No they don’t. There’s a common misconception that exchange controls stop money leaving the country.

That’s not really the case, as VALR CEO Farzam Ehsani recently pointed out in a Moneyweb article.

“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.”

Most rands today are digital entries on the balance sheets of SA banks. These cannot be placed in a suitcase and shipped across the border.

Here’s what happens: 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.

No rands have left SA. All that has happened is ownership has changed.

That’s not to say this transaction is without consequences. More people with rands wanting to swap these into USD will cause the price (exchange rate) of rands to fall.

The exchange rate is the market-clearing mechanism between those who want rands and those who want foreign currency.

There is also a belief that demand for USD reduces the SA Reserve Bank’s stock of foreign reserves. This is also a fallacy.

As Ehsani explains: “They 9foreign reserves) 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.”

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.

All of which raises the question: why do we still have exchange controls?

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.

It’s clear that exchange controls no longer deliver on these objectives. The evidence is the99% devaluation of the ZAR against the USD since the rand came into existence in 1961.

What these exchange controls do is impede the exercise of freedom to allocate capital as you see fit, invest where you like and move your money without interference. These are basic property rights.

It would be far better to remove the current 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.