SARB’s Gold and Foreign Exchange Contingency Reserve Account represents cumulative revaluation profits and losses incurred from SARB’s management of South Africa’s gold and foreign-exchange reserves. The first chart shows that the accumulated value of the account has risen a lot over the past decade and sits at over R450 billion. The second chart shows that these accumulated profits have reflected profits on South Africa’s foreign exchange and gold reserves, while the use of foreign exchange swaps to manage domestic money market liquidity has sometimes been costly.

These accumulated profits represent unrealised gains in the value of South Africa’s reserves, and realising a large proportion of these accounting liabilities would likely require some reserves to be sold. Whether realising such profits would be a good thing for government depends very much on one’s view of what the appropriate foreign reserve strategy for South Africa is. If the SARB sells some reserves, it would leave South Africa with lower buffers against external shocks and fewer resources with which to manage domestic liquidity. The IMF thinks South Africa needs higher, not lower buffers.

The main driver of these unrealised profits has been depreciation of the rand. Increasing our reserves again in future might end up being more expensive if the rand continues to depreciate over time relative to major advanced economies, and if the country’s fiscal situation continues to deteriorate and financing such purchases becomes more expensive.

The existence of this account creates a communication challenge for SARB as it can create pressure for these unrealised profits to be realised and used for other government purposes. For that reason, it would be good for SARB to align the way it treats reserve valuation gains with international best practice by accounting for it in retained profits instead.

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