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Your support makes all the difference.CAPE TOWN - Conditions are ripe to start dismantling South Africa's decades of strict exchange controls, and the timing of the decision is now up to President Nelson Mandela's government of national unity, Dr Chris Stals, governor of the Reserve Bank, said yesterday.
Since last year, foreign reserves had strengthened to about 12bn rand (£2.1bn) and South African interest rates were closer in line with the rest of the world, Dr Stals said. There had also been a fall in foreign holdings of the key exchange control instrument, the financial rand, which was within 10 per cent of the currency's market value.
President Mandela has said the financial rand will be dropped soon. Dr Stals declined to comment on timing, saying only that "there has been so much speculation in the markets that one day they will be right".
The Reserve Bank followed international interest rates up yesterday by lifting its discount rate 1 per cent to 14 per cent. Dr Stals said the move was a vital signal of tight monetary policy needed to control a 16 per cent expansion in the money supply last year, well above last year's 9.9 per cent rate of inflation. Money supply had been boosted mainly by a boom in credit to consumers and the private sector.
Rather than triggering an outflow of funds, Dr Stals thought it more likely that freeing exchange controls would initially bring an inflow of funds from banks and institutions keen to invest in South Africa and profit from interest rates well above the rate of inflation. But the bank still needed more reserves in case that capital suddenly took fright.
The Reserve Bank was already buying dollars in a fight to prevent the rand from appreciating too fast against world currencies, Dr Stals said. The financial rand was trading at about 3.83 rand to the dollar yesterday, compared with a commercial rand rate of about 3.53.
Dr Stals said the biggest outflow was likely to come from South African insurance and mutual funds. The biggest four institutions alone held 400bn rand in investments but had not one cent invested abroad. Exchange controls for private residents who wished to transfer money abroad would probably be the last to go, he added.
The financial rand was introduced to protect the South African economy from sanctions and capital outflows during the years the world isolated the country because of its racist apartheid policies.
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