TAX ON CAPITAL INFLOW
Is this fair?
THERE’S A FAIR AMOUNT
of agreement in South Africa that the rand is currently too strong – with the subsequent disadvantages this holds for things such as company profits and employment. However, the approach adopted in getting the rand to weaken to “more realistic levels” has led to sharp debate. It certainly looks as if most analysts regard a tax on capital inflow into SA – as is being considered by the ANC – as undesirable.
former Registrar of Banks, is one of those who provisionally supports such a tax plan, similar to the 2% tax Brazil has levied on foreign investments in its capital and share markets since last year. “At this stage, we must do something to get the rand to weaken and – bearing in mind Government has limited instruments for doing so – it can’t be summarily shot down. It needn’t necessarily be 2% and – provided it’s stated clearly it’s only a temporary measure – it’s unlikely most investors will think their money is unwelcome in SA.”
IT COULD MAKE
SA’s markets fall sharply at first, as was the case in Brazil, Wiese says. “Just as they recovered quickly there, they should also recover fairly quickly here and bring the rand to a more acceptable level – say about the US$1/R8-R8,50 many feel is the best level. Foreigners must decide whether such a tax is too great a price to pay to share in the investment advantages of an emerging economy.”
could cause such a tax plan to boomerang, Wiese says. “It must be a temporary measure and the Treasury must under no circumstances become so accustomed to it that it can’t be got rid of again. And there’s the risk of the rand weakening too much – which would lead to other problems.”
Brait economist Colen Garow, a tax such as this makes sense, given the short-term and speculative nature of the current inflow. However, the markets could react negatively to the tax and see it as a restriction on capital.
the reaction of overseas investors, the possibility of the tax perhaps doing little to change the situation (as happened with similar fiscal interventions in Chile, Russia and China), possibly extremely expensive imports and negative consequences for inflation are seen as some of the risks on a tax on capital inflow.
(who recently attracted attention all the way to Parliament with his research on the excessively high salaries of executive managers) feels such a tax would simply fill the State’s coffers and wouldn’t achieve a meaningful objective. “The value of the rand is the result of economic forces,” he says. “You can’t keep those forces at bay with questionable tax agendas. They’ll simply reappear elsewhere and then disturb the economy again. Short-term gains (perhaps) can have serious consequences later.”
is so strong because there’s a lot of capital flowing to SA, says Theunissen. “However, the current portion of the balance of payments tells a different story: we’re importing far too many consumer goods and exporting too little. It doesn’t help trying to weaken the rand by discouraging capital inflow. We should rather concentrate on the current portion by discouraging the importing of consumer goods and encouraging exports. We must treat the illness, not just the symptoms.”
THE DEMOCRATIC ALLIANCE’S
shadow minister of finance – Dion George – says the rand became attractive to have because of the activities surrounding the Soccer World Cup and the low interest rates in the developed economies, especially over the short term. He says a tax on short-term capital inflows won’t change it into a long-term investment. “The ANC mustn’t confuse the aims of monetary and fiscal policy. It’s not about the value of the rand, but about a climate that makes investments attractive over the long term and creates economic growth.”
PHILIP THEUNISSEN, CEO Computus
NO Don’t treat the symptoms and not the illness
CHRISTO WIESE, former Registrar of
YES An investment levy can’t be summarily shot down