Time for exchange controls dinosaur to be laid to rest

South Africa remains stuck in a policy time warp that is hurting the economy’s competitiveness.

Raising the age-old debate around the country’s exchange controls for individuals, Andrew Hannington, CEO of Grant Thornton Johannesburg says it is high time for this legacy policy to be abolished.

“The steady slackening of exchange controls for individuals over the past number of years is to be applauded, but we have reached a point at which they serve no real purpose. Historically, monetary policy was designed to protect an economy isolated from the rest of the world and potentially at risk if large volumes of capital fled the country.

“Those priorities no longer apply. For one, the Reserve Bank has moved away from intervening in the exchange rate through such measures. Secondly, the bigger risk is the flight of foreign money from capital markets, which is not subject to any controls or restrictions, and is driven by our attractiveness as a modern, stable economy.”

Similarly, asset managers who are the most likely candidates to invest large sums abroad are subject to separate restrictions that further limit the economy’s exposure to capital outflows.

“The corporate and individual thresholds announced in this year’s budget are a further indication that the concept of exchange control is little more than an oddity. Quite frankly, the number of individuals with the wherewithal to come even close to the R10 million annual foreign investment allowance limit is negligible. In addition, by special application to the Reserve Bank, individuals can seek permission to invest much greater amounts offshore. Similarly, the number of corporations able to invest R1 billion a year is also minimal.

“At these levels exchange control is an anomaly, but unfortunately one that impacts the country’s attractiveness and competitiveness.”

Hannington says this is the biggest threat posed by exchange controls, especially as a number of African nations have relaxed or abolished these rules. Botswana, Mauritius, Rwanda, Uganda and Zambia are among these, and they have all recorded much stronger GDP growth than South Africa has managed.

“There may not be a direct correlation between GDP growth and forex rules, but at a time that South Africa has lost its advantage as the gateway to Africa, more needs to be done to attract foreign firms to the country. We are increasingly seen as a less attractive option than other nations that have embraced globalisation and have positioned themselves to benefit from that.”

Hannington acknowledges that measures are needed to combat illegal practices such as money laundering, but that foreign exchange control is not the mechanism to achieve this.

“We have a sophisticated and respected financial system that is geared to preventing such practices,” he says. “We need government to show confidence in this system by finally doing away with exchange control regulations for individuals that even former Reserve Bank governor Tito Mboweni described as ‘purposeless’ nearly a decade ago.”