EXCHANGE CONTROL LIBERALISATION

In his Budget Speech on 12 March, the Minister of Finance, Mr Trevor Manuel, said that the further Exchange Control liberalisations that were announced on that day would be fully implemented by 1 July 1997. Today's announcement meets that pledge.

Progress so far

Significant progress has been made in the liberalisation of exchange controls since the new Government came into office in 1994. The Financial Rand mechanism was abolished on 13 March 1995, removing controls on non-residents. Since then, the international community has endorsed this move by investing a net amount of no less than R39,5 billion into our equity and bond markets.

Direct investment has increased substantially and many international corporations have re-entered South Africa. The partial privatisation of Telkom, involving some $1.2 billion, is an excellent example of the increased investment South Africa has received.

The liberalisation of exchange controls has permitted significant portfolio diversification, giving South African corporations and insurance companies, pension funds and unit trusts the ability to invest offshore. To date, an amount of some R27,7 billion has been invested abroad by institutional investors.

In the Budget there were announcements of a significant easing of restrictions on local borrowing by international corporations when investing in South Africa, as well as non-residents in the Common Monetary Area being allowed to maintain foreign currency denominated deposits with South African banks. In addition, South African corporates are now able to borrow offshore on the strength of their local balance sheet and to make new investments abroad of up to R30 million and up to R50 million into member countries of the Southern African Development Community. The limits on offshore investment by institutional investors were also further relaxed by again permitting offshore investments of up to 3 per cent of the net inflow of funds for the calendar year 1996.

Furthermore, virtually all the controls on current account transactions were removed. This included an increase in the allowances for residents travelling abroad, with a bigger increase for travelling to neighbouring countries.

In order to give South African resident individuals the opportunity to invest in foreign assets, we have put in place a mechanism whereby individuals who are registered taxpayers in good standing over the age of eighteen, will be allowed to apply to an authorised dealer in foreign exchange to invest an initial amount abroad.

Today's announcement

This initial allowance will be R200 000. This may be held offshore or alternatively held in foreign currency deposits with domestic foreign exchange dealers. The amount may be dealt with in any manner that the investor deems fit. This will come into effect from 1 July 1997.

The size of the initial allowance could be somewhat bigger than the markets were expecting. This could be seen as a further indication of our commitment to the liberalisation of exchange controls as fast as economic circumstances permit.

The Budget Speech further mentioned that the Exchange Control Department would consider applications by private individuals to invest in fixed property, such as holiday homes and farms, in SADC member countries. This will also come into effect from 1 July 1997.

Furthermore, to give effect to the undertaking that South African resident private individuals would be allowed to freely transact internationally, income accruing to them from foreign sources after 1 July 1997 may be retained abroad.

As set out in the March budget, emphasis will be placed on compliance with the South African tax legislation and to give effect to this requirement individuals availing of this facility will be required to sign a declaration of good standing. These declarations will be made available to the South African Revenue Services and any fraudulent declarations will be vigorously pursued by the authorities. These declaration forms will be made available by the Authorised Dealers to be completed before the transfer of funds may be effected.

Conclusion

The announcements today represent another part of the continuing process of liberalisation of the South African foreign exchange market. I believe that these measures will boost confidence, both domestically and internationally, in the South African economy and lay the foundation for the further liberalisation of the remaining exchange controls in the future.