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Scrapping SA’s exchange controls: A golden bullet — or too little too late?


Sean Gaskell is group managing director and Kerstin Engler is senior relationship manager for the Geneva Management Group.

After decades of pressure, South Africa is finally making serious strides in scrapping exchange controls, the system of government-imposed limits on the purchase and sale of currency by residents and non-residents, as well as on the transfers of any currency across national borders. Announced by Finance Minister Tito Mboweni during the 2020 Budget Speech, the move has been broadly welcomed. But is it too little too late?

In order to understand the potential impact that the easing and, in some cases, removal of exchange controls will have, it’s worth looking at why they’ve been such a bugbear for so long. But it’s also important to interrogate whether current economic conditions mean that scrapping exchange controls will fail to offer the benefits they once might have had. 

Historically, exchange controls have been a necessity, especially in a country where the recent past has been as volatile as South Africa’s. 

In the final days of apartheid and the early years of the new democratic dispensation, it made sense to control how much money could leave the country. The Reserve Bank effectively had zero foreign reserves, there was a huge pent-up demand for an outflow of capital, and distortions embedded in the South African financial system meant that the sudden removal of exchange control would have caused massive disruption to the local economy. 

With limits on how much could be taken out of the country in a panic, those with means were given extra incentive to stay and make things work.

As the local economy experienced strong economic growth in the late 1990s and early 2000s, however, exchange controls became a hindrance to investment and also posed an obstacle for residents trying to do business as part of the global economy.

Removing exchange controls signals to the world that, despite South Africa’s internal woes and perceived capital outflows, the country is serious about, and capable of, encouraging international investment. If South Africa is to flourish, it’s vital to create an environment that makes the country competitive and attractive, rather than a perceived regulation-heavy destination.

No panacea 

While removing exchange controls is certainly part of creating that environment, it cannot be seen as a panacea for South Africa’s myriad economic issues.

Investors still see immense potential in South Africa, but there are serious structural reforms needed before they pull the trigger and pour money into the country in any meaningful way.

Perhaps the best example of this is the ongoing power crisis. Until it’s clear that the lights will stay on in South Africa (something that can no longer be solely in Eskom’s hands), the country will continue to be trapped by low growth at best. At worst, it’ll continue to fall into the kind of recession it was revealed to be in on Tuesday 3 March.

The reality is that the South African economy is not where it was a decade ago when scrapping exchange controls could have helped accelerate growth. Instead, it’s being used as an emergency measure to help boost the economy. Compared with the challenge of keeping the lights on, reducing Eskom’s astronomical debt and keeping labour onside, exchange controls are a drop in the ocean.

Staying positive 

That does not, however, mean that South Africa faces an impossible task in clawing its way out of the current economic malaise.

The Ramaphosa administration appears to be gaining momentum and measures that would have been unthinkable just a few months ago are being passed with little to no opposition. The scrapping of exchange controls is just one of those. 

Make no mistake, there’s a lot of work still to be done, but South Africa still has plenty of room for growth and with the right conditions in place, investors will want to be part of that. BM


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