Address by Dr Chris Stals, Governor of the South African Reserve Bank, at the Annual Australia / Southern Africa Business Council Meeting, Sydney. 1. The history of exchange control in South AfricaThe beginning of exchange control dates back to 1939 when South Africa, as a member of the now defunct British Sterling Area, was asked, together with other members of the Sterling Area, to introduce restrictions on the outflow of funds to non-Sterling Area countries. This ensured the free movement of funds, emanating mainly from the United Kingdom, within the Sterling Area.After World War II, the Sterling Area exchange controls were gradually phased out, but in South Africa in 1961 the controls were extended and given a specific South African function. This followed upon disrupting internal political clashes (the Sharpeville incident), and South Africa's withdrawal from the British Commonwealth. Exchange control in South Africa was now intended to provide some protection to the domestic economy from the adverse effects of large-scale outflows of capital. For the first time, exchange control also restricted the repatriation of non-resident investment funds from the country.During the period 1961 to 1993, exchange control was extended from time to time, mostly in reaction to a worsening of South Africa's internal political situation, and increasing external pressures in general. For example, in 1976, after the uprising of school children in Soweto, proceeds of the sale of non-resident owned securities in South Africa were blocked and eventually converted into securities rand, tradable only at a substantial discount at a second tier (lower value) exchange rate. After the United Nations introduced world-wide economic and financial sanctions against South Africa in 1986, a standstill on the repayment of a major part of South Africa's foreign indebtedness was introduced, providing for an extended negotiated redemption of the outstanding amount.By the time that the major social and political reforms were introduced in South Africa in the early nineties, there existed a very comprehensive system of exchange control that covered certain current account transactions and the inflows and outflows of both resident and non-resident investment funds. 2. The phasing out of exchange controlThere was general consensus that exchange controls created many distortions in the South African economy. Interest rates, the exchange rate, financial asset and property prices, and even production costs in the domestic economy were affected by the comprehensive exchange controls. The system prevented the important price mechanism of the market economy from functioning properly. This led to the maldistribution of scarce resources and the functioning of the economy at levels below its optimum capacity.After the democratic election for a new Government of National Unity took place in April 1994, and international punitive actions against the South African economy were removed, there was general consensus within the new Government that exchange controls should also be removed. There was, however, major disagreement on how fast the controls should disappear. At the one extreme were supporters, mostly in the private financial sector, of a "big bang" approach. They pleaded for the immediate removal of all the controls. On the other hand, there was substantial support for a more gradualist approach and for the dismantling of the exchange controls over an extended period of time.The Reserve Bank supported the latter approach, mainly for the following reasons:Years of economic sanctions, boycotts, disinvestment campaigns and the withdrawal of foreign loan funds from South Africa depleted the country's foreign reserves. At the time of the elections of April 1994, the Reserve Bank owned, on a net basis, zero foreign reserves.During the long extended period of exchange controls, backlogs developed, and a huge pent-up demand for an outflow of capital emerged. Overdue loans had to be repaid to non-residents, and no South African residents were allowed to accumulate foreig