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ATC240320: Report of the Standing Committee on Appropriations on the Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill [B7 – 2024] (National Assembly – Section 77), Dated 20 March 2024

Standing Committee on Appropriations

Report of the Standing Committee on Appropriations on the Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill [B7 – 2024] (National Assembly – Section 77), Dated 20 March 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 Amendment Procedure and Related Matters Act No. 9 of 2009 (as amended by the Money Bills Amendments Procedure and Related Matters Amendment Act, No. 13 of 2018), the Standing Committee on Appropriations reports as follows:

 

1. Introduction

 

Section 28 of the South African Reserve Bank Act, No. 90 of 1989, states that ‘Any credit or debit balance on the Gold Price Adjustment Account, the 20 Foreign Exchange Adjustment Account and the Forward Exchange Contracts Adjustment Account shall, at the close of each financial year of the Bank or at such other times as the Bank and the Treasury may determine, be transferred to a Gold and Foreign Exchange Contingency Reserve Account established and managed by the Bank on behalf of the Treasury’. The 2024 Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill (hereafter referred to as the Bill) proposes to provide for direct charges against the National Revenue Fund for the requirements of the South African Reserve Bank and reporting thereof, and to provide for matter incidental thereto. The Standing Committee on Appropriations, hereinafter referred to as the Committee, is established in terms of section 4(3) of the Money Bills Amendment Procedure and Related Matters Act, 2009 (as amended), and herein referred to as the Act.

 

The Bill was tabled in Parliament by the Minister of Finance on 21 February 2024 during the presentation of the 2024 budget and was referred to the Committee for consideration and report to the National Assembly as prescribed in section 13 of the Act. In processing the Bill, section 4 (4) (c) of the Act also requires the Committees on Appropriations of both Houses to consult with the Financial and Fiscal Commission (FFC). In addition to consulting with the FFC, the Committee also invited the Parliamentary Budget Office to comment on the Bill.

 

The Act also requires the Committee on Appropriations to conduct public hearings on the Bill and for the Committee to report to the House on the comments and amendments to the Bill. In compliance with the requirements of the Act, advertisements were published on Parliament’s website and social media platforms, inviting the public and interested parties to comment on the Bill. The public hearings on the Bill were held on 15 March 2024 via the Zoom virtual meeting platform. In response, written and oral submissions were received by the Committee for consideration, and in line with the requirements of the Act from the following stakeholders:

 

  • Congress of South African Trade Unions;
  • Dr Sean Muller; and
  • Mr Benjamin Cronin.

 

2. Background to the Bill

 

The Gold and Foreign Exchange Contingency Reserve Account Defrayal Amendment Bill (GFECRA) is an account held at the Reserve Bank (SARB). As specified in the SARB Act, it captures losses and profits on certain foreign currency transactions, protecting the SARB from currency volatility. The SARB Act establishes GFECRA and 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 then, grown to over R500 billion due to significant rand depreciation.

 

The amendment to the GFECRA Act provides for direct charges against the National Revenue Fund for the Contingency Reserve Account of the SARB. It also provides for a reporting of such funds, informed by a New Settlement Agreement between the Minister of Finance and the SARB Governor. Under the old GFECRA settlement framework, most amounts that entered GFECRA went unsettled, and so the account grew steadily larger because of currency depreciation. Under the new framework, by contrast, GFECRA balances are distributed, in a ‘waterfall’ arrangement, to three ‘pools’. The first pool is a GFECRA buffer, which will be large enough to absorb large and plausible rand appreciation shocks, without resulting in negative balances on the account. Once this pool is full, additional funds flow into a second pool, which is the SARB’s contingency reserve. This is an all-purpose equity buffer for the SARB, maintained to absorb losses, including losses from the 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 NT, on an annual basis.

 

The GFECRA buffer is being set at R250 billion. By minimising risks that the GFECRA account turns negative, this buffer will help protect National Treasury from having to be paid out to the account to make it positive again. The SARB contingency reserve buffer will receive R100 billion. The goal of this transfer is to protect the SARB’s policy solvency, defined as the flexibility to pursue mandates without concern for the financial position. The contingency reserve buffer will be replenished from excess GFECRA balances when available. This buffer is meant to be large enough to last through extended periods when these 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, R25 billion and R25 billion in the 2024/25 financial year and the subsequent two financial years respectively. 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. This amounted to R30 billion over the 2024 MTEF. The exact costs will depend on the level of short-term interest rates and will recur indefinitely. The proceeds from GFECRA will be used to reduce government borrowing. An amount of R150 billion will be used to reduce government’s borrowing by R100 billion (2024/25), R25 billion (2025/26) and R25 billion (2026/27). As a result, debt service costs will reduce by R30.2 billion over the medium-term, which is accompanied by a reduction in the growth in the stock of debt.

 

3. Provisions of the Bill

 

The following section was inserted after section 2 of the Gold and Foreign Exchange Contingency Reserve Account Defrayal Act, 2003 (Act No. 4 of 2003):

 

“Direct charges for requirements of South African Reserve Bank

2A. (1) A net amount of R100 billion, credited to the National Revenue Fund from the Gold and Foreign Exchange Contingency Reserve Account in the 2024/25 financial year, following an agreement between the National Treasury and the South African Reserve Bank, as envisaged in section 28(2)(b) of the South African Reserve Bank Act, 1989 (Act No. 90 of 1989), is a direct charge for the 2024/25 financial year against the National Revenue Fund for the contingency reserve requirements of the South African Reserve Bank and must be attributed to the vote of National Treasury. (2) An amount, credited to the National Revenue Fund from the Gold and Foreign Exchange Contingency Reserve Account in any financial year following the 2024/25 financial year, as provided for in the agreement contemplated in subsection (1), is a direct charge for the financial year against the National Revenue Fund for the contingency reserve requirements of the South African Reserve Bank and must be attributed to the vote of National Treasury. (3) A direct charge in terms of subsection (1) or (2), must be disclosed in the National Treasury’s next quarterly report to the Standing Committee on Appropriations of the National Assembly and the Select Committee on Appropriations of the National Council of Provinces.’’.

 

4. Comments and hearings on the Bill with identified stakeholders

 

The sections below provide an overview of the submissions made by the identified stakeholders on the Bill.

 

4.1 Financial and Fiscal Commission

 

The Financial and Fiscal Commission (FFC) submitted that the purpose of the GFECRA was important as it was a buffer to insulate the SARB’s profit-and-loss statement from swings in our exchange rate. The FFC stated that 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 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 jeopardizing investor confidence, inviting substantial run-ups in borrowing costs, thus ushering in debt distress.

 

In conclusion, the FFC supported the agreement as the Bill will ensure retaining sufficient funds to absorb exchange rate swings, with the obligation for the National Treasury to cover exchange rate losses. The FFC recommended that National Treasury tighten, even further, the fiscal expenditure and consolidate with a non-diverted purpose to increase economic productivity and growth. In terms of section 28(1) of the Act, by mere operation of law, any gains made by the following accounts were credited to the GFECRA, namely: ‘Gold Price Adjustment Account, the Foreign Exchange Adjustment Account and the Forward Exchange Contracts Adjustment Account’. In terms of section 28(2)(b) of the Act any profits in the Account which are carried forward ‘at such times as the Treasury and the Bank may deem desirable, be credited to the State Revenue Fund’. 

 

4.2 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. The PBO continued that South Africa maintained open financial accounts and a floating exchange rate, therefore, it was 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 has chosen to pay for the transfer to National Treasury by increasing reserves of banks and financial institutions that will be remunerated at high policy interest rates. Even though it viewed the use of the Gold and Foreign Exchange Contingency Reserve Account (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. PBO continued that 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.

 

The PBO suggested that the GFECRA should be strategically allocated to finance a targeted financial stimulus for the economy. This would reduce suffering related to high levels of poverty and to support a developmental approach that will increase growth and future revenue.

5. Public Submission on the Bill

 

The section below provides an overview of the submission that was made in response of the advertisement that was published on Parliament’s website and social media platforms.

 

5.1 Congress of South African Trade Unions

 

The Congress of South African Trade Unions (COSATU) welcomed the Bill and stated that it provided relief to an under strain fiscus by accessing a limited portion of the SARB’s reserves. COSATU submitted that it appreciated the severe pressures facing the fiscus, society and the economy at large with numerous expenditure demands and limited sources of revenue. 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 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 therefore emphasised that the proposed relief should be utilised strategically in a manner that will ease the pressure on the fiscus, stimulate the economy, reduce unemployment, and generate future tax revenues. Whilst noting the current state of Eskom and Transnet, COSATU advocated for the utilisation of R150 billion over the MTEF to ease the financial burdens on Eskom and Transnet. This would reduce the fiscal burden on the state and enable the said two entities to invest in their infrastructure and improve their performance.

 

COSATU noted that the reserves have grown substantially over the past decade. To this end, it suggested that consideration should be given to utilising future surplus growth to be allocated to a Sovereign Wealth Fund. This fund’s interest and capital at times must be available for the fiscus for developmental and other purposes.  This would ease the fiscal pressures on the state, assist in meeting the 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 legislation be drafted and tabled in Parliament establishing a Sovereign Wealth Fund in the beginning of the 7th Parliament.

 

 

5.2 Dr Sean Muller

 

Dr Muller submitted that the processing of the Bill will occur after the processing of the 2024 Fiscal Framework and Revenue Proposals in Parliament. In processing the fiscal framework, Parliament has 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. However, the proposed fiscal framework in the Budget Review is based on the GFECRA transaction. Dr Muller was therefore of the view that it was illogical to process the Bill separately from the fiscal framework.

 

Dr Muller continued that the separation of the legislative amendment required to facilitate the GFECRA transaction from the consideration of the fiscal framework created a similar problem to the existing situation with the tax proposals. The tax proposals are only finalised late in the fiscal year (between August and November), even though in theory 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 has. He stated that there are two different versions, which may or may not be in conflict. The first version attributed credit for the idea to the Institute for Economic Justice (IEJ). The second attributed credit to a working paper by some foreign finance consultants and academics (students) in the United Kingdom. Related to this, Dr Muller suggested there were several key questions that have not been adequately ventilated or addressed. Dr Muller raised the following concerns in respect of the Bill:

 

  • On the basis of the publicly available facts, it appeared that the SARB and National Treasury deliberately allowed a very large ‘surplus’ to grow in the GFECRA while simultaneously proposing and implementing large cuts in public expenditure on the basis that those are 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 then 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.

 

5.3 Mr Benjamin Cronin

 

Mr Cronin submitted that the Bill misconstrued the status and operation of the Gold and Foreign Exchange Contingency Reserve Account (the ‘Account’).  The Account was established in terms of section 28 of the South African Reserve Bank Act1 (the ‘Act’) and was in essence a notional account held by the Reserve Bank for the benefit of the national government.

 

Mr Cronin noted that the State Revenue Fund was the equivalent of the National Revenue Fund prior to the current constitutional dispensation. Further, section 28(2) already created a mechanism for crediting the National Revenue Fund without the need for additional legislation. This provision already empowered National Treasury and the SARB to make this decision.

 

Mr Cronin further submitted that the Bill erroneously envisaged granting an additional direct charge in favour of the SARB when the money in question can and on the apparent information provided has already been credited to the National Revenue Fund. He continued that it was unnecessary and counterproductive for Parliament to consider an additional direct charge being enacted. Mr Cronin made the following submissions and recommendations on the Bill:

 

The Bill misconstrued the status and operation of the GFECRA;

 

  • It is neither desirable for a further direct charge to be enacted for the stated purpose of further public spending; nor is it unnecessary to give effect to the use of R100 billion which is credited to the National Revenue Fund by agreement with the SARB.
  • If there is any uncertainty regarding the wording in section 28 of the Act, then this is the provision that should be amended by Parliament.
  • The very purpose of section 28(2)(a) has been misunderstood in the process of drafting this Bill. Where profit arises in the notional Account it ‘shall accrue to the Government as a profit and shall be for the benefit of the State Revenue Fund’.

 

An addition to the above, the Parliamentary Legal Services (PLS) was requested to comment on the inputs by the stakeholders during the public hearings. The PLS submitted that 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 of the Republic of South Africa, 1996 ("Constitution").  The Money Bills Act endeavours to create that procedure in an economic context that ensures 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 is the sequence envisaged in the Money Bills Act, however, nothing prevented Parliament from amending the Bill within the "prevailing fiscal framework”.

 

National Treasury was also requested to comment on the submissions and comments made during the public hearings. National Treasury submitted that it, along with the SARB, was in the process of formalising a new GFECRA settlement agreement which will reduce government’s borrowing requirement and debt and will improve the SARB’s equity position. This settlement agreement was governed by the following principles:

  • 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 as long as foreign exchange reserves are below the foreign exchange reserve estimated adequacy levels.
  • There shall be no settlement of an unrealised balance on the GFECRA that could plausibly be unwound by future currency reversals.
  • The settlement of the credit balance on the GFECRA to the National Treasury shall be used to reduce government’s borrowing.
  • Any future settlement of GFECRA funds shall be governed by an agreement and a relevant schedule.

In terms of the new GFECRA settlement agreement, the National Treasury and the SARB will annually review these buffers to ensure they are sufficient to protect both institutions against fluctuations to the currency and interest rates with a view not to burden the fiscus. Therefore, it was not necessary to appoint external experts to assist with the process. In addition, it should be noted that the proposal does not affect the utilisation of the foreign currency and gold reserves. Both the gold and foreign exchange reserves are untouched by this reform and there will be no sale of foreign currency reserves.

 

6. Committee 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 Standing Committee on Appropriations made the following findings and observations:

 

6.1       The Committee notes and welcomes the provision made in the Bill, however, the Committee would

like to implore on government to put more focus on plans and strategies to grow the South African economy, which will in turn increase government revenue and allow government to fulfil its strategic objectives without resorting to these measures. The Committee is of the view that this should never be a permanent solution to government fiscal framework.

 

6.2       The Committee notes the submission by the PBO that while it viewed the use of the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) as a positive step, National Treasury and the SARB’s should consider a broader balance sheet to deal with the current issues of unemployment, poverty and inequality. However, the Committee is notes with concerns on the submission by PBO that that the current framework would create more constraints on government accessing the GFECRA to deal with other emerging issues.

 

 

6.3       The Committee notes and welcomes the submission by the PBO that the GFECRA should be strategically allocated to finance a targeted financial stimulus for the economy in order to reduce suffering related to high levels of poverty and to support a developmental approach that will increase growth and future revenue.

 

6.4 The Committee notes the liquidity management costs which amounts to approximately R30 billion over the 2024 MTEF, depending on the rate, of the approach followed in using the GFECR account. The Committee views these costs as excessively high.

 

6.5 The Committee notes and welcomes concerns raised by the stakeholders about the timing in the tabling of the Bill that limits broader consultation and transparency. The Committee is of the view that the submission by Dr Sean Muller on the inclusion of critical Bills in the fiscal framework should be considered to allow for adequate interaction between the Minister of Finance and the Finance Committees. Delays in the tabling of these types of Bills, whilst the noble intent, may lead to the misconstrued role and mandate of the Reserve Bank of South Africa. Notwithstanding this, the Committee is of the view that this Bill does not in any way compromise the independence of the SARB.

 

6.6 The Committee notes the submission from the Parliamentary Legal Services 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 of the Republic of South Africa, 1996 ("Constitution").  The Money Bills Act endeavours to create that procedure in an economic context that ensures consultation and predictability.

 

6.7 The Committee further notes that Bill did not cover the conditions on the use of the GFECRA and that this has the potential to create public distrust on the noble intention on the object of the Bill.

 

 

7. Recommendations

 

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

 

  1. That the Minister of Finance ensure that National Treasury, in future, develop a framework with conditions for how the GFECRA funds should be utilised. This framework should be submitted to Parliament before the tabling of the 2024 Medium Term Budget Policy Statement.
     
  2. That the Minister of Finance shou in future, consider tabling these types of Bills with the MTBPS. The Committee is of the view that, given this is a section 77 Bill, Parliament must be given sufficient time to consider and deliberate without being rushed to facilitate the passage of such Bills. There must be sufficient time to consult with the relevant stakeholders and to properly consider the critical matters as envisaged in these Bills. This will also assist with the sequencing of the passage of these Bills in Parliament as envisaged in the Money Bills Act.
     
  3. That the Minister of Finance ensures that National Treasury implements the proposed amendments to the 2003 Act, as contained in the Bill to its totality.
     
  4. That the Minister of Finance to explore other alternatives to reduce the estimated R30 billion in liquidity management costs over the coming years.

 

8. Committee Recommendation on the Bill

 

The Standing 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 and classified by the Joint Tagging Mechanism; recommends that the Bill be adopted, without amendments.

 

 

9. Conclusion

 

The responses to the recommendations as set out in section 7 above by the relevant Executive Authorities must be sent to Parliament as well as the Committee within 60 days of the adoption of this report by the National Assembly.

 

 

 

Report to be considered.

 

 

 

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