Exchange controls ‘to be relaxed gradually’

The National Treasury is unlikely to deviate from the path it has pursued since 1995, one of gradually dismantling exchange controls in a phased and responsible manner, despite speculation that the government may opt for a “big bang” approach to lifting remaining exchange-control regulations, Brait economist Colen Garrow said on Friday.

“While an environment in which the rand remains strong is always appropriate for something more creative, the National Treasury is unlikely to deviate from its consistent path of removing exchange controls gradually,” Garrow said.

The gradual process of removing the regulations, which govern the mobility of capital in South Africa, began in 1995 with the removal of the two-tier rand system.

This consisted of a financial rand, which dealt with flows of a capital nature, and a commercial rand, which handled trade-related demand for foreign currency.

Restrictions on investment outflows by domestic companies have been lifted, with the proviso, however, that these need to be approved by the South African Reserve Bank.

“Another issue which is expected to attract scrutiny is the ceiling on private foreign-currency accounts. The argument is that the amnesty process may be concluded, but that it still allows South Africans who took funds illegally offshore, in contravention of tax and foreign-exchange regulations, to hold such funds in exchange for payment of prescribed levies,” he said.

“In such instances, funds held offshore may potentially exceed the R750 000 ceiling, which limits the amount of funds which may be taken offshore via the vehicle of private foreign-currency accounts. The situation, as it is, is thus inequitable and will have to be addressed by government at some stage,” Garrow said.

Finally, Garrow said it is unlikely that the 180-day period during which exporters must convert their foreign-currency earnings into local currency will be scrapped.

Exporters may hold their export receipts in foreign-currency denominated accounts called F178 accounts. The maximum period they may hold their export receipts has varied from seven days under the apartheid regime from 1985 to 1995, to 30 days from 1995 to March 1998. It is currently 180 days.

In 2001, exporters correctly anticipated the weakness in the rand in the fourth quarter after the events of September 11 2001 caused a slowdown in global growth and thereby reduced commodity prices. Then they doubled their remittance period from 60 days in October 2001 to 120 days in November 2001 and this reached a record 147 days in March 2002, but exporters helped the rand’s recovery in April 2002, when they almost halved their remittance period to 79 days.

In a manner similar to the bond market, it is impossible to say what the cause is and what the effect is. What is visible is that as the rand weakens, so exporters generally speaking lengthen their remittance period. The reverse holds true as well, and current estimates are that the remittance period is less than 45 days. — I-Net Bridge

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