Our country can no longer afford foreign exchange controls

14 February 2020
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In 1995, Finance Minister Trevor Manuel announced a five-year “phasing-out process” because as he said, “the rand is not under our control …”

In 1996, President Nelson Mandela declared during his opening of Parliament speech that “…for us, it is not a matter of whether, but when these (foreign exchange) controls will be phased out.

In 2005, Reserve Bank Governor Tito Mboweni said, “For all intents and purposes exchange controls have become purposeless … the cost of exchange control administration and the inconvenience that goes with managing (it) might not be worth the exercise.”

All investors are justifiably sceptical of the real motivation behind forex controls. In the case of foreigners, they serve only to drive investment into the arms of jurisdictions where their funds are welcome to flow freely. In the case of local investors, they drive people to seek (and to retain) investments outside of the country to hedge against the uncertainty created exclusively by the country’s leading politicians. Their manifest lack of confidence in their own country speaks louder, more persuasively and more persistently than any ‘Investment conference’ disquisition could ever counter.

The Apartheid regime introduced forex controls in 1961 after the Sharpeville massacre caused a (relatively brief) run on the currency. The idea was to emulate the Third Reich’s attempts to stop Germans from exporting their assets.

Neither the Nazis nor the apartheid authorities succeeded in their efforts. The mere existence of these controls turned the export of wealth into a kind of national ‘game’ – a competition between the regime and the nation. In both nations’ cases, friends would regale one another over dinner with stories of how they had found yet another way to beat the system. So much so, that when the new South African authorities decided to hold a moratorium on the matter, they were flabbergasted to discover how many billions had ‘left’ the country, notwithstanding stringent controls and severe penalties. In short, to the great cost of both countries, forex controls under the Nazis and the Nats had well-nigh no success whatsoever. Their persistent existence drives (and keeps) more and more money ‘out’ than ever would otherwise occur.

Full knowledge of such complete failure does not deter our South African bureaucrats who still cling to these outdated measures. They simply cannot bring themselves to desist from what is so very patently expensive and counterproductive.

New calls to scrap the remnants of this apartheid legacy are once again coming to the fore, this time from some of the country’s leading wealth managers, as well as from the head of Africa’s largest pension fund, the Government Employees Pension Fund. These calls should enjoy the hearty support of every South African who wants to see our country dig itself out of the economic cesspit into which it has been driven by malign incompetence and brazen corruption. 

Mboweni recognised over fifteen years ago that exchange controls actively discourage both foreign and local investors and create endless hassles for local businesses wishing to enter into transactions with foreigners. The costs hugely outweigh the manifestly paltry benefits of the controls. Indeed, it is surprising that the incalculable burden of forex controls on our country in lost investment opportunities, immensely material as it is, is not spoken of more frequently. This is particularly true of the banks. They never speak out against forex controls because these produce a very significant part of their profits, a drain on our economy which they would plainly be loath to lose. 

South Africa’s generally poor savings culture means that we desperately need foreign investment to fund programmes vital for growth and employment creation. But why would anyone, local or foreign, want to invest in a country where they know that on a bureaucratic whim, they might not receive their dividends? Investors naturally gravitate to countries that welcome their money and that do not have armies of petty officials who, with the blessing of their political masters, arbitrarily impose terms, conditions and controls on private capital flows. 

In jurisdictions where there are no forex controls, there is peace-of-mind that the government is confident in itself and in the future of its country. Regrettably, this is not the case in our own country. Yet it so easily could be.

Successful countries deliberately set out to create environments that attract risk-taking entrepreneurs and investors. They cut down on taxes and red tape and, most importantly, refrain from attempting to prescribe to law-abiding firms and individuals what they may and may not do with their own hard-earned, after-tax money. 

Without another ‘investment conference’, South Africa can send a stronger signal to the rest of the world that our economy is indeed open for business. Eliminating the remnants of a legacy of a bygone era will immediately engender confidence in both local and foreign investors and ensure that our currency returns to its true full value.

This is the ideal opportunity to rid ourselves of another failed Apartheid practice. For our country to grow and create the jobs and the tax revenues that are so desperately needed, we can and must abolish all remaining exchange controls now. We can no longer afford not to. There is now nothing to wait for and everything to gain.

Temba A Nolutshungu is a Director of the Free Market Foundation. The views expressed in this article are those of the author and not necessarily those of the Free Market Foundation.

This article was first published on Daily Maverick on 05 February 2020


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