Address by Dr Chris Stals, Governor of the South African Reserve Bank, at a Roundtable Discussion arranged by Economist Conferences, Johannesburg. 1. Exchange controlsThe exchange controls applied in South Africa were introduced over many years and form part of a macro-economic structure that was distorted by political developments in South Africa, and by international actions against the country that had little to do with economic objectives or realities. These exchange controls, like many other policy components of the distorted economic structure, frustrated the implementation of conventional monetary policies, restricted the effective functioning of the market economy, and led to the incorrect pricing of important productive assets such as capital, labour and foreign exchange.With the major political reforms introduced four years ago, it became a priority of the new South African Government to abolish exchange controls, together with many other unacceptable economic policies of the past. There were, however, good reasons why exchange controls could not be terminated immediately and had to be phased out gradually over an extended period of time. The main reason was, of course, a lack of foreign exchange reserves that would be required for the conversion of South African rand denominated assets into foreign assets. A further reason was that an overall economic system that became addicted to exchange controls over many years had to be prepared gradually to live and survive without the habitual narcotics of the past.The new South Africa made sufficient progress in both these areas to phase out a major part of the exchange controls over the past few years. The programme of a gradual phasing-out created frustration for many people in the private sector who continued to urge Government and the Reserve Bank to move faster. Important steps were, however, taken from time to time without any major disruption of the overall financial stability of the economy. These steps were introduced only when the authorities were confident that the relaxations would not create an unserviceable demand for foreign exchange, and when sufficient progress was made with the reforms of the domestic financial markets, and with the reintegration of South Africa in the world financial system, to justify further relaxation.Without going into the details of the relaxations already made so far, it is true to say that the emotion has now apparently been removed from this debate. The sincerity of the authorities with the commitment eventually to abolish all exchange controls is now accepted without question. The remaining controls are tolerated with more patience, and there is confidence that further steps will be taken as soon as possible to remove those that still remain.The Reserve Bank is continuing to simplify rules and eliminate unnecessary administrative restrictions on international currency transfers. A stage has now been reached where, for the further phasing-out of the remaining controls, the attention is being focused on the diminishing number of transactions that are still subject to restriction, rather than on the growing list of exemptions. Up to now, any transfer of funds from South Africa was prohibited, unless permission was granted by the Exchange Control Authorities for such a transfer. Having passed the half-way mark with the phasing-out programme, we must now begin to think in terms of a system where all transfers will be free, unless specifically prohibited or restricted by Exchange Control. The Reserve Bank is now in the process of restructuring the Exchange Control Rulings on the basis of this new philosophy. This should lend support to a more orderly and more transparent phasing-out programme of the rest of the controls. 2. Monetary policyIt is fashionable, not only in South Africa, but also in many other countries, to become more critical of monetary policy in times of a macroeconomic slowdown. Many businesses, private individuals and even governments often over-indulge in an excessive utilisation of cred
