Why our exchange controls are no longer fit for purpose

Before defending or abolishing exchange controls, we should ask a simpler question: what is the policy actually trying to achieve?

Exchange controls are usually justified by three main policy objectives:

• To control the movement of financial and real assets into and out of South Africa and prevent any unauthorised export of capital;
• To protect South Africa’s foreign currency reserves; and
• To avoid interfering with the efficient operation of the commercial, industrial and financial system.

These sound reasonable. But the first two objectives rely on a mental model that is increasingly outdated.

The regulators imagine capital as something that can physically cross a border, such as gold bars, banknotes or bearer instruments. They imagine the rand as something the state must defend by spending scarce dollars. They imagine private citizens or businesses converting rands into dollars as a direct loss to South Africa.

But in a modern digital banking system, that is not what happens.

The first fallacy: Digital rand cannot leave SA

Most rands today are not physical notes and coins. They are digital entries on the balance sheets of South African banks. In fact, over 97% of SA’s money supply is digital.

A digital rand exists because a South African bank records a rand liability to a customer. It cannot be placed in a suitcase. It cannot be loaded onto a ship.

So when someone says “money has left SA”, we need to ask: what exactly has left?

Take a simple example.

Person A has R1 million in a South African bank account. He wants to pay for a hospital abroad. He goes to his bank and says, “Exchange my rand for dollars and send the dollars to the hospital”.

From Person A’s perspective, he has externalised R1 million. His South African bank balance is gone, and the foreign hospital receives dollars. But Person A cannot buy dollars unless someone else sells dollars. Party B gives up dollars and receives rand.

Read: Common exchange control misconceptions

The rand has not left South Africa. It has moved from Person A’s South African bank account to Party B’s South African bank account, or to a South African rand account held through the banking system.

No capital was externalised from the system. Only ownership changed.

That distinction matters.

What actually changes when you buy dollars

Of course, something does happen when many people want to buy dollars. The price of dollars in rand may rise. In other words, the rand may depreciate. But that is an exchange-rate price adjustment, not a physical draining of rand from the country.

In a floating exchange-rate system, that price is supposed to adjust. The exchange rate is the market-clearing mechanism between those who want rands and those who want foreign currency.

Listen/read: Sars crackdown targets expats moving money offshore

If more South Africans want to change their rands into dollars, this makes the rand weaker, and that in turn can cause inflation and loss of confidence in SA. But that is not the same as saying “capital has left South Africa” in the simplistic sense.

So the real policy problem is whether South Africa is attractive enough that people want to hold rand assets in the first place.

Another fallacy: Crypto conversion depletes Sarb reserves

The second argument for exchange controls is that South Africa must protect its foreign currency reserves. This also needs to be unpacked.

Foreign currency reserves are not the country’s private stock of dollars. They are official public-sector foreign assets held by the South African Reserve Bank (Sarb) and, in relevant respects, National Treasury.

They are used for external obligations, confidence, liquidity and shock absorption. They are not automatically touched every time a South African buys dollars, invests offshore, pays a foreign supplier or buys a crypto asset.

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In a normal private forex transaction, a willing buyer and a willing seller exchange rands and foreign currency. The Sarb’s reserves are not involved unless it chooses to intervene, or unless the state itself is making foreign-currency payments.

This is crucial, and the exact same principle applies to crypto transactions as it does to forex transactions.

The idea that exchange controls are necessary to prevent ordinary South Africans from draining Sarb reserves misrepresents how the system actually works.

Defending the rand is expensive and ineffective

South Africa has already learned the danger of trying to defend the rand.

In the late 1990s, the Sarb attempted to defend the currency under very difficult market conditions. The result was costly and unsuccessful. Interest rates rose sharply. The economy suffered. The rand weakened anyway. Losses ultimately had to be absorbed by the public sector.

If the rand weakens, the sustainable answer is not to “trap” capital. The sustainable answer is to make South Africa more investable.

What exchange control really does

Exchange control does not keep the digital rands physically inside South Africa. They are already inside South Africa by design.

What exchange control does is something else.

The third stated objective is “not to interfere with the efficient operation of the commercial, industrial and financial system”. But this is precisely where the modern framework fails on its own terms. A system of pre-approval, discretion and restriction necessarily interferes with ordinary commercial and financial activity.

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It creates friction, uncertainty and gives officials discretion over lawful private transactions.

It makes international investors worry about whether they can get money in and out. It makes South African entrepreneurs less globally competitive. It encourages offshore structuring. It tells the world that South Africa is not fully confident in its own investment proposition.

Capital goes where it is welcomed, protected, respected and allowed to move.

The question of exchange control and liberty

There is also a deeper question of economic freedom.

If exchange control does not actually prevent macroeconomic capital flight, and if it does not protect Sarb reserves in the way people assume, then we must ask: what exactly are we restricting, and why?

Exchange control no longer prevents capital from leaving South Africa in any meaningful macroeconomic sense.

What it does prevent is freedom: the freedom of citizens to allocate their savings, the freedom of entrepreneurs to build globally competitive companies, and the freedom of investors to enter South Africa with confidence that they can also exit.

The current exchange control model was developed over half a century ago and has not evolved to suit the world of digital money and modern forex markets. It’s time the policy is reconsidered.

We are asking the wrong question

The question should not be: how do we stop people from taking money out? The question should be: how do we make South Africa a place where people want to bring money in?

That means strong institutions, sound monetary policy, credible fiscal policy, clear tax rules, effective anti-money laundering enforcement, and modern reporting systems.

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If the concern is tax evasion, enforce tax law. If the concern is illicit financial flows, enforce anti-money laundering and beneficial-ownership rules.

If the concern is systemic risk, use prudential and macroprudential tools. If the concern is financial crime, properly supervise intermediaries.

Why we should abolish exchange controls

Abolishing exchange controls would not mean abolishing oversight. It would mean replacing pre-approval, suspicion, and restriction with disclosure, reporting, supervision, and enforcement.

It would signal that South Africa is ready to compete for global capital and is more attractive for foreign direct investment.

It would help entrepreneurs raise capital and encourage companies to domicile in SA. It would support the tax base and create jobs.

Exchange control was created for a different world. A world of physical bearer assets, managed exchange rates, sanctions, isolation, and scarce reserves.

But South Africa today needs the opposite posture. We need openness, confidence, and investment.

Listen/read: Dawie Roodt: Do we still need exchange controls?

SA should abolish exchange control as a system of pre-approval and restriction, and replace it with a modern framework based on reporting, transparency, tax compliance, anti-money laundering enforcement, prudential supervision, and the rule of law.

This is not an argument for no oversight. It is an argument for better oversight.

The future of South Africa will not be built by controlling exits. It will be built by becoming a country that people want to enter.

Farzam Ehsani is the co-founder and CEO of crypto exchange VALR.