Maravi

Govt eyes tougher controls on financial sector

Govt eyes tougher controls on financial sector
CAPE TOWN, SOUTH AFRICA Oct 27 2010 14:29

Drastic exchange-control reforms, tougher controls over the financial sector, and a recovery in tax revenue are some of the highlights of Finance Minister Pravin Gordhan's Medium-Term Budget Policy Statement (MTBPS) tabled on Wednesday.

He also announced increased government spending, predicted a stable inflation outlook, raised the possibility of increased taxes, and again warned against currency devaluation and trade protectionism as a response to the strong rand.

Read Finance Minister Gordhan's medium-term budget speech

The proposed exchange-control reforms included raising the offshore investment limit for individuals and removing the exit levy on emigrants' assets.

The limit would be increased from the current lifetime limit of R4-million, to R4-million annually, subject to compliance with all tax and financial integrity legislation, a National Treasury statement accompanying the MTBPS said.

South Africans who emigrated were currently allowed to remit R8-million of capital offshore upon leaving the country, while the rest of their assets were only released if they paid a 10% exit levy.

Treasury proposed releasing emigrants' blocked assets without charging any levy, as this would assist government in curbing excessive appreciation in the rand and enable emigrants' assets to be transferred to them.

It further proposed increasing the single discretionary allowance from R750 000 to R1-million.

Tougher controls

Gordhan said consideration was also being given to tougher controls over the financial sector, including a raft of new legislation and an overarching council of financial regulators.

A discussion document would be released by Treasury in early November, putting forward a "range of proposals" to strengthen South Africa's financial regulatory system.

This followed a request from Gordhan for a review of gaps or weaknesses in the current system, and recommendations from a recent assessment conducted by the International Monetary Fund.

"Lessons from the global financial crisis were also taken into account," Treasury said.

The document would propose a "macroprudential" approach to financial-sector regulation, focusing on the risks to the entire system rather than only on the risks of individual institutions.

The South African Reserve Bank would take the lead in this area, and had already set up a committee to promote financial stability.

A key proposal in the document was the creation of a council of financial regulators, chaired jointly by the finance minister and the governor of the Reserve Bank.

The proposal was first mooted by Gordhan in the February budget.

Treasury said all regulatory agencies in the financial sector would be represented on the council, which would "promote coordination and information sharing".

This would be particularly useful in dealing with diversified financial services conglomerates.

Government spending

According to the MTBPS, total government spending is set to increase by an average 8,5% a year over the next three years.

Gordhan said the proposed budget framework anticipated narrowing the deficit to around 3% of GDP by 2013/14, and stabilising government debt at about 40% of GDP in 2015/16.

Spending would continue to grow, though moderately, and revenue was expected to recover relative to GDP.

The MTBPS document says consolidated expenditure will grow from a revised estimate of R904,1-billion for this year, to R977,2-billion in 2011/12, R1 069,1-billion in 2012/13, and R1 154,2-billion in 2013/14.

It also spells out government's priorities: education, health, infrastructure development, and job creation.

Education

Education remains the prime beneficiary, growing from a revised estimate of R173,2-billion to R215,8-billion over the medium-term period, with an average annual growth of 7,6%.

However, the housing and community amenities budget will grow faster, by about 9,5% a year, from R97,4-billion to R127,8-billion.

Next comes social protection -- an average of 9,1% a year -- from R134,2-billion to R174,2-billion.

The hard-pressed defence budget will be increased by an average of 8,9% a year, from R35,7-billion to R46,2-billion.

Public order and safety (police, justice and prisons) is projected to grow from R86,8-billion to R108,2-billion -- some 7,6% a year.

Health spending will continue to account for a large slice of the cake, growing on average by 7,6% a year, from R101,9-billion to R127,1-billion over the period.

Tax revenue
The document says tax revenue is expected to recover from 24,4% of GDP in 2009/10, to 26,4% of GDP by 2013/14.

However, over the longer term tax revenue must grow to finance spending commitments.

This will require broadening of the tax base, driven by economic growth, higher employment and improved compliance.

If the current mix of tax instruments cannot provide sufficient resources, changes to tax policy, including higher taxes, will need to be considered.

GDP growth of 3% is projected for 2010, before rising to 3,5% in 2011, and 4,4% by 2013.

Consumer price inflation has declined more than expected this year. The latest figures from Stats SA show that this has declined to 3,2%. Headline CPI is expected to remain below 6% over the next three years, supported by moderate increases in food prices and a relatively buoyant exchange rate.

This will allow real interest rates to remain low over the medium term.

Current account deficit
Strong capital inflows will ensure that the current account deficit remains adequately financed over the medium-term.

The deficit narrowed from 7,2% of GDP in 2007, to 4% in 2009, and remained relatively small at 3,6% of GDP in the first six months of 2010, due to a continued improvement in the trade balance.

The MTBPS says that as domestic and international demand have recovered, export and import volumes have risen, but they remain well below pre-crisis levels.

However, the improvement in the current account is expected to be temporary and the deficit is expected to rise from an estimated 4,2% of GDP in 2010, to 4,9% in 2011, and 5,8% in 2013, driven by rising import demand.

But net capital inflows currently exceed the country's external funding requirement. -- Sapa

Labels: ANC, MTBS, PRAVIN GORDHAN

posted by MrK @ 3:32 PM