I believe South African foreign exchange controls are unconstitutional. Yet the South African Reserve Bank (SARB) seems prepared to risk a bloody nose in defence of their forex practices when Mr Shuttleworth asks the Constitutional Court to declare those practices ultra vires.
A far less costly and considerably more elegant strategy would be for the SARB to immediately announce the abolition of the last vestiges of this apartheid dinosaur. They would avoid looking like peevish bad losers and be seen to be a whole lot wiser in the long run. Inevitably, forex controls in this country are going to be abolished as they have been elsewhere. The continued existence of these anachronistic controls is putting South Africa on the short list of the world’s pariah states.
Every successful country has long abandoned what in 1934 Hitler devised as a “Reich’s Flight” tax. Similar forex controls were introduced in South Africa by HF Verwoerd and the apartheid regime in 1961 after Sharpeville. Yet, over the last decades the UK, USA, Canada, every European country, Australia, New Zealand, most African countries, and even Mauritius, have stopped applying this failed strategy. UK Chancellor of the Exchequer from 1983 to 1989 Nigel Lawson remarked that abolishing forex controls in the UK in 1979 ushered in “…more than a decade of rapid growth and recovery… making Britain the European Union’s pace-setter.”
Leading countries worldwide have learned that what former SARB governor Tito Mboweni said in 2005 is wholly true, “For all intents and purposes…they are purposeless.”This followed previous governor Gerhard de Kok’s lamentation that “…they work when you don’t need them, but don’t when you do”.Why has South Africa not taken this sage advice and moved on?
In 1995, South African Finance Minister Trevor Manuel announced a five year ‘phasing-out process’ because “…the Rand is not under our control…”. The following year president Nelson Mandela announced at the opening of Parliament that “For us it is not a matter of whether, but when these controls will be phased out.”But nearly two decades later we remain stuck with these vile reminders of a failed past, doing as much damage to our economy today as ever they did then.
Well-known local and international economists have repeatedly warned of their detrimental features. Forex controls exacerbate capital flight and they do not stop people acquiring foreign assets without ‘permission’. Indeed, they force entrepreneurs and highly skilled individuals who want to trade with the world to leave the country, taking their capital and their skills with them. Mr Shuttleworth is but one example of many thousands of unreported cases. The forex moratoriums revealed just some of the many billions that left the country despite these draconian apartheid controls. They cause top talent and high-tax payers to emigrate in order to be able to diversify the risks of their wealth.
Foreign exchange controls are not only an ‘inconvenience’ for the rich and wealthy but also serve to lower the risk-adjusted returns on pension and retirement fund investments – to the detriment of every pensioner, their widows, dependants and heirs. Moreover, they fail in their most basic ostensible purpose - to protect the value of the currency.
In 1970, the rand was stronger than the US dollar ($1=R0.72). Despite the existence of exchange controls, the rand lost ground against the dollar so that in March 1982 the rand and the dollar reached parity. As everyone knows, the downward spiral has continued to the present day and is now at approximately R11 to the dollar.
Foreign exchange controls distort the market and transfer wealth from exporters to importers and those with foreign debt. They cause investors, local and foreign, to become suspicious of a government that wants to play by rules different to those applied in the rest of the world. They cause investors to seriously doubt whether a government believes in itself or its country’s future. This leads to a foreign-imposed risk-premium on the cost of all local investment and government funding.
In theory, the aim of exchange controls is to trap capital within a country to increase the pool to fund domestic investment and reduce the cost of capital. However, as Investec Wealth and Investment economist Dr Brian Kantor notes, the abandonment of exchange controls would not only significantly reduce the banking and other costs of running a global business from South Africa, but could well lead to an appreciable reduction in the existing risk premium demanded on any investment in South Africa. As such, it will actually reduce South Africa’s cost of capital.
If the government were to abolish forex controls, the natural workings of the global markets will automatically stabilise the currency whenever it becomes over-sold or over-bought, introducing greater liquidity and less volatility. Nomura economist Peter Montalto states, “It would certainly be cleaner if we saw capital controls done away with, saving businesses a significant amount of money. Over time, I think removing them would [also] reduce volatility in the rand as you would have a larger pot of local money offshore ready to come home when value is seen with a weaker currency.”
The advantages of scrapping the last remaining vestiges of foreign exchange controls will not only save SARB’s face, but will also assist in stabilising the rand and in attracting and retaining capital.
Author Temba A Nolutshungu is a Director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.