This resource is hosted by the Nelson Mandela Centre of Memory, but was compiled and authored by Padraig O’Malley. It is the product of almost two decades of research and includes analyses, chronologies, historical documents, and interviews from the apartheid and post-apartheid eras.
4 Monetary And Exchange Rate Policy
4.1 Monetary policy and inflation
The main objective of monetary policy will continue to be the maintenance of financial stability and the reduction of the inflation rate. Positive real interest rates are a minimum condition for overall financial stability. Low inflation is an important requirement for higher economic growth, the creation of employment opportunities and a more equitable distribution of income.
Inflation reduction has been facilitated by other developments. Trade liberalisation has contributed significantly to the containment of domestic prices, while more moderate wage-setting and improved industrial relations have also played a role in holding cost increases in check.
Monetary policy will also aim to maintain real interest rates at positive levels to encourage savings and investment. However current levels of interest rates are bound to have negative effects on economic growth. High interest rates hamper the development of the small business sector which is dependent on bank credit and put home ownership out of reach of more people. It is not possible, however, for the Reserve Bank alone to lower interest rates if conditions are not appropriate. Lowering the Bank rate could lead to higher credit demand, higher inflation, and as inflationary expectations take hold, higher long term interest rates. In addition, such a policy would lead to declining capital inflows, capital flight and higher imports, which all add up to a balance of payments crisis.
What is required are the conditions for lower (but positive) real interest rates. The strategy outlined in this document aims to bring about these conditions. These include sustained lower rates of inflation; a reduction in government dissaving which will reduce pressures on the capital markets; and the attraction of long term capital inflows, particularly direct investment flows, which will make the capital account less dependent on short term capital inflows which are attracted by high real interest rates; the commitment to a stable real exchange rate and higher growth will also reduce the risk premium facing foreign capital inflows and this would then allow for lower real interest rates.
By combating domestic inflation the monetary authorities will also contribute to stabilising the external value of the rand. Over the long run, low domestic inflation is a prerequisite for greater stability in the real effective exchange rate.
4.2 Exchange rate policy
Since mid-February the foreign exchange market has been subjected to intense speculative pressure, causing a substantial real depreciation of the rand. This development to some extent reflects that the rand had become somewhat overvalued in response to a temporary capital surge, but was also the result of increased concerns regarding policy trends and economic prospects. The movements of the exchange rate signal some uncertainty in financial markets and call for careful policy responses.
In order to maintain the current competitive advantage created by the depreciation of the rand in the first four months of 1996, the objective is to keep the real effective exchange rate of the rand at a competitive level. Although short-term fluctuations may at times be unavoidable, monetary and other policy measures will be geared towards the attainment of long-term real effective exchange rate stability. This will provide the stable environment needed for a concerted expansion of export industries.
Although the exchange rate is primarily market determined, its value at any moment cannot be considered a true reflection of the underlying value of the rand while exchange controls exist. The Government has stated repeatedly that it is committed to phasing out controls in a prudent manner. In line with this commitment, the financial rand was abolished in 1995.
In view of the many inherent disadvantages of exchange control, such as the distortion of the price mechanism, the problems encountered in the application of monetary policy, the detrimental effects on inward foreign investment and the large administrative costs, all remaining exchange controls will be dismantled as soon as circumstances are favourable. The gradual approach to the abolition of exchange control is designed to allow the economy to adjust more smoothly to the removal of controls that have been in place for a considerable period.
The current round of exchange control liberalisation is designed as a balanced package which will enhance economic activity. The new measures include the following:
Policies directed specifically at foreign investors include the relaxation of access to domestic credit. Although a measure of capitalisation from foreign funding is still required, the new regulations will allow for local borrowing capability to be enhanced by doubling the current borrowing limit. In terms of the new regulations, a wholly non-resident owned entity is able to borrow 100 percent of shareholders' equity.
Institutional investors, namely insurance companies, pension funds and unit trusts, may currently obtain foreign assets by way of asset swaps for up to 5 percent of their total assets, subject to the stipulations of the legal framework within which they operate. This limit will now be increased to 10 percent.
Institutional investors will also be allowed foreign currency transfers during 1996 of up to 3 percent of the net inflow of funds during the 1995 calendar year. Approval for such transfers will be subject to the overall limit of 10 percent set out above.
Corporate entities who operate in the export field and also import goods from abroad, will be allowed to offset the cost of imports against the proceeds of exports, provided the set-off takes place within a period of 30 days.
Adjustments to existing exchange control limits and measures designed to effect administrative exchange reform are included in the package.