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Reflections on the South African rand crisis of 1996 and policy consequences

  • Janine Aron
  • Ibrahim Elbadawi

After South Africa`s democratic elections in 1994, large capital inflows were induced by the cessation of trade and financial sanctions, improved creditworthiness and a liberalised capital account for foreigners. The flows were managed in a classic trade-off between currency stability, and raised interest rates to counter inflation resulting from a credit boom and partially sterilised intervention. In early 1996, the currency suffered a speculative attack. Using a theoretical model of currency crises, we present some empirical results suggesting the importance of economic fundamentals and policy credibility as determinants of investors` devaluation expectations prior to the crisis. Poor growth associated with subsequent protracted currency volatility and high interest rates argues for a range of complementary policies to manage inflows in South Africa. These include reserve requirements on certain inflows, prudent further liberalisation of domestic exchange controls, improved private and government savings policies, a medium-term public debt framework and closer monitoring of risk management by banking and other financial institutions.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/1999-13.

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Date of creation: 01 May 1999
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Handle: RePEc:oxf:wpaper:wps/1999-13
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  1. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
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