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Stals ends all hopes for early death of controls
Foreign exchange regulations will not be phased out in a hurry, writes SVEN LUNSCHE
By ruling out a "big bang" or once-off scrapping of controls, Stals resisted calls by the local business community and foreign investors for their rapid dismantling. He is also likely to have provided currency speculators with renewed ammunition for a run on the rand, which has hit record lows over the past few trading days. In a series of speeches and interviews on Friday, Stals also said that interest rates would remain high to prevent a marked increase in inflation. He did not rule out a rise in the Bank rate, which economists say is imminent. The rand on Friday took some heart from a small rise in the October gold and foreign exchange reserves but retreated to below R4,70 to the US dollar after Stals's comments. Dealers were also concerned by Finance Minister Trevor Manuel's appointment of a committee to investigate the provision of forward cover in the foreign exchange market. Manuel said billions of rands had been added to the country's debt portfolio in the process of providing forward cover. He said the focus of the investigation would be the long-term forward cover component. The Reserve Bank's stated aim is to withdraw gradually from the forward forex market. But that plan has been disrupted by the rand's fall which triggered a scramble for cover and lifted the total forward cover extended from $8-billion in February $15-billion at the end of August. Stals linked the lifting of capital restrictions to the implementation of the government's macro-economic strategy, itself a gradual process. "These things will be done over the next four to five years and therefore foreign exchange restrictions will be dismantled over that period," he told Reuters. "It's part of the programme. If we have big inflows of capital next year we can go a lot faster, but that applies to the entire plan." However, Stals raised the prospect of allowing financial institutions to invest a larger portion of their assets offshore. "Further steps will include more lenient rules on the foreign investments of institutional investors which will broaden out to the relaxation of controls on the capital transfers of individuals," he said in another interview. "The free transfer of the capital assets of emigrants will probably be implemented only in the final stages of the abolition of controls." He backed the Department of Finance in saying that some "prudential" requirements might still be needed to restrict the movement of cash offshore by funds, to ensure they had adequate cover for liabilities. Stals stressed that he would ideally like three months' import cover in place - equivalent to R30-billion. "But that certainly is not the policy. The policy is a little bit of this and a little bit of that," he said. Despite a slight improvement in October, the reserves remain precarious at R10,3-billion, enough to cover only four weeks of imports. Stals suggested for the first time this week that he would back a loan from the International Monetary Fund to strengthen reserves. It would be up to the government to negotiate an acceptable role for the fund if South Africa were to seek a standby facility. At a speech in Stellenbosch Stals cautioned that the main aim of monetary policy was to curb inflation, which had been raised up by rand's sharp fall. Coupled with growth in credit spending, high inflation looks set to force the Bank to lift interest rates before year-end.
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