The collapse of the rand in 2001 and the effectiveness of exchange controls in South Africa

Abstract

In an effort to furnish support for the beleaguered rand, which had fallen by roughly 12 per cent against the dollar in 2000 and 19 per cent in 2001, and direct more investments into the local economy, the South African authorities imposed a freeze on new offshore investments undertaken by South African financial institutions, a move which came into effect at the beginning of 2002. Institutional investors transferred R3, 8 billion abroad between February and December 2001. In a further effort to discourage foreign investment, the Minister of Finance in his February 2002 budget statement announced that the exemptions limit of interest and dividend income received from abroad from income tax was set at only R1000 compared with R6000 for interest income received from domestic sources. These steps to block such transfers once again raised questions whether the government's commitment to progressively phase out exchange controls in entirety was still in place at that time and these doubts were further strengthened by the comments of the Reserve Bank governor, Tito Mboweni, in his address at the annual general meeting of the bank in August 2002, when he referred to the desirability of relaxing exchange controls very gradually. The resort to tighter exchange controls had, moreover, occurred at a time when the degree of effectiveness of exchange controls had come to the fore once again. The Myburgh Commission, which had been investigating the fall of the rand in 2001, had been focusing part of its attention upon the exchange control system and whether this system could be effectively administered now that many of the regulations in the exchange control field had been simplified or abolished. The majority report of the commission in 2002 concluded that the administration of exchange controls appeared to work well and was effective, but this was a conclusion which could be seriously challenged. The purpose of this article, therefore, is to review the official moves on the exchange control front in 2001 and 2002, as well as assess the effectiveness of the exchange controls in general in an environment where significant partial relaxations in exchange controls had transpired and the rand had been a structurally weak currency. In the process it will be argued that the exchange control authorities were facing mounting difficulties in effectively administering the remaining exchange control system, which called into question the rationale for exchange controls.