapped taxes and domestic resources (for example, in the Public Investment Corp) exist. But the funds do provide a substantial pool at an opportune moment. Policy discussions taking place must be transparent and parliament should play its oversight role ahead of the 2024 budget.
The moment calls for both prudence and boldness. Prudence in that public funds are sometimes squandered. Boldness in that such investments could mark a break from the path of self-defeating budget cuts and a shift onto a path of desperately needed public investment. For this to occur, the funds must be deployed in addition to existing spending plans and complemented by the simultaneous scaling-up of budget investments in other critical social and economic priorities. We have little time to waste.
* The authors work at the Institute for Economic Justice
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