Budget 2024: The future of foreign exchange

The 2024 National Budget delivered key reforms to foreign exchange controls that seek to improve investment and trade, help businesses grow, and increase tax revenue collection through a more efficient financial system.

"To promote trade, the Budget states that authorised dealers will be given greater discretion over certain payment arrangements for customer foreign currency accounts, provided they are satisfied that the relevant transactions are legitimate and have viewed suitable documentary evidence, as reported to the Reserve Bank's Financial Surveillance Department," says Kuda FX, a foreign exchange specialist.

"This development aligns with broader efforts to strengthen South Africa's financial system and improve the country's reputation as a destination for international trade and investment."

Prioritising trade, investment and business growth

In terms of settling foreign exchange transactions, authorised dealers will be permitted to process transactions for customers' foreign currency accounts for all current account payments. Previously, authorised dealers may have been limited here, potentially requiring special permissions. With the proposed change, authorised dealers will have greater flexibility to facilitate foreign currency transactions for various current account payments, potentially easing processes for individuals and businesses dealing with international transactions.

Authorised dealers will also be permitted to process all related-party agreements relating to current account payments if applicants provide suitable documentary evidence confirming that the agreements comply with the transfer pricing rules contained in Section 31 of the Income Tax Act (1962), in line with the OECD Guidelines and subject to the normal reporting requirements of the Financial Surveillance Department.

Kuda FX notes that authorised dealers will also be able to process requests from unlisted companies operating in the technology, media, telecommunications, exploration and research sectors to establish offshore entities or list their primary operations offshore, raising foreign loans and capital of up to R5 billion in line with South Africa's foreign direct investment policy.

Investments exceeding R5 billion per company per year will still require approval from the Financial Surveillance Department, while intellectual property transfers and share-swap mechanisms remain subject to prior approval.

The Minister of Finance also announced that South Africa will reduce its borrowings over the medium term by using a portion of the valuation gains in the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) held at the South African Reserve Bank. This account captures gains and losses on South Africa's foreign currency reserve transactions and has grown to more than R500 billion over the years as the rand has depreciated against the US dollar.

"This is good news and serves as a reminder of the appeal and diversification that can be achieved through investing in foreign currencies," says Bobbie Wessels from AJM Tax, a tax specialist working with Kuda FX.

"Governments benefit from foreign currency transactions through various mechanisms, including stabilising their domestic currency, facilitating international trade, and managing foreign reserves to support economic policies. For everyday investors, engaging in foreign currency transactions can provide diversification, potentially higher returns, and opportunities to hedge against currency risk within an investment portfolio."

Strengthening South Africa's financial systems

Minister Godongwana reiterated that South Africa's long-term tax policy strategy remains focused on broadening the tax base while improving tax compliance and administrative efficiency, particularly through rebuilding and modernising SARS. The tax authority has expanded the tax register, improved debt collection, and reduced fraudulent refunds and trade valuation irregularities, all of which have contributed positively to revenue collection.

"It is encouraging to see government focusing on compliance-related measures to improve revenue collection while also reducing expenditure to address the existing budget deficit," Wessels adds.

To support South Africa's efforts to exit the FATF grey list and strengthen measures to combat financial crime, R628 million has been allocated to the Department of Justice and Constitutional Development for implementing Financial Action Task Force (FATF) and State Capture Commission recommendations, bringing total funding for these initiatives to R2.3 billion.

South Africa will also host the annual meetings of the New Development Bank later this year and assume the G20 Presidency next year. As emphasised during the State of the Nation Address, President Ramaphosa intends to prioritise Africa's development agenda while showcasing South Africa's leadership on both the regional and international stage.

Kuda FX believes these reforms are positive steps towards strengthening South Africa's financial system and restoring confidence in the country's investment environment. At the same time, the long-term case for global diversification remains important. Investing offshore can provide valuable exposure to international markets, reduce concentration risk and help investors preserve purchasing power over time. Foreign exchange continues to play an important role in enabling South Africans to build globally diversified portfolios.