The Sunday Times last weekend reported an apparent mea culpa by finance minister Enoch Godongwana over the increase of the institutional offshore investment limit two years ago to 45%. His description of it as a “grave mistake” was unusual for a politician. But it misses the mark in a big way.
First, a brief background. Since the end of apartheid, the regulations governing exchange control, introduced in 1961 based on legislation passed in 1933, have been gradually relaxed. Those regulations cover everything from the amount of jewellery that travellers can leave the country with to how much South Africans are allowed to invest offshore (the manual is 293 pages long).
For some years, these regulations have been going through a “modernisation” led by the National Treasury. There are a great many reasons why this is important. Exchange controls are classic red tape — burdening businesses and consumers with needless and expensive bureaucracy. Many other countries have got rid of them, including neighbours such as Botswana.
Forms are required for every international payment, banks add charges for every international transaction, consumers pay among the highest fees in the world to send small amounts of money to loved ones elsewhere. It functions as poorly as you might expect for legislation and regulations designed in the 20th century for the purpose of trapping capital from fleeing apartheid. It comes at great cost, and the benefits are hard to see in a democratic country integrated into the global economy.
It is also possibly unlawful. While no-one has brought the right test case to the Constitutional Court, in litigation between Mark Shuttleworth and the SA Reserve Bank a decade ago, many aspects of the regulations were questioned. While in that case the Bank was ultimately vindicated on the narrow question before the court, there was a strong feeling left over that many aspects of the regulations are in desperate need of updating to match our constitutional jurisprudence.
When it comes specifically to investment rules, the modernisation effort has been framed in terms of the Organisation for Economic Co-operation and Development’s (OECD) Code of Liberalisation of Capital Movements. This is for good reason — SA stands to be benefit from reciprocal treatment if it is in line with the OECD’s standards, which have become global benchmarks for how countries treat each other on many economic matters.
Exchange controls are at present in conflict with the OECD’s code, essentially because they violate the principle of equal treatment. SA imposes no restrictions on foreigners investing in our markets. Indeed they are welcomed with open arms and account for a large part of the investment in our bond and equity markets.
Yet South Africans cannot reciprocally invest in foreigners’ markets without having to navigate the investment limits imposed by exchange control. Foreign governments have a right to ask why they should allow their citizens to invest in SA when they cannot enjoy reciprocal treatment. It is at odds with basic principles of international law and moreover leaves SA’s investors worse off by frustrating their access to diversification and return opportunities.
While we have been long promised an overhaul to bring exchange control in line with the OECD code, we have instead been drip-fed piecemeal updates within the existing regulations. The 45% limit is one example of this. In the 2022 budget, the 30% offshore limit, with 10% extra for the rest of Africa, was upgraded to a single 45% limit. The concern is that this new limit has led institutions to externalise investment, starving our markets of much needed capital.
- Stuart Theobald is chair of research-led consultancy Krutham (formerly Intellidex).
This article first appeared in Business Day.
