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The Economic Cost of Foreign Exchange for South Africa

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  • Arnold C Harberger
  • Glenn P Jenkins
  • Chun‐Yan Kuo
  • M Benjamin Mphahlele

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 ex
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Suggested Citation

  • Arnold C Harberger & Glenn P Jenkins & Chun‐Yan Kuo & M Benjamin Mphahlele, 2003. "The Economic Cost of Foreign Exchange for South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 71(2), pages 155-169, June.
    • Handle: RePEc:bla:sajeco:v:71:y:2003:i:2:p:155-169
    DOI: 10.1111/j.1813-6982.2003.tb01310.x
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    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.
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    1. Glenn Jenkins & Tumani Dembajang, "undated". "Integrated Appraisal Of A Regional African Satellite Project," Development Discussion Papers 2005-02, JDI Executive Programs.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    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.

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    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.
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