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South Africa's Treasury Against Capital Inflow Taxes

by Lorys Charalambous,, Cyprus

09 September 2010

South Africa’s National Treasury Director-General, Lesetja Kganyago, has said that it would not be appropriate for South Africa to impose a tax on short-term capital inflows, as the country currently relies on those inflows to finance its current account deficit.

A discussion document, to be considered at the General Council of the African National Congress to be held later this month, has suggested that the capital inflows have increased the value of the rand (by some 30% last year), limiting the overall competitiveness of the economy, such that demand for local production, and employment opportunities, are constrained.

Furthermore, it is said that such short-term investment from abroad is also highly unreliable, leading to unpredictable fluctuations in the stock market. As a way to ensure a more competitive and stable currency, a central debate in the document is whether South Africa should tax those short-run capital inflows.

However, Kganyago said that, as capital inflows are needed to finance the country’s current account deficit arising out of the economy’s import requirements, the levying of such a tax would be like “shooting yourself in the foot”. In addition, if those inflows are subsequently needed to be maintained, investors would probably require higher interest rates to compensate for the tax, thereby also increasing debt service costs to the government.

It is unlikely, therefore, that a tax on short term capital inflows will form part of the Treasury’s medium-term budget statement to be announced next month. Recently, Ismail Momoniate, the Deputy Director-General of the National Treasury, disclosed that the Treasury is still looking for the best way to deal with them.

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TAGS: South Africa | tax | investment | fiscal policy | financial services | capital markets | budget | offshore | tax reform | currency | services | Africa

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