Lesetja Kganyago
4 November 2009
Johannesburg — FINANCE Minister Pravin Gordhan announced the relaxation of exchange controls last week, confirming the shift in policy from an ineffective control approach to a risk-management approach.
Many countries have some form of capital controls, such as capital account management, foreign takeover legislation, foreign direct investment regulation or foreign exchange management. SA is modernising its exchange control approach to investment and capital flows - similar to advances being made by emerging high-growth countries.
Our approach to reform is not influenced by the advocates of unfettered free markets - indeed, loosely regulated financial or foreign exchange markets propelled the global financial crisis. In fact, our exchange control policies have been substantially reformed since 1994.
We have chosen to take a holistic look at our current framework and, instead of radically changing the system, we elected to preserve and modernise those features that protected our financial system. In line with Group of 20 agreements and the emergent global trend, we will strengthen our prudential regulations. This will ensure higher capital adequacy ratios which are no longer pro-cyclical, and macro-prudential regulations for systemically important institutions.
The recent announcements further encourage foreign direct investment, cutting red tape to reduce the cost of doing business in SA and sustaining the long-term financing of the current account. Dividends and interest payments are the largest components of current account, and we need to encourage domestic firms and individuals to invest abroad and repatriate dividends earned.
The proposals also aim to significantly reduce red tape on companies for outward capital investments. Processing these will be moved to authorised dealers (banks), subject to transaction reporting, so that cross- border flows can be better monitored by the Reserve Bank and economic risks better managed. Further administrative reforms include replacing paper-based processes with electronic platforms of reporting for cross- border transactions.
Regional integration will be promoted by removing the prohibition on loop structures within the Southern African Development Community (Sadc), which has now been regularised by allowing South African companies to hold indirect interests in companies within Sadc, except where there are tax and/or exchange control risks (for example, when South Africans hold an interest in a South African company through an offshore structure).
These reforms will improve the attractiveness of SA as an investment destination.
The exchange control review announced by Gordhan will lead to further reforms regarding foreign direct investment, resulting in a more transparent and harmonised policy framework. SA has no exchange controls on foreign investors; the liquidation of investments by nonresidents is free of any exchange controls, as restrictions on the liquidation of investments in a country are likely to affect the economy's ability to attract private foreign capital.
The review will also consider how best to regulate outward investments by South African companies, ensuring that foreign direct investment benefits not only the companies involved, but the country too. There will be consultation with the private sector and relevant government departments and agencies to develop a set of specific proposals next year.
With the Soccer World Cup only months away, we are also simplifying barriers applying to nonresidents and residents, be it the amount of rand that can be taken out or brought into SA, or the holding of foreign currency within the limits allowed. More will be done within the Financial Intelligence Centre Act and these reforms will be announced by the Reserve Bank soon.
These reforms articulate the government's commitment to the gradual relaxation of exchange controls to reduce the cost of doing business, and are in line with the move towards a macro-prudential approach to financial regulation.
Kganyago is director-general in the National Treasury.
Be the first to Write a Comment!
Copyright © 2009 Business Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
