The impact of foreign exchange controls on economic performance of emerging economies and South Africa in particular

Abstract

This study sets out to investigate the impact of foreign exchange controls on economic performance of emerging economies and South Africa in particular. Amidst South Africa’s newly established stable political environment and its reintroduction to the global economy, a fierce debate exists on whether some measure of exchange controls are necessary or whether they should be abolished altogether. The debate also extends to the nature of the economic liberalisation process in the removal of exchange controls, either in an instantaneous “big bang” approach or in a gradual manner. The research describes arguments for both the support of exchange controls and their abolition. This includes a description of the path South Africa has adopted and an assessment of the merits of exchange controls. Experience from other emerging economies is investigated and correlated with the South African experience. Results indicated that a gradual approach in the relaxation of exchange controls is recommended and that domestic monetary and fiscal policy and trade reforms first before liberating the capital account. It was found that the intensive use of exchange controls as a means of capital account restriction appears to hinder good economic performance; instead it is recommended to create and maintain an institutional environment in which the investment process can occur and where policy-makers can stimulate investment activity with a consequential elimination of capital flight.