Should we abolish exchange controls entirely in South Africa? Why/why not?
Recommendation: To further ease exchange controls in South Africa by allowing a local business or the private sector to access the global market with reduced barriers. By doing so, it will allow the country’s chances of becoming an OECD country which will ultimately open in-bound investment.
Concerns & Recommendation
According to the International Monetary Fund (IMF), exchange controls have the impact of discouraging international trade, inhibits the expansion of world trade and also distorts the functioning of an efficient global trade market. Although, we cannot shy away from the potential benefits of having the presence of exchange controls in an economy such as the correcting of the balance of payment, protection of the value of the local currency, protecting local industries just to mention a few.
Countries with weak and/or developing economies generally use foreign exchange controls to limit speculation against their currencies. They often simultaneously introduce capital controls, which limit the amount of foreign investment in the country.
It is for this reason that policymakers often face nightmares in establishing the best way of developing growth in an economy without threatening potential investment opportunities with their development policies.
This year’s Budget speech called for the abolishment of exchange controls, partly for the fact that maintaining exchange controls is rather costly and purposeless. But the biggest driver in the abolishment stems from the fact that South Africa could do with a boost of ‘global competitiveness’, thus creating an attractive environment for the private sector. Therefore, growing the economy means expanding business activity and such activities cannot flourish with the imposition of exchange controls. It is for this reason that the public sector needs to recognise the contributing role that the private sector plays in the economy for economic growth.
Due to past and recent downgrading, South Africa is struggling with a severe issue of being credible thus being not being attractive as an investment destination. This has caused large outflows in our bond markets. However, as an economy, we do need to look at new ways in becoming more competitive, more especially now that the economy is under immense pressure.
The starting point is asking ourselves, ‘how do we become a dominating country in this continent on a sustainable basis’? A clear reality is that, the more we impose exchange controls, the more we are likely to restrict the ability of South African companies to invest offshore and therefore, contributing to the possibility of dampening domestic growth.
In closing, one thing policy-makers should always be aware or cognizant of is that the presence of foreign exchange controls make investors nervous and doubtful of whether a government believes in itself or its country’s future.
