Finance Minister Pravin Gordhan
Finance Minister Pravin Gordhan

#Budget2017: Are exchange controls an issue?

By Amanda Visser Time of article published Feb 13, 2017

Share this article:

Pretoria - South Africa first introduced exchange control in 1939 in the form of the emergency finance regulations. Major strides have been made, especially post 1994 to relax, to simplify and streamline exchange control regulations.

However, a recurring question is why the country has retained a set of rules and regulations which regulate the flow of capital in and out of the country in a time of peace and relative low financial threats.

Exchange controls the inflow and outflow of local currency and other local assets. They are mainly imposed to control outflows and to preserve foreign currency reserves.

Andrew Wellsted, head of tax at Norton Rose Fulbright, believes it has been retained in South Africa partly for legacy reasons, but predominantly because there is still a fear that there could be “large and uncontrolled” cash flows out of the country if it is suddenly withdrawn.

Finance Minister Pravin Gordhan will deliver the 2017 Budget on 22 February. Wellsted says there may still be an announcement relating to the export of intellectual property.

Some of the major changes since 1995 include the increase of an annual foreign capital allowance to R10 million and an additional discretionary allowance of R1m for individuals.

Carwyn Rhode, Standard Bank’s senior exchange control expert, says amendments to exchange control regulations for companies and institutional investors have been “substantial” over the last decade.

These amendments include allowing South African companies to make foreign direct investments up to R1 billion per company, per year. International headquarter companies who meet prescribed shareholding and asset criteria are allowed to invest offshore without restrictions.

Listed and unlisted companies are allowed to establish one subsidiary to hold African and offshore operations which will not be subject to any exchange control restrictions.

Since 2013, companies listed on the JSE were allowed to secondary list on foreign exchanges to facilitate both local and offshore foreign direct investment expansions.

According to the South African Reserve Bank (SARB) website unlisted technology, media, telecommunications, exploration and other research and development companies may apply for approval for a primary offshore listing, or to raise foreign loans and capital for their operations since 2014.

Rhode says the positive side of retaining exchange controls is the ability to protect the country from crises such as the 2008 US prime mortgage crisis which left many other banks – incorporated globally – reeling from the losses incurred.

The negative side is that South Africa is viewed as protecting its income and labour force from external competitors and inadvertently becoming less competitive.

Wellsted says the benefits of retaining exchange control is to keep control over capital flows, something which regulators generally like.

“The downside is regulatory barriers to cross border cash flows. Foreign investors, in particular, struggle with the concept. It is a hurdle to investing in South Africa as people are scared it means their investments may be trapped,” Wellsted says.

Rhode says one of the concerns about scrapping exchange controls is that it will open up the foreign exchange market to various players, increasing the risk of unfair market practices such as foreign exchange rate riggings.

Rhode adds the recently introduced Currency and Exchanges Manuals setting out what is allowed and what not in terms of foreign exchanges for banks, companies and individuals have “liberalised” South Africans from previous rules and regulations.

These manuals were only introduced in August last year. It will require time to become accustomed to the changes, he says.

Only then it will become clear if the changes have been positive or negative for South Africa, its businesses and its people.

Wellsted says the ideal will be to move to a reporting of transactions, rather than pre-approval. “However, in these volatile economic and political times, it is unlikely they (National Treasury) will significantly relax controls further.”

According to Keith Engel, CEO of the South African Institute of Tax Professionals, the big remaining issue is how to further liberalise exchange control for South African multinationals to make them more competitive globally.

South African multinationals still need exchange control approval in order to shift local funds for investment into new offshore opportunities or to grow pre-existing ones. 

“Cross-border loans also remain a problem. Even South African subsidiaries of foreign companies face challenges when seeking to repatriate funds back to their home countries through mechanisms other than straight dividends such as share buy-backs.”

Government has held back on further exchange control liberalisation out of fear that it could inadvertently allow South African multinationals to shift their headquarters into other locations. 

Hence, a “go-slow" approach has been adopted to ensure that openings are not created that could lead to a sudden outflow. 



Share this article: