South Africa scraps finrand

FROM HUGH POPE

in Johannesburg

South Africa yesterday abolished the financial rand, a big psychological step towards dismantling the foreign exchange controls that protected its financial system from apartheid-era sanctions.

The finrand will be replaced by a single floating rate on Monday morning, the finance ministry said. South African shares were already being marked up on foreign markets in preparation for what pundits said was a wall of money waiting to invest.

The reality will probably be more modest, and plenty of money is waiting to leave as well. One London-based banker for a large US bank said South Africa was still classified alongside other emerging markets that have been hit by a crisis of confidence after the Mexican market collapse. "It's pretty significant, even if it is more intellectual than practical at this stage," the banker said. "It does expose the market to downward sentiment. But it's good that it's over. The rumours have been causing a lot of pain."

South African exporters and businesses have been hanging on to their dollars in expectation of the move and a long-term weaker rand. But some experts think that the rand will actually strengthen in the short term.

The Reserve Bank Governor, Chris Stals, has been saying for weeks that South Africa was as ready as it ever would be to compete in international currency markets.

Foreign reserves have been steadily rising, inflation is under control at under 10 per cent and South African interest rates are close to those of its main trading partners.

Reserve Bank reserves continued their strong recent recovery last month, rising 1.1bn rand to 12.37 bn rand (£2.1 bn). "The figures explain why I have been confident about scrapping the finrand," Dr Stals said.

International bankers are also impressed by the fiscal discipline of the 10-month-old government of national unity. All the signs are that next week's budget will be remain conservative, despite pressure from poor black townships for faster action on houses and jobs.

Initially, the new unitary floating exchange rate will not allow individuals to transfer money freely.