Forex and cash reserves — no free lunch

SA needs to raise tax revenues faster and reduce the pace of government spending growth to escape the debt trap. This is made very difficult by a stagnant economy, but fortunately there is another way. That is to sell state assets.

Asset sales or leases could be a source of income for the government to replace borrowing and interest paid. Regardless of how much the asset sales would fetch they could be made to work far better in private hands.

The assets would come to be worth more and their owners and service providers, including employees, would increase their output and pay incomes and taxes. Do the foreign exchange reserves managed by the Reserve Bank on behalf of the government fall into this category of assets that could usefully be sold down? It is possible to hold too much as well as too little gold and foreign currencies on the national balance sheet. They are a useful reserve against unforeseeable contingencies such as a collapse of exports or capital inflows, or a flight of capital that would make essential imports unobtainable and foreign debt and interest unpayable.

SA’s foreign assets have grown strongly in rand value. Since 2010 these reserves have gone from R299bn to about R1.2-trillion. But while they have doubled in dollar terms since 2010, they still only amount to $62bn. There are not many battleships or jet fighters you can buy with that loose change. Much of the growth in the stock of reserves is the result of a weaker rand. This is accounted for in the Bank’s books by mark-to-market value adjustments of their higher rand values. These now have an accumulated value of more than R400bn and are described as the Gold & Foreign Asset Contingency Reserve (and recorded as a liability to the government on the Bank’s balance sheet).

On any consolidated Treasury and Bank balance sheets these assets and liabilities cancel out, leaving only the market value of the forex reserves as a net government asset. As Reserve Bank governor Lesetja Kganyago has pointed out, these reserves would have to be sold to realise any value. The other R800bn of foreign assets on the Bank’s balance sheet originally came from positive flows on the balance of payments when the Bank bought dollars in exchange for rand deposits. The extra foreign asset held by the Bank is in the form of a dollar or other foreign exchange deposit in a foreign bank. The extra liability is a (cash) deposit with the Bank.

In recent years this source of dollars supplied to the Bank is likely to have come from the Treasury rather than the private banks and their customers. A flexible exchange rate will have balanced the supply of and demand for foreign currency transactions that originate in the private economy.

The extra dollars acquired by the Treasury will have been borrowed by the government offshore, or have been the result of flows of foreign aid or concessionary finance provided to SA. And then sold by the Treasury to the Reserve Bank for an additional credit on the Government Deposit Accounts with the Bank.

It is striking how rapidly government deposits with the Bank, denominated in foreign currencies and rand, have grown since 2010, though these cash reserves peaked in 2020 at close to R250bn and have been drawn down sharply in recent years. Why do these cash reserves need to be as large as they are? Why must expensive debt be raised by government to hold cash?

Yet running down the Treasury deposits to spend in SA increases the cash reserves of the banking system. The SA banks now hold large amounts of excess cash reserves, on which they earn high marketrelated interest rates at present. Should the banks turn the extra cash into extra bank lending the supply of bank deposits — the money supply will grow rapidly and encourage inflation.

It is a possibility that will require close attention.