Free lunch anyone? We specialise in those in SA, and it’s been terrifying to see the sudden explosion of conversation about a supposedly remarkable pot of gold in the Reserve Bank that until very recently no-one seemed to know anything about.
There’s this thing called the Gold & Foreign Exchange Contingency Reserve Account (GFECRA) on the books of the Reserve Bank. There is R459bn in it, enough to pay the current R350 a month social relief of distress grant for 10 years. Or, indeed, all of Eskom’s debt.
The Reserve Bank will rue the day it called this thing a contingency reserve because if our current condition doesn’t warrant a contingency measure it is hard to imagine what does. The National Treasury faces a funding shortfall of about R100bn (left-wing economists say the shortfall is half of that) as taxes disappoint.
The options for finance minister Enoch Godongwana as he prepares his medium-term budget policy statement for next week, and then a budget in February, are to raise taxes, borrow more or cut spending.
Appeals to the ANC and the cabinet to cut spending, especially ahead of an election in 2024, have been met with outright hostility, and President Cyril Ramaphosa has not stood up for the Treasury. So the Left, to the relief of the ANC (which is not at all Left but likes to think it is) has pounced on the GFECRA for at least a solid portion of the solution.
Left-wing economists never saw a free lunch they didn’t want to eat, and this is no exception. The GFECRA is paper money. It exists only as a mirage. It is the “profit”, or better merely the increase, in the value of the Reserve Bank’s foreign exchange reserve in rand terms, as a result of the steady depreciation in the value of the rand.
SA had low forex reserves 20 years ago. It was Tito Mboweni, as governor of the Bank at the time, who built them up to the more or less $55bn the net reserves are today. About R7.26 bought a dollar in 2011. It would take about R19 to buy a dollar today.
Bear in mind that the dollar amount of our reserves has not changed much at all. So what you do to get to the R459bn in the GFECRA is to count all the extra rand you would have to spend to get our foreign exchange reserves back to where they are. Your first $55bn would have cost say R300bn to accumulate. Today it would cost more than R1-trillion. And then, in something only economists can do, you turn that into real money and pay off Eskom’s debt with it.
Well, no. The only way to turn it into real money is to sell the dollars you own for rand, and in so doing deplete the reserves. Why do we need reserves? The Bank for International Settlements, a key forum and facilitator for the world’s central banks, said a few years ago the reason the SA Reserve Bank raised the level of reserves from about $28bn at the dawn of democracy “has been largely for self-insurance purposes, recognising the need to reduce external vulnerability. SA’s current level of gross reserves of approximately $50bn, although above the estimated adequacy level, has not yet reached a level that is deemed as sufficient.”
That “self-insurance” is no longer necessary, if anything the very opposite. We can only hope the debate about this nonexistent money fades away. But don’t underestimate the capacity for self-harm in both the ANC and in the Ramaphosa administration. “Yes, yes”, you can almost hear the conversation, “not all of it, obviously, but just a little. Who is going to notice?”
So you pay off some debt. To do that you have to commit the ultimate heresy. Because the R459bn isn't actual money you have to go and print it, then hand it over to the Treasury, which then redeems one of its upcoming bonds with its crisp new notes, the ink barely dry. Of course, you make an arrangement for the Treasury to pay you back, but by then it’s too late. You’re on the thin and the thick end of the wedge. Everyone sees you do it, and you fall even further in the estimation of the industrial and democratic world. They’re the ones with the money to invest. You’ve drunk the Kool-Aid. The rand takes another tumble. You’re Argentina.
It feels mad writing about this. The Financial Mail ran a good cover story on the GFECRA last week and rightly tried to dispose of it as a source of comfort. But even that piece allowed for the possibility that some transfer of GFECRA to the Treasury might occur in 2024. Apparently the rationale is that other central banks do it so why can’t we?
Because in a sea of corruption, rotten government, useless policy and absent, flaccid leadership, something needs to stand strong or we are lost. Some rules can be broken, perhaps, given our past, but not all of them. Caution with money, with healthcare, with respect for the law ... you lose these, you lose your soul.
We are not a big, robust industrial economy. The US and EU can print money because their foreign exchange reserves are in their own currencies, and much of the world values their currencies. Most of our debt may be in rand, but it would be madness to think we could simply print more rand to be rid of it.
We already sustain a vast population of poor and indigent fellow citizens with the thinnest imaginable layer of taxpayers. There is no room here any more for arrogant alternative economics.
• Bruce is a former editor of Business Day and the Financial Mail.
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