Exchange Rate Policy
Table of contents Pages
1. Introduction 2
2. Exchange control and its uses 2
2.1 . Disadvantages of tightly managed exchange control
2.2 . Advantages of flexible exchange controls
2.3 . Disadvantages of flexible exchange controls
3. Emerging markets and exchange control 3
4. South Africa and exchange controls 3
5. Conclusion 5
6. References 6
List of figure:
Figure 1: Exchange rate forecast 4
Figure 2: Price of Brent crude oil 4
Figure 3: SA inflation: history and forecasts 5 Introduction
South Africa and the countries of the world have seen tremendous shifts in exchange control and exchange regimes since the mid 1990’s. Evolving from stringent do-or-die fixed measures of tightly managed floats and soft pegs to more flexible floats and open capital accounts. Developed countries have succeeded in abolishing exchange controls and have set a standard for emerging countries to follow. This study evaluates the relaxation of exchange controls in the South African context.
Exchange control and its uses
Exchange controls are restrictive measures used to control the in- and outflow of foreign and domestic currencies in order to prevent uncontrollable large scale movements of capital. (SARB (b)) The exchange rate is the rate at which a domestic currency is traded for a foreign currency and is determined by the demand and supply of money in a managed flexible exchange regime. (SARB (b))
Disadvantages of tightly managed exchange control
• Exchange control restricts South African organisations from expanding their operations abroad, thus hampering their growth and competitiveness. (SARB (b))
• Exchange controls restrict the much needed inflow of foreign investment. (SARB (b))
• Exchange control administration and maintenance is costly and complicated. ( Cobbett 2005)
Advantages of flexible exchange controls
• Greater inflow of foreign
1. Introduction 2
2. Exchange control and its uses 2
2.1 . Disadvantages of tightly managed exchange control
2.2 . Advantages of flexible exchange controls
2.3 . Disadvantages of flexible exchange controls
3. Emerging markets and exchange control 3
4. South Africa and exchange controls 3
5. Conclusion 5
6. References 6
List of figure:
Figure 1: Exchange rate forecast 4
Figure 2: Price of Brent crude oil 4
Figure 3: SA inflation: history and forecasts 5 Introduction
South Africa and the countries of the world have seen tremendous shifts in exchange control and exchange regimes since the mid 1990’s. Evolving from stringent do-or-die fixed measures of tightly managed floats and soft pegs to more flexible floats and open capital accounts. Developed countries have succeeded in abolishing exchange controls and have set a standard for emerging countries to follow. This study evaluates the relaxation of exchange controls in the South African context.
Exchange control and its uses
Exchange controls are restrictive measures used to control the in- and outflow of foreign and domestic currencies in order to prevent uncontrollable large scale movements of capital. (SARB (b)) The exchange rate is the rate at which a domestic currency is traded for a foreign currency and is determined by the demand and supply of money in a managed flexible exchange regime. (SARB (b))
Disadvantages of tightly managed exchange control
• Exchange control restricts South African organisations from expanding their operations abroad, thus hampering their growth and competitiveness. (SARB (b))
• Exchange controls restrict the much needed inflow of foreign investment. (SARB (b))
• Exchange control administration and maintenance is costly and complicated. ( Cobbett 2005)
Advantages of flexible exchange controls
• Greater inflow of foreign
References: 1. COBBETT, J., 10 November 2005. Exchange controls useless-Tito. Citizen. [Online]. Available: http://www.samedia.uovs.ac.za.ez.sun.ac.za/cgi-bin/getpdf?year=2005&refno=17810&topic=8 : Retrieved 11 August 2008 2. EICHENGREEN, B., RAZO-GARCIA, R., 2006. Economic policy. #47. London: Blackwell Publishing Limited.: 410, 416 3. INGHAM, B., 2004. International Economics. A European Focus. Harlow: Pearson Education Limited.: 191 4. INVESTEC (a) 2008. 3rd Quarter preliminary Macro-economic forecasts. [Online]. Available: http://www.investec.com/NR/rdonlyres/0485B809-FF67-4ABF-8578-AB9BBFFA0ADC/11894/Forecasttable_Q308.pdf : Retrieved 12 August 2008 5. INVESTEC (b) 2008. Houseview SA: Group economics interest rate outlook. [Online]. Available:http://www.investec.com/NR/rdonlyres/CD6B4D6E-87D9-4DD9-A662-C9EED3B62C49/12040/Houseview_InterestRate_Aug.pdf 6. MAFU, T., 01 September 2006. Exchange controls still deter foreign investors. Star. [Online]. Available: http://www.samedia.uovs.ac.za.ez.sun.ac.za/cgi-bin/getpdf?year=2006&refno=13416&topic=8 : Retrieved 11 August 2008 7. MONDI, L., 19 November 2005. SA should retain exchange controls. City Press. [Online]. Available: http://www.samedia.uovs.ac.za.ez.sun.ac.za/cgi-bin/getpdf?year=2005&refno=18507&topic=8 : Retrieved 11 August 2008. 8. SOUTH AFRICAN RESERVE BANK (a). 2008. Monetary Policy Review May 2008. 9. SOUTH AFRICAN RESERVE BANK (b). 2008. Factsheet 4. [Online]. Available: http://www.reservebank.co.za/internet/Publication.nsf/LADV/67C1699E98E8A8C54225733700450AF4/$File/Fact+sheet+4.pdf Retrieved: 11 August 2008