ATC240424: Report of the Select Committee on Appropriations on the Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill [B7 – 2024] (National Assembly – Section 77), Dated 24 April 2024

NCOP Appropriations

Report of the Select Committee on Appropriations on the Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill [B7 – 2024] (National Assembly – Section 77), Dated 24 April 2024

 

Having considered the Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill [B7 – 2024], referred to in terms of Section 13 of the Money Bills and Related Matters Act No. 9 of 2009 (as amended by the Money Bills and Related Matters Amendment Act, No. 13 of 2018) (the Money Bills Act), the Select Committee on Appropriations reports as follows:

 

1. Introduction

The Bill was tabled in Parliament with the 2024 Budget by the Minister of Finance on 21 February 2024 and it was passed by the National Assembly (NA) on 26 March 2024, whereafter it was referred to the National Council of Provinces (NCOP) for concurrence. In compliance with section 4(4)(c) of the Money Bills Act, the Committee consulted with the Financial and Fiscal Commission (FFC) on the Bill and also invited the Parliamentary Budget Office (PBO) to comment.

 

The Constitution and the Money Bills Act require the Committee to conduct public hearings and report to the House on the comments. In compliance with this, advertisements were published on Parliament’s website and social media platforms, inviting the public and interested parties to comment on the Bill. In response, written submissions were received from the following stakeholders, who also made oral submissions during a public hearing held on 15 March 2024:

 

• Congress of South African Trade Unions (COSATU);

• Dr S M Muller; and

• Adv B Cronin.

 

2. National Treasury

Section 28 of the South African Reserve Bank Act, No. 90 of 1989 (the SARB Act) provides for the establishment of a Gold and Foreign Exchange Contingency Reserve Account (GFECRA) held by the SARB, to capture losses and profits on certain foreign currency transactions, protecting it from currency volatility. The Act further empowers the Minister of Finance and the SARB Governor to settle balances by mutual agreement and requires such balances to be paid into the National Revenue Fund (NRF). The last settlement of balances in this account was reached in 2003, to the value of R28 billion in favour of the SARB. The value of the account has since grown to over R500 billion due to significant rand depreciation.

 

The Bill provides for direct charges against the NRF for the Contingency Reserve Account of the SARB; and for reporting of such funds, informed by a New Settlement Agreement between the Minister of Finance and the SARB Governor. Under the new framework, GFECRA balances are distributed, in a waterfall arrangement, to three pools. The first pool is a GFECRA buffer, large enough to absorb large and plausible rand appreciation shocks without resulting in negative balances in the account. Once this pool is full, additional funds flow into a second pool, the SARB’s Contingency Reserve Account, which is an all-purpose equity buffer, maintained to absorb losses, including losses from interest costs paid by the SARB to manage liquidity when there are GFECRA payouts to National Treasury. Once this pool is full, any remaining funds are distributed to National Treasury on an annual basis.

 

The GFECRA buffer is being set at R250 billion. By minimising risks that the GFECRA turns negative, this buffer will help protect National Treasury from having to pay into the account again. The goal of the R100 billion transfer to the SARB Contingency Reserve Account is to protect the SARB’s policy solvency, defined as the flexibility to pursue mandates without concern for the financial position. This buffer will be replenished from excess GFECRA balances, when available, and is meant to be large enough to last through extended periods when top-up funds from GFECRA are not available.

 

National Treasury will receive R150 billion. As detailed in the Budget Review, this will be paid out in three tranches of R100 billion in the 2024/25 financial year, and R25 billion in each of the subsequent two financial years. These proceeds from GFECRA will be used to reduce government borrowing. The liquidity management costs of these payouts are expected to be around R8 billion in 2024, R10 billion in 2025, and R12 billion in 2026, amounting to R30 billion over the 2024 MTEF, which is accompanied by a reduction in the growth in stock of debt. The exact costs will depend on the level of short-term interest rates and will recur indefinitely. 

 

3. Consultation  

 

3.1 Financial and Fiscal Commission (FFC)

The Financial and Fiscal Commission (FFC) submitted that the GFECRA was an important buffer to insulate the SARB’s profit-and-loss statement from exchange rate fluctuations. The gains derived from the account was due to the losses of value and depreciation of the rand against the US dollar, thus it was not a real profit or asset. Therefore, the FFC was of the view that the use of the GFECRA to the tune of R150 billion over the MTEF was in effect weakening South Africa’s strategic position and capability to stabilise the currency value in an increasingly volatile world economy, and the country’s financial and fiscal integrity. The FFC asserted that, while drawing on reserves could provide immediate fiscal relief, assessing the short-term returns against the prospective longer-term risks was critical. To forgo this assessment was tantamount to jeopardising investor confidence and inviting substantial run-ups in borrowing costs, thus ushering in debt distress.

 

The FFC supported the agreement as sufficient funds would be retained to absorb exchange rate fluctuations, with the obligation for the National Treasury to cover exchange rate losses. The FFC recommended that National Treasury further tighten and consolidate expenditure with the non-diverted purpose to increase economic productivity and growth.

 

3.2 Parliamentary Budget Office

The Parliamentary Budget Office (PBO) submitted that government’s foreign exchange reserves could be thought of as a form of insurance against instability, financial crises, and contagion that may harm the economy, in particular the financial sector and other businesses. South Africa’s open financial accounts and floating exchange rate made it vulnerable to sudden shifts in sentiments in the global financial and exchange rate markets.

 

The PBO was of the view that by holding large levels of foreign exchange, government provided a free service to the economy from which the banks and the financial sector gained disproportionately huge benefits. The PBO was concerned that the SARB had chosen to pay for the transfer to National Treasury by increasing reserves of banks and financial institutions that would be remunerated at high interest rates. Even though it viewed the use of the GFECRA as a positive step, the PBO submitted that National Treasury and the SARB’s use of the account did not indicate a move to consider the broader balance sheet to deal with the current issues of unemployment, poverty, and inequality, and it was negative towards development and growth prospects. The current framework would create more constraints on government accessing the GFECRA to deal with other emerging issues. To this end, the PBO submitted that it should not solely be used for debt reduction but should be strategically allocated to finance a targeted financial stimulus for the economy. This would reduce suffering related to high levels of poverty and support a developmental approach that would increase growth and future revenue.

 

3.3 Congress of South African Trade Unions

The Congress of South African Trade Unions (COSATU) welcomed the Bill, stating it would provide relief to a strained fiscus by accessing a limited portion of the SARB’s reserves. COSATU appreciated the severe pressures facing the fiscus, society and the economy at large with numerous spending demands and limited revenue sources. It also recognised the need for the SARB to maintain adequate reserves to protect the value of the rand and thus the economy.

 

COSATU submitted that the proposed relief to the State was essentially a once-off, albeit over three years, with the bulk being allocated in the current financial year. It cautioned that this was not an unlimited source of funds and that sufficient reserves must also be maintained by SARB. COSATU emphasised that the proposed relief should be utilised strategically in a manner that would ease the pressure on the fiscus, stimulate the economy, reduce unemployment, and generate future tax revenues. COSATU advocated for the utilisation of some of the R150 billion over the MTEF to ease the financial burdens on Eskom and Transnet, which would reduce the fiscal burden on the State and enable the two entities to invest in infrastructure and improve their performance.

 

COSATU noted that the reserves had grown substantially over the past decade; and suggested that consideration should be given to utilising future surplus growth to create a Sovereign Wealth Fund, of which the interest and capital at times must be available for the fiscus for development and other purposes. This would ease the fiscal pressures on the State, assist in meeting developmental mandates and lessen the burdens on society, and particularly the working class. COSATU proposed that discussions should take place on the appropriate levels of reserves required, and that the relevant legislation be drafted and tabled in Parliament early in the 7th Parliament.

 

3.4 Dr S M Muller

Dr Muller pointed out that the Bill was being processed after the adoption of the 2024 Fiscal Framework and Revenue Proposals by Parliament, by which it had already taken a position on the balance of expenditure, revenue and borrowing, as well as on the proposed debt path contained in the 2024 Budget Review. As the proposed fiscal framework in the Budget Review had been based on the GFECRA transaction, Dr Muller was of the view that processing the Bill separately from the fiscal framework was illogical. He was of the view that it created a similar problem to the existing situation with the tax proposals, which were only finalised late in the fiscal year (between August and November), even though Parliament approved the fiscal framework premised on those proposals in February or March.

 

Dr Muller stated that given the magnitude of the transactions that the Bill was intended to facilitate, questions arose as to the reasons this proposal emerged in the way it had. He noted two differing versions; one of which attributed credit for the idea to the Institute for Economic Justice (IEJ), and the second to a working paper by certain foreign finance consultants and academics in the United Kingdom. Dr Muller suggested that several key questions related to this had not been adequately addressed, including what the involvement of SARB officials or advisers had been, and why the proposal had been tabled at this particular time and the GFECRA not used earlier to offset harsh expenditure cuts.

 

Dr Muller further outlined the following concerns in respect of the Bill:

• On the basis of the publicly available facts, it appeared that the SARB and National Treasury had deliberately allowed a very large surplus to accumulate in the GFECRA while simultaneously proposing and implementing large cuts in public expenditure on the basis that they were necessary for fiscal consolidation.
• Consideration of the possibility of using some of the GFECRA surplus was left as late as possible in order to maintain planned expenditure cuts before the election.
• The proposed use of the GFECRA transaction to reduce debt appeared intended to increase fiscal space after the elections. A more obvious use would have been to prevent expenditure cuts and use the remainder of the amount to reduce debt obligations.
• One may interpret the sudden and relatively dramatic nature and timing of the GFECRA proposal as being linked to unstated political interests rather than purely technical considerations.

 

3.5 Adv B Cronin

Adv Cronin submitted that the Bill misconstrued the status and operation of the GFECRA, which had been established in terms of section 28 of the SARB Act and was in essence a notional account held by the SARB for the benefit of the national government. Adv Cronin noted that section 28(2) already created a mechanism for crediting the National Revenue Fund (NRF) without the need for additional legislation. This provision already empowered National Treasury and the SARB to make this decision. Adv Cronin further submitted that the Bill erroneously envisaged granting an additional direct charge in favour of the SARB when the money in question could and, on the apparent information provided, had already been credited to the NRF, making it unnecessary and counterproductive for Parliament to consider an additional direct charge to be enacted for the stated purpose of further public spending. The Bill was not necessary to give effect to the use of R100 billion credited to the NRF by agreement with the SARB. Adv Cronin was of the view that, if there was any uncertainty regarding the wording in section 28 of the SARB Act, then that was the provision that should be amended by Parliament.

 

3.6 Responses

3.6.1 Parliamentary Legal Services

The Parliamentary Legal Services (PLS) was requested to comment on the inputs by the stakeholders during the public hearings. The PLS submitted that the intention of the Money Bills Act was to establish a procedure for the amendment of money Bills as envisaged in section 77(3) of the Constitution. The Money Bills Act endeavoured to create that procedure in an economic context that ensured consultation and predictability. Therefore, Parliament had to amend the proposed fiscal framework for the 2024/2025 financial year if the intention was to amendment the Bill. This was the sequence envisaged in the Money Bills Act. However, nothing prevented Parliament from amending the Bill within the prevailing fiscal framework.

 

3.6.2 National Treasury

National Treasury was also requested to comment on the submissions and comments made during the public hearings. National Treasury submitted that, together with the SARB, it was in the process of formalising a new GFECRA settlement agreement which would reduce government’s borrowing requirement and debt and would improve the SARB’s equity position. In terms of the agreement, the National Treasury and the SARB would annually review the buffers to ensure they were sufficient to protect both institutions against currency and interest rate fluctuations, with a view to not burden the fiscus. Therefore, it was not necessary to appoint external experts to assist with the process.  The proposal did not affect the utilisation of the foreign currency and gold reserves, as both were untouched by this reform.

 

The response further included the following:

• No settlement of any balance on the GFECRA shall, at any time, undermine the policy solvency of the SARB.
• There shall be no sales of the foreign exchange reserves to realise GFECRA gains if foreign exchange reserves are below the estimated adequacy levels.
• There shall be no settlement of an unrealised balance on the GFECRA that could plausibly be unwound by future currency reversals.
• Any future settlement of GFECRA funds shall be governed by an agreement and a relevant schedule.

 

4. Findings and Observations

Having considered all the submissions made by the above stakeholders on the Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill [B7–2024], the Select Committee on Appropriations made the following findings and observations:

 

1. The Committee noted that the Bill provides for direct charges against the National Revenue Fund (NRF) for the Contingency Reserve Account of the South African Reserve Bank (SARB); and for reporting of such funds, informed by a new settlement agreement between the Minister of Finance and the SARB Governor, and that under the new framework, Gold and Foreign Exchange Contingency Reserve Account (GFECRA) balances are distributed, in a waterfall arrangement, to three pools. To this end, the Committee noted that National Treasury will receive R150 billion to be paid out in three tranches of R100 billion in the 2024/25 financial year, and R25 billion in each of the subsequent two financial years.

 

1. The Committee noted that to monetise the process, the SARB will expand the liquidity to the market via the banking system and allow the funds to reach the National Treasury through the loan accounts that are part of NRF. However, the Committee remained concerned that the increased market liquidity may have an adverse inflationary impact.

 

1. The Committee welcomed the fact that the arrangement will reduce government’s gross borrowing requirement and debt service costs, providing some fiscal space, especially given that most rating agencies have raised concerns over South Africa’s high debt-to-GDP ratio. The reduction in the debt-to-GDP ratio and the stabilising of debt service costs by 2025/26 should change the perspective of the rating agencies towards the South African economy.  

 

1. The Committee remained concerned that government is now tapping into reserves with no set of clear terms and conditions being developed and tabled in Parliament to provide for guidance on how these funds should be utilised for their intended purpose.  

 

1. The Committee noted the FFC’s view that the use of GFECRA to the tune of R150 billion over the MTEF has the potential to weaken South Africa’s strategic position and capability to stabilise the currency value in an increasingly volatile global economy, and the country’s financial and fiscal integrity. Moreover, the Committee noted the FFC’s recommendation that National Treasury should tighten and consolidate expenditure with the non-diverted purpose to increase economic productivity and inclusive growth.

 

1. The Committee noted the PBO’s concern that the SARB has chosen to pay for the transfer to National Treasury by increasing reserves of banks and financial institutions that will be remunerated at high interest rates; and that National Treasury and the SARB’s use of the account did not indicate a move to consider the broader balance sheet to deal with the triple challenge of unemployment, poverty, and inequality.

 

1. The Committee noted the PBO’s view that the current framework has the potential to create more constraints on government to access the GFECRA to deal with other emerging issues; and its recommendation that this should not solely be used for debt reduction but should be strategically allocated to finance a targeted financial stimulus for the economy to reduce suffering related to high levels of poverty and support a developmental approach that would increase growth and future revenue generation.  

 

1. The Committee welcomed COSATU’s recommendation that the proposed relief should be utilised strategically in a manner that would ease the pressure on the fiscus, stimulate the economy, reduce unemployment, and enhance future tax revenue generation.

 

1. The Committee welcomed COSATU’s view that consideration should be given to create a Sovereign Wealth Fund (SWF) through future surpluses, of which the interest and capital at times must be available for development and other purposes; and that discussions should take place on the appropriate amounts of reserves required, and that the relevant legislation be finalised early in the 7th Parliament.  

 

1. The Committee noted Dr S Muller’s concern that the Bill is processed after the adoption of the 2024 Fiscal Framework and Revenue Proposals and that Parliament has already taken a position on the balance of expenditure, revenue, and government borrowings, as well as the proposed debt path for the 2024/25 MTEF period.  

 

1. The Committee noted Adv B Cronin’s view that section 28(2) of the South African Reserve Bank Act (as amended in 2010) already creates a mechanism for crediting the National Revenue Fund (NRF) and empowers the Minister of Finance and the SARB to make this decision without the need for additional legislation.

 

 

5. Recommendations

Having considered the briefings and comments by stakeholders on the Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill [B7–2024], the Select Committee on Appropriations recommends as follows:

 

1. Upon approval of the Bill, the Minister of Finance should gazette the amendment to the Gold and Foreign Exchange Contingency Reserve Account Defrayal Act of 2003 to provide for a direct charge against the National Revenue Fund (NRF) to be credited with a net amount of R100 billion for the 2024/25 financial year from the Gold and Foreign Exchange Contingency Reserve Account as well as R50 billion for the MTEF period.   

 

1. The National Treasury, together with the South African Reserve Bank (SARB) should, within 60 days after the adoption of this Report by the House, develop a set of terms and conditions or principles to ensure that funds are strictly utilised for their intended purpose to reduce government debt and stabilise the escalating debt service cost by the 2025/26 financial year; and the National Treasury should publish the terms and conditions urgently to assist Parliament to continuously monitor the implementation.          

 

1. Whilst welcoming the Bill as a critical piece of legislation, in future, the Minister of Finance should consider tabling such Bills during the Medium Term Budget Policy Statement (MTBPS) to create enough space for Parliament to adequately engage with the proposed legislation.     

 

6. Conclusion

The Select Committee on Appropriations, having considered the Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill [B7 – 2024] (National Assembly – Section 77); referred to it for concurrence and classified by the Joint Tagging Mechanism as a Section 77 Bill; recommends that the Bill be adopted, without amendments.

 

The Democratic Alliance (DA), the Economic Freedom Fighters (EFF) and the Freedom Front Plus (FF+) reserved their positions on the Report.

 

Report to be considered.