Division of Revenue Bill; Second Adjustments Appropriation (2023/24 FY) Bill & GFECRA A/B: engagement with FFC

Meeting report

The Chairperson welcomed the Members and the delegation from the Financial and Fiscal Commission (FFC) to the meeting, and went through the meeting agenda. She then allowed the FFC 45 minutes to present on the three Bills.

Financial and Fiscal Commission (FFC) presentation

Dr Patience Mbava, Chairperson, FFC, introduced the team from the FFC and provided an overview of the presentation.

Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill [B7-2024]
Mr Chen-Wei Tseng, Acting Chief Executive Officer (CEO), FFC, said the purpose of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) was crucial as a buffer to insulate the central bank’s profit-and-loss statement from swings in the exchange rate. The gains derived from the account were due to the losses of value and depreciation of the rand against the US dollar, not a real profit or asset. It would cost South Africa the same exchange rate to regain the foreign reserves unless the rand appreciated. The use of GFECRA to the tune of R150 billion over the medium term expenditure framework (MTEF) was, in effect, weakening South Africa’s strategic position and capability to stabilise its currency value in an increasingly volatile world economy, and South Africa’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 the assessment would be to jeopardise investor confidence, inviting substantial run-ups in borrowing costs, thus ushering in debt distress. The FFC supported the agreement, as the GFECRA Defrayal Amendment Bill would ensure retaining sufficient funds to absorb exchange rate swings, with the obligation for National Treasury to cover exchange rate losses, and called upon National Treasury to tighten even further the fiscal expenditure and consolidate with a non-diverted purpose to increase economic productivity and growth.

Second Adjustments Appropriation (2023/24 Financial Year) Bill [B6-2024]

On the summary of the Second Adjustments Appropriations Bill for the 2023/24 financial year, he said there were R470 million in total additions, with similar-sized reductions. The largest addition (R200 million) was in the Home Affairs vote, specifically for the Represented Political Parties Fund, as political parties prepared for the general elections in May. There were also reductions to two public employment programmes – the Community Works Programme (CWP), of R400 million, and the Expanded Public Works Programme (EPWP), of R8 million. The FFC supported additions in the safety and security cluster aimed at improving the efficiency and productivity of judicial and prosecution services.

Division of Revenue Bill [B4-2024]

On the Division of Revenue Bill, Mr Tseng said provinces are responsible for delivering social goods and services that were not revenue generating, making provinces highly dependent on fiscal transfers and therefore vulnerable to policy reprioritisation and funding constraints. Decisions regarding wage agreements occurred outside the budgeting process, thus making provinces susceptible to any adjustments to national transfers which fell short of compensation of employee (CoE) inflationary adjustments. To absorb these shortfalls, provinces were required to reduce expenditure elsewhere, such as infrastructure, goods and services, thereby undermining their ability to deliver and improve service delivery.

The FFC noted with concern the trend of increasing CoE expenditure, and the impact of wage negotiations which happened without taking full cognisance of the fiscal framework and the Intergovernmental Fiscal Review (IGFR) system. The population share across provinces was a key determinant of the provincial equitable share (PES), and the timing of the release of Census 2022 meant that the PES formula would be updated with Census 2022 only in the outer years of the 2024 MTEF.

Dr Mbava said the Commission was concerned about the use of the GFECRA to the tune of R150 billion over the MTEF, which in effect weakened South Africa’s strategic position and capability to stabilise its currency value in an increasingly volatile world economy, and South Africa’s financial and fiscal integrity. The Commission supported the terms and conditions in the GFECRA Defrayal Amendment Bill that it would ensure retaining sufficient funds to absorb the exchange rate swings, with the obligation of the National Treasury to cover exchange rate losses, and called upon National Treasury to reprioritise even further the fiscal expenditure and consolidate with a non-diverted purpose to increase economic productivity and growth.

Regarding the Second Adjustment Appropriations Bill, the Commission recommended that cuts to strategically important public employment programmes should be based on a thorough evaluation of their performance, and that in the current fiscally constrained environment, allocations in respect of administration (and other non-core programmes) should be limited.

On the Division of Revenue Bill, the FFC welcomed the additional funding allocated to the National Schools Nutrition Programme over the 2024 MTEF, but recommended the strengthening and improvement of spending to ensure alignment with the grant objectives, and that consideration be given to linking the rate of increase in this grant to that of food inflation.

See attached for full presentation

Discussion

Mr D Ryder (DA, Gauteng) said there had been a lot of discussion and analysis on the GFECRA, and shared the concerns raised by the FFC that the country would be eroding its wealth position. However, his concern was the process of monetisation of the R150 billion because it had been clarified that the country would not be selling any assets to realise those gains. It looked like the Reserve Bank was going to be giving out more currency, and that was the reason for the mooting of an additional R100 billion to remove it from the balance sheet of the Reserve Bank as contingent liability, and to place it as an asset so that the balance sheet balanced and money supply could be increased. That would be the result of the monetisation of the reserve.

He said supply and demand was an economic principle that applied to everything, including currency, and he was concerned that inflation would increase as soon as money supply was increased. The country was currently having low growth, and the currency was weakening. With the current fuel prices, it did not seem that inflation would stop anytime soon. He asked the FFC to provide more clarity on the matter.

He said the moving of money to administration could be a good thing, but the shift from the EPWP and the way it was handled looked like it was financing more millionaire managers and the gap that was created by the shortfall in the budget last year for the public wage increase, and was taking the pressure off the public service to streamline themselves. That almost created an incentive for departments to underspend in the long run, and that pointed to weak target setting from government and administrative oversight.

He said the National Health Insurance (NHI) was dead, the District Development Model (DDM) was dead, and the budget that had been presented showed that to be the case. He asked the FFC to comment on that, and also to comment on the marginal squeeze that resulted from the National Energy Regulator of South Africa (NERSA) giving higher increases to Eskom than they were allowing municipalities. The marginal squeeze was impacting the ability of municipalities to deal with reticulation infrastructure, and was putting municipalities under more pressure. Lastly, he said the legacy debt between Eskom and Rand Water remained the elephant in the room that had not been spoken about by anyone, and there were still no solutions for this matter. He asked the FFC to comment on those issues.

Mr W Aucamp (DA, Northern Cape) asked the FFC to expand more on its concern about the use of the GFECRA to the tune of R150 billion over the MTEF, and asked them what a better alternative would have been. According to him, a better fiscal policy and better implementation and oversight and better management would have prevented this.

On the Second Adjustment Appropriation Bill, he wanted to know the FFC’s view regarding the reduction of the R400 million for the Community Work Programme (CWP) and EPWP budgets, given the significance of these programmes to poverty alleviation. According to the FFC, what specific steps could be taken by government to ensure that budget reductions were not made at the expense of service delivery?

On the Division of Revenue Bill, according to the FFC, what could be done by government to ensure that wage negotiation processes improved in a way that did not make provinces susceptible to adjustments of national transfers which fall short of compensation of employees and the inflationary adjustments? What was the view of the FFC regarding the fiscal consolidation programme, especially because the main revenue amounted to R1.8 trillion, with a total expenditure reaching R2.1 trillion? What recommendations could the FFC suggest to improve the current fiscal situation?

He wanted to know the view of the FFC regarding the impact of local government capacity building interventions, as well as the budget forums, considering that the challenges of local government were rising. Local government was where most of the services had to be delivered to the people on the ground, but there was a huge capacity shortage in that area. What were the observations of the FFC so far in terms of Eskom Debt Relief Bill, which was also aimed at municipal debt relief? Were there any improvements in that regard?

Mr F du Toit (FF+, North West) said in the previous engagement regarding the contingency reserves, he had posed a question to National Treasury on whether the R150 billion should be taken, and what was stopping them from taking more funds, and when they anticipated that the government would put its hand into the "cookie jar" again, since government finances were currently declining. The South African Special Risk Insurance Association (SASRIA) was allegedly in consultation with National Treasury to have an open chequebook should there be a repeat of the July 2021 unrest, and according to some experts, there was a possibility of that happening. He asked the FFC to comment on that, and state its view on the possibility of government taking more funds from the reserve in the future.

FFC’s response

Dr Mbava said they would not want to quickly dismiss the district development model (DDM) as unworkable. The FFC had made strong recommendations regarding its strengthening and for it to be funded, and when those challenges were addressed, the model would have an opportunity to work.

Mr Tseng said the FFC was concerned about the R150 billion, because the Reserve Bank was there for a reason, and that was for it to be tapped into when the country was under a fiscal squeeze. The GFECRA was there for a money squeeze that happened in foreign reserves, meaning it had implications regarding foreign exchange and inflation. There was no definitive relationship that if there was an increase in the distribution of money, there would be inflation. Inflation was the money residual, which was money that was not used effectively, so if the flow of money was speeded up, it would not be a problem if the level of economic growth and productivity corroborated that speed of money. Inflation would be high if the economic growth and productivity did not match the speed of money.

Dipping into the GFECRA account would weaken the country's strategic position in terms of the exchange rate and its trade terms. The concern was that for this account to stay maintained, it would mean the money that was used would need to be returned. This meant it would remain the same amount, so using it would not result in a profit and the country would not gain from using it unless the rand appreciated and the dollar spending from the account could be redeemed at a lower price. This would affect the entire fiscal flow, integrity, and position of the country. In the political scene, a country’s foreign exchange reserve was the backbone that gave it the power to promote its national interests on the international stage.

He agreed that there was some weak target setting in the EPWP and the wage bill, and there were structural weaknesses and deficiencies in the public sector wage bill, including salary structures and salary levels. One of the major deficiencies in the salary structures was that it was linear, whereas the structure of governance was not necessarily linear in terms of the responsibilities and roles, and only the latter translates to public value and public sector productivity.

The concept and principles of the DDM made sense, because government had struggled for many years in the municipal space because there were 257 municipalities, and they had different political , structural and executive management teams. Even their financial management was completely ambiguous, which contributed to the government's inability to implement the DDM successfully. The DDM was supposed to be the middle ground that monitored the municipalities and ensured that the three spheres of government worked together. Government needed an interactive map as a monitoring tool to look into monitoring the municipalities, because that could be a good tool which would prevent over-expenditure while being effective.

The FFC had not figured out the costing structure of NERSA and Eskom, because the formula had not been shared with the public or to researchers to engage. This made it difficult to provide an analysis or to find any solutions to the municipal debt crisis with Eskom, as the costing structure would provide the missing information. The alternative to structural debt or digging into reserves, was that within the Intergovernmental Fiscal Review (IGFR) systems, there were reserves of all the entities, municipalities, provinces, municipalities and departments, of operating surpluses after all activities. However, those cash surpluses were in banks, so there must be a way for government to recoup all those funds by strengthening the fiscal system.

The Chairperson thanked the FFC for its presentation and engagement.

Dr Mbava thanked the Committee for having worked together well during the Sixth Administration, and hoped that the next Select Committee on Appropriations would continue in the same manner.

Consideration of minutes

Mr Aucamp moved the adoption of the minutes of 6 March, and was seconded by Mr Du Toit.

Ms L Moss (ANC, Western Cape) moved the adoption of the minutes dated 13 March, and was seconded by Mr Aucamp.

Mr Aucamp moved the adoption of the minutes of 15 March, and was seconded by Ms Moss.

Announcements

The Committee Secretary said next week, the Committee would interact with the South African Local Government Association (SALGA) on the Division of Revenue Bill and the Parliamentary Budget Office (PBO) on the Division of Revenue Bill, the Second Adjustments Appropriation Bill, and the Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill. He said the notice would be sent to Members before the end of the week, as per the normal procedure.

The Chairperson said that at the last meeting, the Committee Secretary had committed to revisiting the Committee programme to help Members with planning, and asked if that had been done.

The Committee Secretary said they were working on the framework, but there had been delays from the Select Committee on Finance. A draft was in place, and would be sent to the Committee after the delay was sorted out.

The Chairperson asked that this be done before Friday, and thanked Members for participating in the meeting.

The meeting was adjourned.