Exchange Rate Policy

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2.Exchange control and its uses2

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 control3

4.South Africa and exchange controls3



List of figure:

Figure 1: Exchange rate forecast4

Figure 2: Price of Brent crude oil4

Figure 3: SA inflation: history and forecasts5

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 investment that leads to economic growth. (Mafu 2006) •The SARB can improve their balance sheets.
The improvement of South Africa’s credit rating abroad. (Mondi 2005)

Disadvantages of flexible exchange controls
Less control over the movement of capital out of the country in times of crises. .
Emerging markets and exchange control
Most emerging markets in the world still use exchange controls with limited flexibility, as they lack the “so called” preconditions required to effectively manage and sustain a stable open capital account. (Eichengreen & Razo-Garcia 2006: 410) These preconditions include among others, a strong and well developed financial sector, transparent and strong monetary and fiscal policies and well developed banking systems. (Eichengreen & Razo-Garcia 2006: 416)

South Africa and exchange control
South Africa boasts with a very well developed financial sector, far superior to that of most developing countries. It has a sound and well governed banking sector and transparent and consistent economic policies. As far as these preconditions are concerned, South Africa is a prime candidate for the eradication of exchange controls. South Africa however opted for a flexible exchange regime with economic policy “anchored” to an inflation target. The inflation target is the primary concern of the SARB, with the interest rate as an operational target and the exchange rate as intermediate target. (Ingham 2004: 191)The interest rate affects the demand and supply of money in the market which in turn determines the exchange rate that ultimately affects the inflation. (Ingham 2004: 191) In concept the more flexible the exchange regime, the more volatile the market for the supply and demand of money and the higher the risk of unwanted capital flight. In figure 1 below, the forecast depicts a steady increase in the exchange rate of the Rand against major currencies throughout 2007 to 2013. This indicates the depreciation of the Rand, although the...
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