Legal tender and forex laws hamper trade

What freedom do the people of Zimbabwe enjoy that is denied South Africans? The freedom to conduct their personal and business affairs in other currencies. Legal tender laws, which required all transactions to be conducted in Zimbabwe dollars, especially the payment of taxes, disappeared along with the national currency.

When Zimbabwe’s currency collapsed due to hyperinflation, the government was forced to allow citizens to do legally what they had been doing illegally; use foreign currencies for their day-to-day transactions. Exporters, who previously had been compelled to convert their foreign exchange (forex) earnings into Zim dollars at unrealistically high exchange rates, were allowed to retain what foreign currency they earned (mostly US dollars and South African rands) and conduct their business in those currencies. Once that was in place, business recovered some measure of normality.

By contrast, SA exporters are not contending with currency depreciation but a rand that has appreciated. Their problem is nevertheless similar in that they are compelled to exchange their dollars, pounds and euros at what they consider to be unrealistic rates. Exporters want more rands for their foreign currency earnings than what they are currently being paid and essentially want the Reserve Bank to inflate the rand to reduce its exchange value.

Rand appreciation is a positive sign for South Africa. For various reasons, one of which is superior management, our national currency has appreciated against the currencies of SA’s major trading partners. Management of the rand has not always been better. If it had been, its international purchasing power would not have depreciated so drastically over the years. In 1980 you could exchange R1 for about US$1.30 compared to about US$0.13 today, a 90 per cent decline in 30 years. The reason for the erosion of value is that the rand was debased more rapidly than the dollar. This process has recently been reversed, hence the appreciation in value that exporters are complaining about.

Currency manipulation always allows some members of the population to gain at the expense of others. To weaken the rand by deliberately inflating the currency, making it less desirable as a store of value and medium of exchange, might please exporters but have highly negative consequences for pensioners and anyone else on a fixed income or whose income does not keep pace with inflating prices and the poor who are major buyers of low cost imported goods. A more unsettling result is that the functioning of the SA economy would be destabilised. Suppliers of goods and services would not be able to tell whether price changes were the result of increases or declines in demand or distortions created by monetary manipulation.

When producers of goods and services have reliable information, economic growth tends to be higher. All economic activities are measured in money and a stable currency, as a dependable unit of measurement, is an absolute necessity. That the worldwide economic growth in the recent past came about during a period of lower inflation is no coincidence. That an excess of currency manipulation ended the growth is also no coincidence.

Commentators tell us that the rand is over-valued by X per cent on the basis of purchasing power parity. The China’s Renminbi or yuan faces the same criticism. The SA and Chinese governments are being hounded to weaken their currencies in order to give sellers out of SA and those into China an advantage they currently do not enjoy.

The fundamental source of the problem is the insistence that business be conducted in national currencies. Strife over exchange rates could be solved if the world had an acceptable, single medium of exchange, which, for centuries, was fulfilled at various times by either gold or silver.

But, in the absence of a generally accepted medium of exchange, such as gold, governments do have another method available to them to solve the exchange rate problems of exporters. They could solve the exporters’ problem and avoid destabilising their economies by adopting a “Zimbabwe” solution. Remove exchange controls, if they exist, and repeal the legal tender laws that compel citizens to conduct all their business in local currency and allow exporters to conduct business in whatever currency they receive for their exports. An exporter selling in dollars would maintain a dollar account at a local bank and, as far as possible, pay its expenses in dollars, just as the Zimbabweans have done.

South Africans would rapidly come to terms with dealing with multiple currencies. Anyone who has visited Hong Kong will have seen how traders in the smallest of shops deal in whatever currency they find acceptable. Both the shopper and the trader need to have access to the latest exchange rates. A multi-currency trading environment sounds chaotic but it functions well and gives importers, exporters, traders, investors, employers, employees and consumers in general, a range of choices they are denied when compelled to operate in a single-currency environment.

Freeing up the monetary system is a far better option to that of manipulating the currency for the purpose of satisfying the short-term demands of particular interests, whether they are ‘strong rand’ or ‘weak rand’ proponents. And, it does not entail ‘robbing Peter to pay Paul’, which is especially iniquitous when Peter lives in poverty and a weaker rand would force him to pay more for food, medicine, clothing, heating and other basic household necessities.

Author: Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the authors and are not necessarily shared by the members of the Foundation.

FMF Feature Article/29 June 2010