Address by Dr Chris Stals, Governor of the South African Reserve Bank, at the Europe-South Africa Business and Finance Forum Cannes. 1. Exchange control: HistorySouth Africa originally introduced exchange controls in 1939, together with the United Kingdom and other members of the Sterling Area, as part of the Emergency Finance Regulations applied by this selected group of countries, mostly members of the British Commonwealth, during and after the Second World War. The original objective was to retain a free movement of funds between these countries, but to prevent "hard currency" funds from flowing out of the area to non-sterling area countries. The Sterling Area exchange controls were gradually removed after the War. In 1961, however, South Africa's exchange controls received its own identity when restrictions were placed on the outflow of funds from South Africa to the rest of the world. This decision followed upon the Sharpeville tragedy which led to a large outflow of funds from South Africa, and which drained liquidity and savings needed for economic development from the domestic economy.The South African exchange controls were extended from time to time in reaction to further political incidents that led to capital outflows not based on underlying economic fundamentals. The controls were intended to protect the domestic economy from the adverse effects of non-economically motivated capital outflows -- movements that could not be arrested or reversed by conventional macroeconomic policies such as interest rate or exchange rate changes. The South African exchange controls were applied relatively widely after 1985 when international sanctions, trade boycotts, disinvestment campaigns and the withdrawal of loan funds from South Africa exerted severe pressure on the balance of payments, and on the domestic economy. At that stage, certain restrictive measures applied to a few current account transactions, while the discounted financial rand system for non-residents was reintroduced, and the outward movement of funds of residents were subject to prior approval by the Exchange Control Authorities.It should be noted that throughout this period, the responsibility for exchange control policy remained vested with the Minister of Finance, who appointed the Reserve Bank as his agent to implement and administer the policy on behalf of Government. The Reserve Bank has therefore always been, and still is, but an adviser to Government when it comes to decisions on Exchange Control policy. 2. The phasing out of exchange controlsThe initial non-economic factors that led to the outflows of capital from South Africa during more than thirty years, from 1961 until early in the 1990's, rapidly disappeared after the announcement of the election of the Government of National Unity towards the end of 1993. Although a large amount of funds still flowed out of the country during the first half of 1994, the situation changed dramatically thereafter. In the second half of 1994, there was a net inflow of more than R9 billion into the country, and during the calendar year 1995 a further net inflow of R21,7 billion, to bring the total net inflow of capital for the 18 months from July 1994 to December 1995 to more than R30 billion.In the beginning, most of the capital inflows consisted of short-term funds, but gradually more medium and long-term loan funds flowed into the country and, towards the end of 1995, large portfolio investments entered the country through investments in South African securities (equities and bonds) listed on the Johannesburg Stock Exchange.The renewed capital inflows paved the way for the removal of the exchange controls. There was general agreement that the exchange controls were not in the interest of optimal economic growth and development. Over time these direct control measures, applied in a market-oriented economy, distorted important price structures, such as interest and exchange rates, financial asset prices, and even wages and salaries. Distorted prices lead to the mal-allocation of resources, and to economic growt