IDEAS home Printed from https://ideas.repec.org/p/qed/dpaper/5514.html
   My bibliography  Save this paper

The Economic Cost of Foreign Exchange for South Africa

Author

Listed:
  • Arnold C Harberger

    (University of California, Los Angeles, USA)

  • Glenn P. Jenkins

    (Department of Economics, Queen's University, Kingston, Canada and Eastern Mediterrean University, North Cyprus)

  • Chun-Yan Kuo

    (Senior Fellow, John Deutsch International, Department of Economics, Queen’s University, Canada,)

  • M Benjamin Mphahlele

    (Limpopo Economic Development Agency, Limpopo Province, South Africa)

Abstract

In economic cost benefit analysis there is a need to choose a numéraire in which all costs and benefits are evaluated. In recent years the most common practice has been to express all costs and benefits in terms of domestic currency at the domestic price level. When this numéraire is chosen it is necessary to adjust all transactions that are made with international traded goods and involve foreign exchange to account for the divergence that arise between the financial cost of foreign exchange and its economic value.*(2) The purpose of this paper is to develop an analytical framework that will enable us to estimate the economic cost of foreign exchange for South Africa. Since the demand for imported goods is generally distorted by import tariffs and non-tariff barriers (as is the supply of exports by subsidies and export taxes), there will be a difference between the economic cost of foreign exchange and the market rate for foreign exchange. This difference represents the loss of tariff revenues associated with forgone imports as well as other distortions associated with the additional production of exported goods in the external sector. A further set of distortion must be considered that includes value-added taxes (VAT) and other indirect taxes such as excise taxes. When the demand for imports by other consumers and investors decline due to the impact of the financing of the project and its demand for foreign exchange, some VAT and other indirect taxes are forgone. On the supply side, the resources required to produce the additional exports needed to earn the foreign exchange must come from the non-traded goods sector. This will reduce the supply and the corresponding demand for non-traded goods and the associated VAT and other indirect tax revenues. All of these repercussions in the economy have to be accounted for as part of the externalities associated with the use of foreign exchange. When a project generates foreign exchange, the reverse will hold. A foreign exchange premium must be applied to the foreign exchange generated by the sales of the output from a project. This adjustment will ensure that in the project’s appraisal the economic opportunity cost of foreign exchange to the country is appropriately reflected. In the same way that there is a generalized externality (the foreign exchange premium) associated with the sourcing of funds the capital market to purchase foreign exchange, there will also be either a premium or discount when funds sourced from the capital markets are used to purchase non-traded goods. It is normal that a generalized externality will be created by the combined act of sourcing funds from the capital market and using these funds to purchase non-traded goods and services. This same premium or discount should also be applied to the financial revenues generated by the production of non-traded goods.

Suggested Citation

  • Arnold C Harberger & Glenn P. Jenkins & Chun-Yan Kuo & M Benjamin Mphahlele, 2003. "The Economic Cost of Foreign Exchange for South Africa," Development Discussion Papers 2003-04, JDI Executive Programs.
  • Handle: RePEc:qed:dpaper:5514
    as

    Download full text from publisher

    File URL: https://cri-world.com/publications/qed_dp_5514.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Chun‐Yan Kuo & Glenn P. Jenkins & M. Benjamin Mphahlele, 2003. "The Economic Opportunity Cost Of Capital In South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 71(3), pages 523-543, September.
    2. Glenn Jenkins & Chun-Yan Kuo, 1998. "Estimation Of The National Parameters For Economic Cost-Benfit Analysis For The Philippines," Development Discussion Papers 1998-04, JDI Executive Programs.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Glenn P. Jenkins & Chun-Yan kuo & Arnold C. Harberger, 2020. "Analyse Couts-Avantages Pour Les Decisions D’Investissement Chapitre 9; Le Prix Ombre Des Bourses D'échange Et De Marchandises Non Commercialisables," Development Discussion Papers 2020-09, JDI Executive Programs.
    2. Glenn Jenkins & Chun-Yan Kuo & Arnold C. Harberger, 2011. "Cost-Benefit Analysis for Investment Decisions: Chapter 9 (The Shadow Price of Foreign Exchange and Non-Tradable Outlays)," Development Discussion Papers 2011-09, JDI Executive Programs.
    3. Glenn P. Jenkins & Chun-Yan Kuo & Sener Salci, 2013. "Measuring The Foreign Exchange Premium And The Premium For Non-Tradable Outlays For Twenty Countries In Africa," Development Discussion Papers 2013-05, JDI Executive Programs.
    4. Hasan Ali Bicak & Glenn P Jenkins & Chun‐Yan Kuo & M Benjamin Mphahlele, 2004. "An Operational Guide To The Estimation Of The Economic Opportunity Cost Of Labour In South Africa1," South African Journal of Economics, Economic Society of South Africa, vol. 72(5), pages 1057-1068, December.
    5. Chun-Yan Kuo & Sener Salci & Glenn P. Jenkins, 2015. "Measuring the Foreign Exchange Premium and the Premium for Non-Tradable Outlays for 20 Countries in Africa," South African Journal of Economics, Economic Society of South Africa, vol. 83(2), pages 269-285, June.
    6. Glenn Jenkins & Tumani Dembajang, "undated". "Integrated Appraisal Of A Regional African Satellite Project," Development Discussion Papers 2005-02, JDI Executive Programs.
    7. Glenn Jenkins & Chun-Yan Kuo & Arnold C. Harberger, 2011. "Cost-Benefit Analysis for Investment Decisions: Chapter 7 (Principles Underlying The Economic Analysis of Projects)," Development Discussion Papers 2011-07, JDI Executive Programs.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Abdallah Othman & Glenn P. Jenkins & Mikhail Miklyaev, 2022. "Estimation of Economic Opportunity Cost of Capital: An Operational Guide for Mozambique," Development Discussion Papers 2022-04, JDI Executive Programs.
    2. Monika Foltyn-Zarychta & Rafał Buła & Krystian Pera, 2021. "Discounting for Energy Transition Policies—Estimation of the Social Discount Rate for Poland," Energies, MDPI, vol. 14(3), pages 1-21, January.
    3. Glenn P. Jenkins & D.N.S. Dhakal, 2003. "Integrated Investment Appraisal of a Cogeneration Electricity Project Agreement with Global Environment Externalities," Development Discussion Papers 2003-01, JDI Executive Programs.
    4. Rafał Buła & Monika Foltyn-Zarychta, 2022. "Declining Discount Rates for Energy Policy Investments in CEE EU Member Countries," Energies, MDPI, vol. 16(1), pages 1-27, December.
    5. Glenn Jenkins & Chun-Yan Kuo, 2007. "The Economic Opportunity Cost of Capital for Canada - An Empirical Update," Development Discussion Papers 2007-04, JDI Executive Programs.
    6. Saule Baurzhan & Glenn P. Jenkins, 2017. "On-Grid Solar PV versus Diesel Electricity Generation in Sub-Saharan Africa: Economics and GHG Emissions," Sustainability, MDPI, vol. 9(3), pages 1-15, March.
    7. Glenn Jenkins & Chun-Yan Kuo & Arnold C. Harberger, 2011. "Cost-Benefit Analysis for Investment Decisions: Chapter 8 (The Economic Opportunity Cost of Capital)," Development Discussion Papers 2011-08, JDI Executive Programs.
    8. Chun-Yan Kuo & Sener Salci & Glenn P. Jenkins, 2015. "Measuring the Foreign Exchange Premium and the Premium for Non-Tradable Outlays for 20 Countries in Africa," South African Journal of Economics, Economic Society of South Africa, vol. 83(2), pages 269-285, June.
    9. Glenn Jenkins & Chun-Yan Kuo & Arnold C. Harberger, 2011. "Cost-Benefit Analysis for Investment Decisions: Chapter 9 (The Shadow Price of Foreign Exchange and Non-Tradable Outlays)," Development Discussion Papers 2011-09, JDI Executive Programs.
    10. Glenn Jenkins & Andrey Klevchuk, "undated". "Appraisal Of El-Kureimat Combined Cycle Power Plant," Development Discussion Papers 2006-03, JDI Executive Programs.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:qed:dpaper:5514. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Mark Babcock (email available below). General contact details of provider: https://edirc.repec.org/data/qedquca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.