A new index for measuring SADC exchange control restrictiveness

Abstract

This paper addresses the issue of the assessment of foreign exchange and capital controls in the context of the Southern African Development Community's goal of regional integration. It reviews the pros and cons of current and capital account liberalisation and argues that there is a lack of sufficiently refined de jure measures of capital account openness. A new index for measuring exchange control restrictiveness is created based on data from the International Monetary Fund's Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) for the 15 SADC member states. This index is unique in that it employs ordinal measures of exchange control restrictions rather than the binary measures used in previous measures. The new index illustrates the considerable range of variation of exchange restrictiveness within SADC, as well as illustrating SADC's relative exchange restrictiveness compared with other countries, inside and outside of Africa. The new index also correlates with several measures of financial development, certain balance of payment items, and some measures of institutional development, which makes it a useful measure for SADC integration. The paper highlights the challenges for SADC monetary union in the sphere of exchange control.