South Africa must learn from the Zimbabwe experience, writes Jasson Urbach, a director of the Free Market Foundation.
During 2009 – 2013 when Morgan Tsvangirai’s MDC was running the finance portfolio, Zimbabwe lifted all foreign exchange (forex) and price controls – The results were spectacular: Economic growth shot up to an average of 8% per annum compound for five successive years and inflation went negative by as much as 7%.
Zimbabwean economist Edward Cross states, “What authorities fear the most about relaxing exchange controls is that they will run out of foreign exchange. This is false, and Zimbabwe has proved it. We did away with exchange controls and prices stabilised. The great fear of running out of money to pay for imports was proven to be wrong. We had millions more dollars to pay for imports than we had before. South Africa has one of the most restrictive exchange control regimes in the world. The same with Venezuela. We could solve their problems in an hour.”
Every day, South Africa’s forex controls destroy more economic growth, job creation and transformation. Every day they increase poverty and exacerbate inequality.
If President Ramaphosa is serious about boosting economic growth and reducing poverty, he will do well to remember the words of Nelson Mandela who, in the state of the nation address on 9 February 1996, said: “For us, it is not a matter of whether, but when, these controls will be phased out”. This followed finance minister Trevor Manuel announcing a five-year “phasing-out process” in 1995 because he said, “The rand is not under our control …”
Reserve Bank governor Tito Mboweni then acknowledged in 2005 that the time had come for exchange controls to be entirely dismantled. “For all intents and purposes,” he said, “exchange controls have become purposeless … the cost of exchange control administration and the inconvenience that goes with managing [it] are not worth the exercise”.
In 1961, shortly after the Sharpeville massacre, the apartheid regime under HF Verwoerd introduced what Hitler had devised as the “Reich Flight Tax” in what proved to be a completely failed attempt to trap funds in the country. (Subsequent moratoriums have revealed a small percentage of the extent of the billions that fled as a result.)
Despite the existence of the most austere forex controls, the rand has rapidly lost ground. The downward spiral has continued and whilst currently at just 6,2% of its 1970 value, it has been as low as 4,2% of that value.
This, despite SARB bureaucrats furiously attempting to control forex transactions every working day of the year.
In short, these measures have obviously failed to protect the currency in more than half-a-century of trying to force them to work – at great cost to our country and its poor.
Forex controls serve only to distort the market. They cause investors, both local and foreign, to become suspicious of a government that wants to play by different rules to those that apply in the rest of the world where countries wish to attract and retain investment capital.
Such controls make investors wary about investing in South Africa, where they know that a bureaucrat in Pretoria has the power to apply variable rules that have not been approved by Parliament and to decide whether, where, when and how such funds may be invested or disinvested.
Moreover, horror stories abound about recent experiences with these erratic characters and their agents the South African banks, seriously damaging South Africa’s reputation as an investment destination.
As respected South African economist Dr Brian Kantor notes, the total abandonment of forex controls would not only reduce the banking and other costs of running a global business from South Africa, but it would lead to a drop in the risk premium that they have caused to be attached to investments made in South Africa. Scrapping them would actually reduce South Africa’s cost of capital.
High-growth countries deliberately set out to create the kind of environment that will attract risk-taking entrepreneurs and investors. With the current unexpected and possibly temporary confidence in our country and its currency, there will seldom be a better time to abolish this shameful relic of apartheid.
Regrettably, ZANU PF government policy and corrupt practices have subsequently reversed all gains made.