SA’s exchange controls: put a stop to this perpetual own goal

Rhodes>Perspective>2013 Archive

In the late 1990s, my digs mate at Rhodes University started an international business. Using a US credit card, obtained during a brief time living in Colorado, he opened an account on eBay.

He sold stamps out of his childhood collection, but then started buying them around the Eastern Cape to sell online. Every day he would go down to the local post office to dispatch to customers around the world. He would be paid through PayPal into his US account and quite often we would receive cash dollars in the postbox of our Grahamstown cottage from buyers overseas. Somehow it always arrived.

There was one problem with this venture: exchange controls made it illegal. So when he graduated and aspired to grow an international trading business rather than one that provided him with beer money, he realised he would have to emigrate. So he did.

Another friend ran the offshore division of a South African multinational. He witnessed the crippling effect of exchange controls on his cash flow and the embarrassment of explaining to offshore partners, customers and shareholders the need to apply for exchange-control permission for the most basic transactions. Overseas-based competitors were more agile. He now lives in London.

The exchange-control manual that governs all this is a document that would make Franz Kafka recoil in horror. The section governing the personal transactions of South Africans could only have been written by a schoolmarm with a fascist streak. For example: "The amount of jewellery to be carried by travellers must be reasonable in relation to their financial means and standing," the manual helpfully tells us.

There is little the drafters have not thought of. It even has a paragraph governing "donations to missionaries", which require a letter from a "recognised religious body" confirming that the missionary exists. It is language strongly reminiscent of the rubbish the apartheid government came up with. And that is because it is.

I run businesses in South Africa and the UK. The business in London does work all over Africa and has clients around the world. It would be next to impossible to run it in South Africa. In the UK, it is easy.

The banks are geared to help companies transact across borders — I can do payments to anywhere in the world through online banking without filling in a single form or submitting any documents. In contrast, the South African business once had to pay R3,000 to a supplier in Taiwan who translated a document for us. We paid him three months late after we had jumped all the hurdles thrown up by our bank and the Reserve Bank. I no longer do international business from South Africa.

Large companies get around exchange controls by setting up subsidiaries or holding companies outside South Africa. MTN, Standard Bank and others hold their international operations through Mauritian entities. Mauritius, Botswana and other countries with smaller and less sophisticated economies than ours provide better environments from which to operate international companies. Those jobs, capital and taxes could be in South Africa.

What benefit do we get from the cold water poured on entrepreneurs’ international aspirations, the elaborate bureaucracy that has to be paid for to maintain it and the countless hours wasted on filling out forms? The only upside that all of this is thought to provide is to prevent "capital flight".

When exchange controls were introduced during apartheid, this was a real issue. South Africans were eager to avoid having their wealth destroyed in South Africa. The National Party’s response was never to change the underlying cause — economic lunacy — but simply to try to ban its consequences.

The apartheid government could get away with it because international trade was something only large companies did, and you could manage them case by case. But technology has enabled many more businesses to be internationally active. The opportunity cost of exchange controls is much greater now.

Could capital flight still be a concern? Economic logic is that you should currency-match your liabilities and assets. If you are planning to retire in South Africa, you should keep much of your savings in rand because your costs are going to be in rand. The same applies to companies. No rational person would expose themselves to currency risk, although it is wise to take on some in return for the portfolio benefits of diversification.

Capital flight would be a fear only if we were planning a return to economic lunacy.

Even then, as was proved during apartheid, determined South Africans can find ways to get their money out, despite the best efforts of the government. But more important, most examples of capital flight globally have been of foreigners pulling money from a country, rather than locals sending it out. Iceland, and more recently Cyprus, were forced to impose controls in the midst of their crises because their banking systems rested substantially on foreign deposits. That is not the case in South Africa because of rules that sensibly control the currency risk our banking system is exposed to. Some believe we survived the 2007-08 financial crisis because of exchange controls. That is rubbish — it was sensible banking-sector regulation that protected us, as it did in Canada and Australia, which have no exchange controls.

The 1997 East Asian crisis is another example where countries had to introduce emergency controls. There, it was because of "hot money" — portfolio investments by foreign investors into the domestic capital market. But one of the first things our democratic government did was free up foreigners to invest in our share and bond markets, a step that led to a huge inflow of foreign investment and now allows the government to fund its budget deficit. Today, half of the market capitalisation of the JSE’s companies is owned by foreigners and more than that proportion of the bond market. Foreigners are free to sell and leave at any time, yet we obsess about letters for donations to missionaries.

Our banking system is safe anyway, and a flight of "hot money" is a risk regardless.

Is there anything else that motivates exchange controls? All I can see is the costs: Cape Town’s excellent fund-management industry that could be managing funds for investors around the world, but can’t; Sandton’s banks, which could be funding infrastructure and companies in the rest of Africa, but can’t; the next PayPal, Facebook or Google, which could be starting up in a Grahamstown digs, but isn’t; Elon Musk, Mark Shuttleworth and other entrepreneurs who run businesses overseas rather than Pretoria or Cape Town; the billions wasted in form-filling.

Why are we so terrified of imagined risks and so lacking in ambition? Why do we not do everything possible to give every one of our citizens a shot at being globally competitive? Perhaps these are lingering scars of apartheid, the control ethos of the Bank, the paranoia about capital. We are stuck with tragic self-destructive insecurities about the relationship between South Africa and the rest of the world — ones that should have died with apartheid.

Shuttleworth has mounted a legal challenge on constitutional grounds over the levies that were imposed when he emigrated with his money. Good for him, and the courts will decide. But the rest of us should demand that this stupid own goal is buried once and for all.

We should let all of our entrepreneurs and companies turn their gaze to the rest of the world, and see it as a marketplace, not a threat; as opportunity, not bureaucracy.

Picture Caption: South African entrepreneur and multibillionaire Mark Shuttleworth.

Picture Source: SUNDAY TIMES


Theobald is a Business Day columnist and a director of companies in South Africa and England.

Source: Business Day