VII External Policies in the Context of Trade and Financial Sanctions
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund
  • | 2 https://isni.org/isni/0000000404811396, International Monetary Fund

Abstract

The imposition of trade and financial sanctions against South Africa in 1985 resulted in a marked change in the country’s external accounts. After a long tradition of being a net user of external savings, South Africa was denied access to international capital markets, thus forcing it not only to rely on its own domestic savings but also to repay foreign capital on a significant scale. In response, the South African authorities increased their reliance upon the exchange rate and demand-management policies to effect the required shift in the external current account balance. In addition, they intensified the system of trade protection already in effect, reintroduced a dual exchange rate, and negotiated a standstill arrangement on a significant part of their external debt.

The imposition of trade and financial sanctions against South Africa in 1985 resulted in a marked change in the country’s external accounts. After a long tradition of being a net user of external savings, South Africa was denied access to international capital markets, thus forcing it not only to rely on its own domestic savings but also to repay foreign capital on a significant scale. In response, the South African authorities increased their reliance upon the exchange rate and demand-management policies to effect the required shift in the external current account balance. In addition, they intensified the system of trade protection already in effect, reintroduced a dual exchange rate, and negotiated a standstill arrangement on a significant part of their external debt.

This chapter broadly examines external developments since 1985 and describes the policy response to those developments, emphasizing, in particular, trade policy and resort to capital controls. In view of the prospect of elimination of sanctions, the chapter also focuses on the scope for moving toward a more liberal trade and payments system that might be consistent with both a better allocation of resources and a more export-oriented pattern of development.

Broad Overview of External Developments Since 1985

The most striking development in South Africa’s external position since 1985 has been the swing in its capital account: it went from being a net importer of capital of about 3 percent of GDP a year before 1985 to being a significant net capital exporter during 1985–90 (see Table 26). This development reflected the country’s substantially reduced access to new external loans and the increased difficulty in rolling over outstanding maturities following the imposition of international financial sanctions, as well as the increased capital outflows associated with an uncertain domestic environment. As Table 26 shows, South Africa’s capital outflow has tended to decline since 1985, to some extent reflecting the fall in its external debt from 40 percent of GDP in 1985 to about 20 percent in 1990. The decline in the outflow has not been matched by a similar narrowing in the current account surplus, which has permitted a buildup of reserves.

Table 26.

Current Account Balance and Capital Flows

(In percent of GDP)

article image
Source: South African Reserve Bank.

The swing in the external current account that began in the mid-1980s was accomplished to some degree by a substantial depreciation of the currency.40 Indeed, over the second half of the 1980s, the real effective exchange rate was approximately 29 percent more depreciated than it was in the first half of the 1980s (see Table 27 and Chart 5). However, since 1989, when the authorities moved to slow the depreciation of the nominal exchange rate as part of their anti-inflation efforts, the real exchange rate has tended to appreciate modestly. Nonetheless, as of May 1991, the real effective exchange rate was still 7 percent below its level at the end of 1984.

Table 27.

Nominal and Real Effective Exchange Rate Levels

(1985 = 100)

article image
Source: IMF, International Financial Statistics.
Chart 5.
Chart 5.

Exchange Rates of the Rand

Source: South African Reserve Bank, Quarterly Bulletin; and IMF, International Financial Statistics.1 Based on relative consumer prices.2 The difference between the prices of the commercial rand and the financial rand as a percent of the commercial rand. The financial rand was unified with the commercial rand in early 1983 before being reintroduced in 1985 following the introduction of financial sanctions. Figures as of end of period.

The other basic strand in the authorities’ response to the changed external situation was the maintenance of a restrained demand-management policy. Although policies were relaxed briefly in 1986 and 1987, over the six years since 1985, growth in real domestic demand has been restrained to 1 percent a year, on average. As described more fully below, these policies were supported by both an intensification of trade protection and a tightening of capital controls.

The use of the exchange rate and domestic demand restraint has succeeded in effecting a major shift in the current account balance over the past six years (see Chart 6). Of particular note in this regard was the strong performance of non-gold exports. Thus, notwithstanding the application of trade sanctions, since 1985 these exports have grown at an average of 10 percent a year or by approximately twice the rate of growth in world trade.41 Over the same period, import volume growth has been, on balance, highly restrained, as suggested by import volumes in 1990, which were barely 2 percent above their corresponding level in 1984.

Chart 6.
Chart 6.

Selected Balance of Payments Indicators

Source: South African Reserve Bank, Quarterly Bulletin.

Trade Policies

Import Protection

South Africa’s trade policy has traditionally aimed at import substitution and inward-looking development. The application of trade sanctions against the country in the mid-1980s lent considerable impetus to those tendencies, taking the form of an import surcharge, introduced in 1985, that ranged between 10 percent and 60 percent and that was directed especially at the importation of luxury goods. Although this surcharge was subsequently reduced to its present level of between 5 percent and 40 percent, it still contributes importantly to the current high level of effective protection. The Industrial Development Corporation of South Africa Limited (IDC) estimates that the manufacturing sector now enjoys an average rate of effective protection of more than 30 percent.42

The main features of the current system of import protection in South Africa are summarized in Tables 28 and 29. Aside from the import surcharges already referred to, the system comprises the following basic three elements: (1) ad valorem duties, which are relatively low for primary products and capital goods but are about 25 percent for semimanufactured and manufactured goods; (2) a wide-ranging system of formula duties, which cover over 20 percent of all tariff lines and which, in many cases, have an ad valorem equivalent of over 40 percent. These duties, which add a floor price to the pre-existing tariff schedule, are granted on a selective basis to protect domestic producers from competition from low-cost producing countries; and (3) an extensive import-licensing system, which affects approximately 20 percent of total imports and which has been used in the context of international trade sanctions to afford administratively more speedy protection than do formula duties or tariff protection. This licensing system, which is currently being converted into a system of equivalent tariffs in the agricultural sector where it is most prevalent, is estimated by the IDC to add about 10 percent to the prevailing rates of protection.

Table 28.

Structure of Protection in 1990

article image
Source: Industrial Development Corporation of South Africa Limited.
Table 29.

Nominal Rates of Protection as of Mid-1990

(In percent)

article image
Source: Industrial Development Corporation of South Africa Limited.

The prospect of an early lifting of international trade sanctions has prompted the Government to direct the IDC to review the present system of protection with a view to moving toward a more open trade regime. The IDC’s preliminary proposals are to adopt a preannounced schedule of liberalization over a number of years and to institute reforms that would reduce the system’s selectivity and increase its transparency. The main proposals of the IDC may be summarized as follows: (1) A more uniform tariff structure would be established through the eventual elimination of the present system of formula duties, which is to be replaced by more standard antidumping procedures. Until the formula duties were scrapped, they would be subject to a maximum ad valorem ceiling; (2) the present system of import surcharges would be eliminated in the near future; (3) the preannouncement of a schedule of reductions in ad valorem duties would take effect over a five- to six-year period. This schedule would envisage a faster rate of tariff reduction for products subject to higher rather than to lower tariffs and would aim at maximum rates of protection for the manufacturing sector of no more than 30 percent and for other sectors of no more than 15 percent; and (4) the selective approach to the granting of import tariffs would be replaced by an automatic system that would operate within the overall policy framework of lowering levels of protection. As an immediate step in this direction, the requirement that protection be contemplated only when at least 60 percent of local demand can be met would be eliminated to avoid the establishment of further uncompetitive product lines.

Export Promotion

During the 1980s, a variety of incentives were introduced to promote exports, including, most notably, generous and variable export marketing allowances through Section 11(b) of the Income Tax Act and subsidized electricity rates for the beneficiation of mineral exports. In 1990, it was announced that these subsidies would be phased out by 1992 and replaced by a more transparent General Export Incentive Scheme (GEIS). This scheme provides direct subsidies on the domestic component of exports according to the degree of manufacture of the export at rates along the lines indicated in Table 30.

Table 30.

Rates of Subsidy Under the General Export Incentive Scheme

(In percent)

article image
Source: Industrial Development Corporation of South Africa Limited.

As part of its proposal to liberalize the trade system, the IDC is recommending that the GEIS be phased out as import tariffs are reduced. However, the IDC proposal is contingent upon more active use being made of the exchange rate and upon a substantial reform of the tax system that would enable South African exporters to compete on more equal terms with their competitors. In the latter respect, the IDC stresses the need to reduce the company tax rate from its current level of 48 percent to below 40 percent.

Capital Controls

As regards the capital account, the South African authorities responded to the imposition of financial sanctions by substantially tightening the system of capital controls already in place. This tightening involved reintroducing the financial rand system and negotiating a number of standstill arrangements that rescheduled that part of South Africa’s external debt that was frozen in 1985.

Financial Rand System

In September 1985, the authorities reintroduced the financial rand system, which had been eliminated in 1983, to protect the country’s foreign exchange reserves from capital outflows arising from disinvestment transactions. Under this system, all foreign disinvestment in equities is financed at the financial rand rate rather than at the more attractive commercial rand rate. At the same time, as an inducement to new foreign investment, nonresidents are authorized to purchase local currency at the financial rand rate to finance investments in quoted securities and, with the specific approval of the Exchange Control Department, in nonquoted shares.43 Under the system, disinvestment does not affect the country’s foreign exchange holdings because the sale of financial rand by some nonresidents is offset by corresponding purchases by others.

The differential between the financial and the commercial exchange rates has fluctuated widely over the past five years, mainly because of changing foreign perceptions of the risk of investing in South Africa (see Chart 5). The discount reached a peak of over 50 percent at the end of 1986 at the height of the political unrest. As a result of the new political initiatives at the beginning of 1990, the discount has narrowed substantially, falling to less than 10 percent in July 1991 following the lifting of trade sanctions by the United States. The authorities have indicated that they intend eventually to unify the exchange rate but only when there is solid evidence of an enduring strengthening of the capital account.

Debt Standstill Arrangements

In response to the decision by a number of major commercial bank creditors at the end of July 1985 not to roll over maturing loans to South Africa, the Government announced a temporary debt moratorium pending the renegotiation of the terms of that debt. This debt standstill applied to about $13½ billion, or 57 percent of South Africa’s outstanding external debt at that time, but excluded trade credits, debt guaranteed by foreign governments or export agencies, and debt contracted directly by the Reserve Bank. The moratorium did not apply to interest payments on the debt, which were made on schedule throughout the period.

In March 1986, agreement was reached on a First Interim Arrangement through July 1987.44 This agreement envisaged the repayment of 10 percent of the debt, the option to roll over the debt or else to convert it into a government deposit, and the option to exit from the net through the conversion of short-term debt into medium-term maturities with prescribed maximum interest rates. Two subsequent interim arrangements were agreed upon in March 1987 and October 1989, with terms similar to those of the First Interim Arrangement, but they extended the exit option to allow affected debt to be converted into property or equity at the financial rand rate.

Because of repayments under the interim arrangements, as well as the exercise of the various exit options, it is estimated that, by the end of 1993, when the Third Interim Arrangement expires, only $5 billion, or about 25 percent of South Africa’s external debt, will remain within the net. The South African authorities have indicated that, with the reopening of international capital markets, they intend to stop relying on these interim arrangements and will undertake negotiations to that end at a time closer to the expiry date of the present arrangement.

  • Abedian, I., and B. Standish,Poor Whites and the Role of the State: The Evidence,South African Journal of Economics, Vol. 53 (June 1985), pp. 14165.

    • Search Google Scholar
    • Export Citation
  • Bayoumi, TamimOutput, Employment and Financial Sanctions in South Africa,IMF Working Paper 90/113 (Washington: International Monetary Fund, December 1990).

    • Search Google Scholar
    • Export Citation
  • Boateng, E. Oti, and others,A Poverty Profile for Ghana, 1987–88,Social Dimensions of Adjustment in Sub-Saharan Africa, Working Paper No. 5 (Washington: World Bank, 1990).

    • Search Google Scholar
    • Export Citation
  • Coopers & Lybrand, International Tax Summaries: A Guide for Planning and Decisions, 1991 (New York: J. Wiley & Sons, 1991).

  • de Lange, A. Roukens and D. E. van Seventer,Implications and Implementation of Income Redistribution: An Investigation Based on Social Accounting Matrix,Second Carnegie Conference into Poverty and Development in Southern Africa, Post Conference Series No. 16 (Cape Town, 1986).

    • Search Google Scholar
    • Export Citation
  • Development Bank of Southern Africa, Annual Report (Pretoria), various issues.

  • Development Bank of Southern Africa, SATBVC Countries: Statistical Abstracts, 1989 (Sandton, South Africa: Halfway House, 1990).

  • Devereux, S.South African Income Distribution 1900–1980,Saldru Working Paper No. 51 (Cape Town: Southern Africa Labor and Development Research Unit, 1983).

    • Search Google Scholar
    • Export Citation
  • Eckert, J. B.Physical Quality of Life Indices for South Africa,Development Southern Africa, Vol. 3 (February 1986), pp. 619.

  • Economist Intelligence Unit (United Kingdom), Country Profile: South Africa, 1990–91, Annual Survey of Political and Economic Background (London, 1990).

    • Search Google Scholar
    • Export Citation
  • Gandhi, V. P., P. Shome and H. H. Zee, South Africa: Introduction of VAT—Structure, Price Effects, and Protecting the Poor (unpublished; Washington: International Monetary Fund, 1991).

    • Search Google Scholar
    • Export Citation
  • Hofmeyr, J.Black Wages: The Post-War Experience,” in The Political Economy of South Africa, ed. by Nicoli Nattrass and Elizabeth Ardington (Cape Town: Oxford University Press, 1990).

    • Search Google Scholar
    • Export Citation
  • Industrial Development Corporation of South Africa Limited, Modification of the Application of Protection Policy: Policy Document (Sandton, June 1990).

    • Search Google Scholar
    • Export Citation
  • International Monetary Fund (1990a), Government Finance Statistics Yearbook (Washington, 1990).

  • International Monetary Fund (1990b), International Financial Statistics Year-book (Washington, 1990).

  • Iyengar, Murali, and Richard Porter,South Africa Without Apartheid: Estimates from General Equilibrium Simulations,Journal of International Development, Vol. 2 (January 1990), pp. 159.

    • Search Google Scholar
    • Export Citation
  • Knight, J., and M. McGrath,An Analysis of Racial Wage Discrimination in South Africa,Oxford Bulletin of Economics and Statistics, Vol. 39 (November 1977), pp. 24571.

    • Search Google Scholar
    • Export Citation
  • Knight, J.,The Erosion of Apartheid in the South African Labour Market: Measures and Mechanisms,Discussion Paper No. 35, Institute of Economics and Statistics (September 1987).

    • Search Google Scholar
    • Export Citation
  • Leape, Jonathan South Africa’s Foreign Debt and the Standstill, 1985–1990 (London: Center for the Study of the South African Economy and International Finance, London School of Economics, 1991).

    • Search Google Scholar
    • Export Citation
  • May, Julian,The Migrant Labour System: Changing Dynamics in Rural Survival,” in The Political Economy of South Africa, ed. by N. Nattrass and E. Ardington (Cape Town: Oxford University Press, 1990).

    • Search Google Scholar
    • Export Citation
  • McGrath, M.Economic Growth, Income Distribution and Social Change,” in The Political Economy of South Africa, ed. by N. Nattrass and E. Ardington (Cape Town: Oxford University Press, 1990).

    • Search Google Scholar
    • Export Citation
  • Nattrass, Nicoli, and Elizabeth Ardington, eds., The Political Economy of South Africa (Cape Town: Oxford University Press, 1990).

  • Nel, P. A., and H. de J. Van Wyk, Personal Income of the RSA and National States by Population Group and Magisterial District, 1960 to 1980 (Pretoria: Bureau of Market Research, University of South Africa, 1984).

    • Search Google Scholar
    • Export Citation
  • Porter, Richard C., A Model of the Southern African-Type Economy,American Economic Review, Vol. 68 (December 1978), pp. 74355.

    • Search Google Scholar
    • Export Citation
  • Price Waterhouse, Individual Taxes: A Worldwide Summary (New York, 1989).

  • Price Waterhouse (1990a), Corporate Taxes: A Worldwide Summary (New York, 1990).

  • Price Waterhouse (1990b), Doing Business in South Africa (New York, 1990).

  • Republic of South Africa, White Paper on the Report of the Commission of Inquiry into the Tax Structure of the Republic of South Africa (Margo Report) (Pretoria, 1988).

    • Search Google Scholar
    • Export Citation
  • Republic of South Africa, Central Statistical Services, South African Labor Statistics, 1991 (Pretoria, August 1991).

  • Republic of South Africa, Department of Finance, Inland Revenue, Statistical Bulletin No. 4 (Pretoria, 1986).

  • Republic of South Africa, Department of Finance, Inland Revenue, Statistical Bulletin No. 6 (Pretoria, 1988).

  • Republic of South Africa, Department of Finance, Budget 1991/1992 (Pretoria, 1991).

  • Republic of South Africa, Department of Information, Official Yearbook of the Republic of South Africa, 1989–90 (Pretoria, 1990).

  • Republic of South Africa (1991a), Department of National Education, Education in the RSA 1988 (Pretoria, 1991).

  • Republic of South Africa (1991b), Department of National Education, Education Realities in South Africa 1990 (Pretoria, 1991).

  • Republic of South Africa (1991c), Department of National Education, Education Renewal Strategy: Discussion Document (Pretoria, 1991).

  • Republic of South Africa, Department of National Health and Population Development, 1990 Health Trends in South Africa (Pretoria, 1991).

    • Search Google Scholar
    • Export Citation
  • Republic of South Africa, Inland Revenue Information Service, Taxation in South Africa, 1990 (Pretoria: Government Printer, 1990).

  • Research Institute for Education Planning, Education and Manpower Development, 1989 (Bloemfontein, 1990).

  • South African Reserve Bank, Quarterly Bulletin (Pretoria), various issues.

  • Tanzi, V., The Response of Other Industrial Countries to the U.S. Tax Reform Act,National Tax Journal, Vol. 40 (September 1987), pp. 33955.

    • Search Google Scholar
    • Export Citation
  • Technical Committee on Mining Taxation, Report of the Technical Committee on Mining Taxation (1988).

  • Terreblanche, S., and N. Nattrass,A Periodization of the Political Economy From 1910,” in The Political Economy of South Africa, ed. by N. Nattrass and E. Ardington (Cape Town: Oxford University Press, 1990).

    • Search Google Scholar
    • Export Citation
  • Trotter, G. J., Education and Income Distribution,South African Journal of Economics, Vol. 45 (December 1977), pp. 33561.

  • Trotter, G. J., Education and the Economy,” in The Political Economy of South Africa, ed. by N. Nattrass and E. Ardington (Cape Town: Oxford University Press, 1990).

    • Search Google Scholar
    • Export Citation
  • van der Berg, Servaas (1989a), “Long-Term Economic Trends and Development Prospects in South Africa,African Affairs, Vol. 88 (April 1989), pp. 187203.

    • Search Google Scholar
    • Export Citation
  • van der Berg, Servaas (1989b), “Meeting the Aspirations of South Africa’s Poor Through Market and Fiscal Processes,Paper delivered to the Colloquium on the Future South African Economy, Lausanne, July 1989 (Lausanne: Institut des hautes etudes en administration publiques).

    • Search Google Scholar
    • Export Citation
  • Wilson, Francis, and Mamphela Ramphele, Uprooting Poverty: The South African Challenge: Report for the Second Carnegie Inquiry into Poverty and Development in Southern Africa (Carnegie report) (New York: Norton, 1989, 1st American ed.).

    • Search Google Scholar
    • Export Citation
  • World Bank (1990a), The World Bank Atlas: Gross National Product, Population, and Growth Rates (Washington, 1990).

  • World Bank (1990b), World Development Report 1990 (New York: Oxford University Press, 1990).