Reserve Bank confirms discussions to draw on reserves

by MMC
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South Africa’s central bank has confirmed it is in talks with the National Treasury to find a way to tap contingency reserves to finance the country’s growing budget deficit.

“We are engaged with the Treasury,” governor Lesetja Kganyago told reporters Thursday after the monetary policy committee kept rates steady. “We have also brought in international expertise to engage on these issues,” including how to manage the bank’s capital situation, he said.

The two institutions are currently studying the amount of the withdrawal, its duration and its cost for the central bank. The value of the reserves is currently 497 billion rand ($26.4 billion), Kganyago said. He declined to name the outside advisers or say when a decision would be made.

He explained that this was a complex issue because profits on reserves are on paper, change from month to month, and realizing this would mean selling off some of the reserves and potentially disrupting investors.

“The problem is not that simple,” he said.

The central bank oversees the gold and foreign exchange contingency reserve account on behalf of the Treasury. The account contains unrealized gains or losses on reserves that are incurred due to fluctuations in exchange rates and all gains or losses accrue to the government.

In the early 2000s, the Treasury paid more than R28 billion over four financial years to the central bank to cover a loss on this account.

Economists, academics, civil society organizations and the Institute for Economic Justice, an economic think tank, have increasingly called for the Treasury to use the account to avoid budget cuts. The move is expected to be made in conjunction with the central bank, which has warned against the move because contingency reserves are seen as a buffer in the event of extreme monetary shocks.

In an interview with Bloomberg after presenting his medium-term budget statement on November 1, the Minister of Finance Enoch Godongwana said the Treasury could not rule out drawing on reserves and that the matter was under discussion with the central bank.

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