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Thursday, 9 September 2010

The US Dollar and the Euro are not money in SA

Foreign exchange

A foreign currency is not the functional currency in South Africa since it is not the generally accepted national monetary unit of account. The Rand is the monetary measuring unit in SA. The SA economy is not a Dollarized economy. The Rand is the functional currency.

Money has three functions:

1. Unstable medium of exchange
2. Unstable store of value
3. Unstable unit of account

A foreign currency like the US Dollar or the Euro is, however, a medium of exchange in SA. Most businesses and individuals would accept the USD or the Euro as a means of payment; that is, as a medium of exchange because they can easily sell the foreign currency amounts they would receive in transactions at their local banks for Rands.

A hard currency is also a store of value in SA. The USD and the Euro are hard currencies with daily changing market values. They are generally accepted world wide as a relatively stable store of value. People know there are normal daily small changes in their exchange values.

The USD and the Euro are, however, not national units of account in SA. You cannot normally do your SA accounts in US Dollars or Euros for tax purposes during low inflation and deflation. You have to do your accounting in Rand values in the SA economy during low inflation and deflation. The USD and the Euro are not functional currencies in SA since they do not fulfil all three functions of a functional currency within the SA economy. A foreign currency like the USD or the Euro only fulfils two functions of money, namely, unstable medium of exchange and unstable store of value. They therefore are not money or the functional currency in SA from a strictly technical point of view. They are not monetary items in SA.

Foreign currencies are variable real value non-monetary items in the SA economy. They have variable real values which are determined in the foreign exchange markets daily.

The US Dollar is only a functional currency outside the United States of America in countries like Ecuador, Panama and Zimbabwe which have Dollarized their economies. They use the US Dollar as their functional currency. They do not have their own national currencies. That is not the case in SA.

It just appears very strange to say that the US Dollar or the Euro is not money in SA. Technically speaking that is correct because an economic item can only be money if it fulfils all three functions of money. The Euro is only money in the European Monetary Union (EMU) and the USD is only money in the US and in countries which have Dollarized their economies.

The man and woman in the street, however, regard anything that is a medium of exchange as “money” in very limited applications. Cigarettes are often used as a medium of exchange in prisons. Shells have been used way back in history as a medium of exchange.

The man and woman in the street in SA certainly regard the USD and the Euro as money in SA. Accountants would, however, classify foreign exchange as a variable real value non-monetary item stated at its current market value and not the same as the SA Rand, that is, not as a monetary item when they choose to implement financial capital maintenance in units of constant purchasing power in terms of the Framework, Par 104 (a) during low inflation and deflation, i.e. when they implement Constant ITEM Purchasing Power Accounting (CIPPA).


Copyright © 2010 Nicolaas J Smith