Mungo Soggot
RESERVE Bank governor Chris Stals said this week he feared lifting exchange controls because of the heavy “pent-up demand” in South Africa to invest abroad that had built up in the past 30 years.
Talking about the rand’s meltdown and the Reserve Bank’s relationship with the government, Stals rejected the view that the rand’s collapse had given him a good opportunity to abolish exchange controls. He said South Africa’s gold and foreign exchange reserves were too paltry for him to “open the taps all at once. A large outflow of funds in a short time could have a devastating effect on the exchange rate, interest rates and inflation.”
Many economists have called on Stals to give a clear indication of his plans for unwinding exchange controls, which he has said will be a gradual process. Before scrapping the financial rand he spelled out what economic targets had to be met, injecting some certainty into the markets.
He hasn’t done that this time. Fears that restrictions on residents would be unwound too quickly had encouraged the assault on the rand, he said. The International Monetary Fund and many foreign investors had cautioned the Bank against a “big bang”.
He told the Mail & Guardian he had no objection in principle to setting a timetable for the abolition of exchange controls linked to certain targets, but said this would have to be part of a thorough macro-economic restructuring programme from government, which so far has not materialised. It was difficult to set a timetable as it was almost impossible to predict when there would be sufficient reserves to take the next step. In the meantime, he favoured gradual abolition as and when the country could afford it.
Stals warned that the economy’s many deficiencies – including a low level of saving, inflexible labour markets, uncompetitive industries and relatively high inflation – should not be exposed to a “big bang” scrapping of exchange controls.
Despite his independence, which is enshrined in the constitution, Stals is in close contact with senior government officials and has a formal meeting with the finance minister once a month. “In practice, however, we have much more regular contact. So far, with Mr Manuel, it has almost been on a daily basis.”
Stals said changes in monetary policy were not discussed with anyone outside the Bank, and were, in fact, confined to members of the Governor’s Committee of the Bank. However, he did discuss the state of the rand and the economy with the finance minister and other political leaders, so the change in the Bank rate last Friday did not come as a “big surprise” to them.