Outdated exchange controls are crippling SA’s growth potential

Every day, SA’s foreign exchange (forex) controls destroy more economic growth, job creation and transformation. Every day they increase poverty and exacerbate inequality. With the unexpected strength in the rand, there will seldom be a better time to abolish them.

In a state of the nation address on February 9 1996, then president Nelson Mandela said: "For us, it is not a matter of whether, but of when, these controls will be phased out."

This followed then finance minister Trevor Manuel announcing a five-year "phasing-out process" in 1995 because, as he said, "the rand is not under our control …".

Former Reserve Bank governor Tito Mboweni then acknowledged in 2005 that the time had come for exchange controls to be entirely dismantled. "For all intents and purposes," he said, "exchange controls have become purposeless … the cost of exchange control administration and the inconvenience that goes with managing [it] are not worth the exercise."

Forex controls cause foreign and local investors to think twice about investing in SA when they know a bureaucrat in Pretoria has the capricious power to decide whether and where their hard-earned income may be returned to them.

It is naïve to believe that government officials have the knowledge or nimbleness required to protect us from the symptoms of international financial crises. In a world of fiat currencies with routine official interstate manipulation and credit expansion, it is no wonder we have periodic currency crises and disruptions in the global foreign exchange markets.

Every successful country has long abandoned what in 1934, Hitler devised as a "Reich Flight Tax" in a failed attempt to stop Jewish people from exporting their wealth. Similar forex controls were introduced to SA by HF Verwoerd and the apartheid regime in 1961, less than a year after the horrific Sharpeville massacre, which shocked the world and set the tone for the next four decades of civil strife.

In a democratic country that engages in peaceful and open trade with the rest of the world, the system is now out of place and a severe brake on growth and job creation.

In 1970, 72c bought you a dollar, but despite the existence of tight exchange controls, the rand rapidly lost ground and in March 1982, the rand and the dollar reached parity. As everyone knows, the downward spiral continued and the exchange rate is now about R14 to the dollar, having got close to R17 earlier this year.

This has been a loss of more than 234%, despite bureaucrats furiously managing stringent forex controls. In short, they obviously do not, and have not, worked to protect the value of the currency.

Rather, exchange controls serve to 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 different rules from those that apply in countries that welcome capital.

They cause investors to seriously doubt whether our government believes in itself or our country’s future. This leads to a foreign-imposed risk premium on the cost of all local investment and government funding.

That is to say nothing of a threatening downgrade to junk status.

Exchange controls have become redundant and are now simply a costly administrative exercise that severely limits transformation.

SA’s low saving rates and stunning lack of economic growth necessitate a welcoming environment for investment.

High-growth countries deliberately set out to create the kind of environment that will attract risk-taking entrepreneurs and investors. They do this by producing goods and services other people actually want.

They cut down on taxes and red tape and, most importantly, refrain from attempting to prescribe to law-abiding people, local or foreign, what they may or may not do with their own money.

This article was first published in Business Day on 27 October 2016

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