(Bloomberg) -- South Africa’s cash-strapped Finance Minister Enoch Godongwana tapped the country’s gold and foreign-exchange reserves to steady its eye-watering debt, while boosting spending on teachers, nurses and welfare in a critical election year.

In his last budget before the May 29 vote, in which the ruling African National Congress risks losing its national majority for the first time since 1994, Godongwana told lawmakers in Cape Town on Wednesday that he will restructure reserves held at the central bank to free up 150 billion rand ($7.9 billion) over three years.

The account, known as the Gold and Foreign Exchange Contingency Reserve Account, or GFECRA, showed paper profits of 507.3 billion rand as of last month — a massive increase from the 1.8 billion rand in 2006 that reflects the South African currency’s slump in value against the dollar.

Investors Cheer

The rand strengthened as much as 0.8% against the dollar and yields on South African government bonds fell as investors welcomed the news the nation was taking steps to control rising debt levels.

“Near-term, the focus will be on the positive market reaction,” said Razia Khan, head of research for Africa and the Middle East at Standard Chartered Bank in London. “Longer-term, there’s still a lot of heavy-lifting to do to reassure on growth and a more meaningfully positive debt outlook,” that doesn’t rely on dipping into reserves, she added.

Technically, 250 billion rand will be withdrawn from GFECRA. But 100 billion rand will be allocated to protect the central bank’s balance sheet from losses, and then returned to the government over time as the central bank generates its own buffer. The remaining 250 billion rand will still be earmarked to shield the country’s reserves from currency losses.

The design is aimed at reassuring investors that the funds are being used wisely and that reserves won’t be plundered for voter-pleasing budget giveaways. The move allows for a decrease in the amount of debt auctioned at weekly sales and means South Africa will now borrow less to fund deficits.

“There is no association between GFECRA and what is happening on the spending side,” Treasury Director-General Duncan Pieterse told reporters ahead of the budget’s delivery in parliament. “It is helping us to finance the borrowing requirement by replacing what we would have normally done - which is to issue fixed rate bonds.”

Central bank Governor Lesetja Kganyago told the same media briefing that the actual reserves won’t be sold to raise the funds for Treasury. Rather, the central bank will create a new liability which it will then need to service.

“Printing money is not free. It costs 8.25% per annum, the repo rate,” he said, explaining that it also entailed sterilization costs, which is why the central bank needed the buffer until it can build up its own protective cushion of funds.

The move will immediately ease pressure on South Africa’s precarious public finances and avoid a debt blowout.

The Treasury sees debt-service costs declining by 30 billion rand over the medium term as a result. Debt as a share of the overall economy is now seen peaking at 75.3% in 2025-26, down from 77.7% estimated in November, it said.

Election Year

Tapping the reserves helps President Cyril Ramaphosa project a measure of fiscal probity, while avoiding cuts to popular spending programs in an election year.

Opinion polls show support for the ANC dipping below 50%, which would force it to form a coalition with smaller parties to remain in power.

The budget allocates 33.6 billion rand toward funding contentious 350-rand monthly stipends that were introduced as a temporary measure to cushion the vulnerable from the fallout of the coronavirus pandemic. Godongwana, who previously committed to an extension until March 2025, made provisional allocations for it for two more years, pending a decision on how it would be funded. It allotted 35.1 billion rand and 36.7 billion rand for the 2026 and 2027 financial years, respectively.

Ramaphosa last month said there is a case for the grant to be made permanent, even with South Africa’s fiscal risks, stressing a complete overhaul of the country’s social welfare system is needed.

No additional money was set aside to help troubled state logistics company Transnet SOC Ltd. or to fund a national health insurance plan. 

--With assistance from Monique Vanek.

(Updates with analyst reaction in fifth paragraph.)

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