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South Africa’s Central Bank Confirms Discussions to Tap Reserves

South Africa’s Central Bank Confirms Discussions to Tap Reserves
Governor Lesetja Kganyago.

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

“We are engaged with the Treasury,” Governor Lesetja Kganyago told reporters on Thursday after the monetary policy committee held rates steady. “We have also bought in international expertise to engage on these matters,” including how to deal with with the capital position of the bank, he said.

The two institutions are ironing out how much the withdrawal could be, over what length of time and the cost involved 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 did spell out that it was a complicated issue because the profit on the reserves are on paper, changes from month to month, and realizing it would mean selling part of the reserves and potentially unnerving investors.

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

Read More: South Africa Weighs Tapping Reserves to Close Funding Gap

The central bank oversees the Gold & Foreign Exchange Contingency Reserve Account on behalf of the Treasury. The account contains unrealized profit or losses on the reserves that are incurred due to exchange-rate fluctuations and any gains or losses accrue to the government.

In the early 2000s, Treasury paid more than 28 billion rand over four fiscal years to the central bank to defray a loss on the account.

There have been growing calls from economists, academics, civil society organizations and the Institute for Economic Justice, an economic think tank, for the Treasury to use the account to avoid budget cuts. The move would have to be done in collaboration with the central bank, which has warned against it as contingency reserves are seen as a buffer for extreme currency shocks.

In an interview with Bloomberg after delivering his medium-term budget statement on Nov. 1, Finance Minister Enoch Godongwana said the Treasury can’t rule out tapping the reserves and that the matter is being discussed with the central bank.

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