Why does South Africa insist on maintaining destructive exchange controls?
In the second part of his critique of exchange controls in South Africa (part one), Dr Brian Benfield recalls that when the ANC took over power in 1994, one of its main objectives was to dismantle totally this apartheid protection tool. . Yet nearly three decades later, the bureaucracy’s grip on this financial scourge remains as tight as ever. The reality is that these regulations are a hidden tax on law-abiding citizens that benefits the vested interests of the financial industry. An obvious example is ruinous Regulation 28, which requires South African citizens to invest 70% of their retirement savings in the small, underperforming local investment pool. As he did in his first article on the subject, Benfield is once again aiming for the sacred cows. Hope someone with a rational mind is listening. –Alec Hogg
Why does South Africa insist on maintaining destructive exchange controls?
“For us, it’s not a question of whether, but when these controls will be phased out.”
Opening of Parliament, February 1996
By Dr. Brian Benfield*
A generally weakening rand and mounting inflationary pressures mean that the South African Reserve Bank (SARB) has raised interest rates again, to the detriment of the weaker members of our society. A more nuanced approach would be for him to also tap into international markets to help restore and stabilize the rand by finally freeing up the foreign exchange market and allowing it to properly do its natural job.
Also read: Busting exchange control myths – and why their removal is so overdue
Currency controls in the modern world date back to Nazi Germany, which introduced them as a Reich theft tax in a desperate attempt to prevent Jews from transferring their money into other currencies. Following the Sharpeville massacre in 1960, Hendrik Verwoerd, an arch-architect of apartheid, also instituted these controls on the convertibility of our currency in a deeply flawed and now indisputably failed attempt to prevent citizens from escaping his “laager”.
After democratic elections in 1994, the new South African government began to gradually relax foreign exchange (forex) controls and allow South Africans to legally hold more of their money in other currencies.
In addition to the late President Mandela’s commitment quoted above, in 1995 then Finance Minister Trevor Manuel announced a phased-out process over the next five years. This followed former Reserve Bank Governor Gerhard de Kok’s laments that “…they work when you don’t need them, but not when you need them”.
In 1997, Manuel again promised the “phasing out of remaining controls”. In 2003, he says, “the rand is not under our control…many factors influence it…decisions made in the White House or in Baghdad”.
The government’s common sense was further challenged when in November 2005 Reserve Bank Governor Tito Mboweni said: “For all practical purposes, exchange controls have become irrelevant…the cost of l Exchange control administration and the inconvenience that comes with managing it might not be worth the exercise.
Yet all these years later, the South African economy is still handicapped by the dead weight of these long-outdated measures.
Why doesn’t the ANC government remove all remaining exchange controls? The massive capital outflows so dreaded and anticipated in the 1990s did not occur. Nor did they occur in all the other countries that abolished exchange controls. In 1979, Britain suffered a “winter of discontent” when it was considered the sick man of Europe. Former Chancellor of the Exchequer Lord Lawson noted that after removing all exchange controls, “the flexibility their disappearance unleashed was spectacular, ushering in more than a decade of rapid growth and recovery, and setting in motion the economic flexibility that makes Britain the leader of the EU.
Exchange controls give confidence neither to local investors nor to foreigners. Investors base their decisions on future prospects and are skeptical of the motivations behind exchange controls. Contrary to intentions, exchange controls discourage domestic investors from keeping their money within a country’s borders and cause them to seek suitable foreign investment to hedge against presumed future uncertainty in the local economy. Maintaining exchange controls sends a signal to investors and markets that the government has no confidence in the future of its own country. Forex controls make investors anxious and lose faith in a country’s future. They deduce the need for a higher than usual foreign investment premium.
It is well known that the amount of red tape required to complete even basic forex transactions has caused many South Africans to choose to live in more investor-friendly destinations. The heavy bureaucratic administrative burden that requires us to fill out countless forms and seek approval from anonymous officials for even the most basic foreign exchange transaction should be removed immediately. They serve no beneficial purpose.
The opportunity to remove the last vestiges of this apartheid legislation and to assure both ordinary South Africans and the world that the government has confidence in the future of our country is here and now.
Capital flows are severely impeded and delayed by bureaucratic gatekeepers who could arbitrarily decide what money can enter the country and what can leave. It is often not understood that the rands never actually leave the country. Rands are simply exchanged for foreign currencies with people who need rands to buy South African products or to visit our country. These pieces of paper depicting the portrait of the late President Mandela are virtually useless in all other countries, except perhaps to a limited extent in a few neighboring states.
Freeing the South African foreign exchange markets will help the rand and our economy in ways almost too many to mention, but here are a few:
- South African citizens with funds abroad (declared or not) will be incentivized to repatriate them (i.e. exchange them for local rands) and enjoy their profits due to a rate exchange rate weakened before local inflation consumed their gains. This act alone will provide appreciable and consistent support to the demand for the rand, stabilizing it and possibly strengthening it.
- Foreign speculators will notice the oversold sticker on the rand and trade it for arbitrage profits. (Right now, they’re often reluctant to do so under the threat of guardians who stand in their way.)
- Foreign investors will take advantage of the ability to buy rand at a “discount” to invest on more favorable terms, thereby automatically increasing demand and helping to restore its value, not to mention the resulting boost to our economy.
- Once investors accept that South Africa has confidence in itself and is ready to play by the same rules as all other major trading nations, they will automatically come back in droves. They will stop fearing that they will no longer be able to get the money they bring back to South Africa out.
Forex controls have many unintended, undetected and under-reported consequences that are seriously detrimental to the rand and our national economy. The government should support the SARB in its attempts to stabilize the rand. He must show the world that he has confidence in the future of our country and that he does not need to maintain Nazi-inspired controls. Interest rate increases are a blunt instrument and an unwelcome blow to the economy that severely affects the weakest and most vulnerable members of our society.
A significant degree of confidence and prosperity will be restored through the simple and urgent act of eliminating every last vestige of these long discredited measures.
- Dr Brian Benfield is a retired professor from the Department of Economics at the University of the Witwatersrand who writes for the Free Market Foundation. The opinions expressed in the article are those of the author and are not necessarily shared by the members of the Foundation.
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