T T Mboweni: Review of the South African Reserve Bank and its activities -
1998-2003, a preliminary assessment
Speech by Mr T T Mboweni, Governor of the South African Reserve Bank, at the Cape Town Press
Club, Cape Town, 29 September 2003.
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1. Introduction
Ladies and gentlemen. I thank you for this invitation to interact with you once again. We certainly live
in interesting times and much has changed in the world over the past five years. These changes have
also affected the South African Reserve Bank as much as any other institution which has a domestic
and international focus. We constantly face new challenges and new circumstances in which to
conduct our work. The fact that the SARB has risen to meet these challenges says much about the
fact that it is an international institution par excellence.
2. International developments
There has been two key developments over the last five years that have brought wide-ranging
changes to the global social, economic and financial order. The first was the introduction of a single
European currency. After decades of preparation, the Euro was introduced as a single currency on
1 January 1999 and Euro banknotes and coin were introduced on 1 January 2002. This currency
change-over in Europe firmly established the European Central Bank (ECB) as the single monetary
policy authority for participating countries of the European Union.
The introduction of the Euro was an eventful episode in the history of Europe. Firstly, the United
Kingdom, Sweden and Denmark elected not to adopt the Euro as their national currency on 1 January
2002, although they are member countries of the European Union. Secondly, the Euro/US dollar
exchange rate has shown large swings since January 1999. After reaching a high of just over €1 =
US$1,18 some four days after its introduction in January 1999, the exchange rate of the Euro
subsequently dropped by nearly 30 per cent to just below €1 = US$0,83 by October 2000.
The second major event was the attacks on the United States on 11 September 2001. These attacks
highlighted a potential systemic risk to financial institutions worldwide in the event of a prolonged
disruption of their operations. Multi-lateral co-ordination to ensure business continuity in the financial
industry has received considerable attention since these attacks, and South Africa and the SARB are
glad to be involved in these initiatives. The Bank has played an active role in the establishment of a
Financial Sector Contingency Forum, which is responsible for the identification and management of
potential crisis events that might threaten the stability of the South African financial sector.
The Bank has also made satisfactory progress with its own business continuity planning to ensure that
the head office and branch activities would continue functioning in the event of any disruption.
The attacks of 11 September 2001 have also contributed to increased international economic
uncertainty, which has in turn resulted in lower economic growth in developed economies. The
monetary policy focus in developed economies shifted from containing inflation to avoiding
unnecessarily and undesirably low inflation. This has brought new terminology to the vocabulary of
central bankers and economists.
3. Domestic developments
Although 1998 is a mere five years ago, so much has changed in South Africa in the interim that a
brief reflection on that year is called for. By 1998, our democracy was only four years old and South
Africa was still re-integrating into the international arena. However, it was already obvious then that the
country's sound macro-economic policies were delivering the desired results.
After a period of double-digit inflation covering the largest part of the 1970s and 1980s, inflation was in
single-digits in 1995. It has averaged around 7,8 per cent per annum over the last decade. The
national government was also achieving success with its sound approach to fiscal policy. While the
deficit before borrowing reached a high turning point of 7,3 per cent of the gross domestic product
(GDP) in the 1992/93 fiscal year, it equaled 3,7 per cent of GDP for the 1997/98 fiscal year and
declined further to 2,8 per cent of GDP in the 1998/99 fiscal year. Owing to the reduction in its deficit
before borrowing, it was clear by 1998 that the national government had managed to slow down the
growth in government debt to sustainable levels. Not only had government proven by 1998 that it
could avoid a debt trap, but it had also successfully reprioritised expenditure and consolidated the
fiscus.
The introduction on 9 March 1998 of the repurchase system of accommodation and liquidity provision
to banks marked a significant change in the country's accommodation system with the repo rate
replacing the previous Bank rate. In the five years since its introduction, changes have been made to
the repo system to improve the transmission mechanism of monetary policy. The most important of
these changes was introduced with effect from 5 September 2001, the date from which the SARB
introduced a fixed repo rate to eliminate any ambiguity from monetary policy signals, which might have
arisen under the previous flexible repurchase rate system.
In 1998 we also experienced the downside of international economic and financial integration:
financial turbulence in a number of south-east Asian economies. Although South Africa could not
escape at the time the negative consequences of such financial turmoil, it became obvious during that
period that sound policies, rather than crisis management, yield the best results in the long run. This
has been a guiding principle for the SARB in the implementation of policy over the past five years.
South Africa barely managed to record an average growth rate of 2,0 per cent per annum during the
1980s, but this has since accelerated to around 3 per cent per annum since 1994. Despite the recent
slowdown in the international economy and the short-lived global recovery, South Africa's growth
performance of 3 per cent in 2002 was relatively sound. After peaking in the first half of 2002, South
Africa's real GDP then slowed down to an annualised 1,5 percent in the first half of 2003.
4. Policy issues
A number of policy issues have occupied the attention of the SARB over the past five years in dealing
with these economic and financial developments. The most important of these are the adoption of an
inflation target as the anchor for monetary policy; the reconsideration of the Bank's role in the foreign
exchange market; the elimination of the oversold net open foreign currency position (NOFP); and the
handling of distressed banks by our bank supervision department.
Although the functions of the SARB have changed and expanded over time, the formulation and
implementation of monetary policy has remained the centrepiece of our activities. The Bank has used
different monetary policy frameworks over time, such as credit ceilings and credit controls in the 1960s
and 1970s, money supply growth targets from the middle of the 1980s, money supply growth
guidelines by the early 1990s, an eclectic monetary policy from the middle 1990s and inflation
targeting since 2000.
Successive mission statements of the Bank confirm a fundamental commitment to low inflation. The
initial mission statement, published in 1990, entrusted the protection of the internal and external value
of the rand to the Bank. This was changed by the middle 1990s to the protection of the value of the
rand. In 1999 the mission was reformulated as the achievement and maintenance of financial stability.
In February 2000, an inflation target set by the government was introduced as the anchor of monetary
policy. This entrusted a single ultimate monetary policy objective to the Bank: price stability. For
targeting purposes inflation is measured as CPIX (CPI excluding interest on mortgages) and the first
target range (for 2002) was set at 3 to 6 per cent. The same target range applies to now.
Achieving an inflation target through the use of monetary policy became the overriding objective. The
objective is clearly set as low inflation, and the short-term interest rate (the repo rate), the instrument
used for monetary policy, is adjusted exclusively for the achievement of this objective. It follows that
interest rates should and will be adjusted once it becomes clear that inflation will be outside the target
range in the period ahead if left unchanged.
Movements in interest rates over the period under review confirms this approach. In 1998 the prime
overdraft rate of the banks started the year at 19,25 per cent. In March it was lowered to 18,25 per
cent. However, as the emerging-markets crisis made itself felt, prime rose to a maximum of 25,5 per
cent in August and September 1998 as one of the policy measures used to contain the decline in the
exchange rate of the rand during that period, before starting to decline during October. For the year as
a whole it averaged 21,8 per cent.
The exchange rate also depreciated strongly in the second half of 2001. Interest rates were also
increased early in 2002, but with a different objective. This increase was caused by the need to
contain the negative inflationary side effects of the lower rand, rather than to support the exchange
rate at any given level.
The medicine worked, bringing inflation and expected inflation down. This made policy relaxation
possible. At the beginning of 2003 the prime overdraft rate was 17 per cent, before being lowered
gradually to 13,5 per cent at present, giving an average rate of 16,3 per cent for the first eight months
of the year.
An important development since 1998, coinciding with the adoption of inflation targeting, was the
establishment of a Monetary Policy Committee with responsibility for deciding on the monetary policy
stance. The establishment of this Committee has contributed significantly to the removal of the myth
that monetary policy decisions and reasons for such decisions are clouded in secrecy, taken by an
invisible decision-maker not accountable to anybody. The Committee deliberates on recent economic
and financial developments and members reach consensus on the appropriate policy stance to be
adopted. The Committee's consensus decision is communicated by means of a detailed policy
statement delivered at a media conference. This approach should enhance the public understanding
of and transparency in the monetary policy process. The media has an important role in
communicating with the general public. If the public does not understand that interest rates are
adjusted with the achievement of the inflation target (and, therefore, price stability) in mind, the actions
of the central bank will be clouded in mystery and the public is unlikely to support the Central Bank.
Since 1998 the SARB has also played its part in the improvement of the communication of monetary
policy decisions and progress towards the successful achievement of the inflation target. The Bank's
Monetary Policy Forums in the nine provinces are now well-established and facilitate open discussions
on monetary policy and general economic developments. The Bank's regular reporting to Parliament
on recent economic and financial developments is also a well-established part of its accountability to
the citizens of South Africa. In addition, since March 2001 the Bank publishes a bi-annual Monetary
Policy Review, which includes a fan chart of the Bank's inflation forecast.
Since 1998 the Bank has been remarkably successful in containing inflation despite exchange rate
instability and the international financial turmoil of 1998 referred to earlier. CPIX inflation averaged
7,1 per cent for 1998 and only rose from a twelve-month rate of 6,5 per cent in February to 7,6 per
cent in October 1998 before starting to decelerate again. During that period, tight monetary policy
helped to contain inflation.
The gradual waning of inflation in 2000 and 2001 was interrupted when inflationary pressures
mounted in the wake of the sharp depreciation of the rand towards the end of 2001. Essentially driven
higher by the cost-raising effects of the depreciated exchange value of the rand, CPIX inflation rose
from year-on-year rates of approximately 6 per cent during the second half of 2001 to 11,3 per cent in
October and November 2002. Initially, CPIX inflation accelerated mainly on account of the sharp
increases in the prices of food products which were largely related to the depreciation of the rand. In
subsequent months, the rise in CPIX inflation became more broadly based. The rise in non-food CPIX
inflation resulted from higher rates of increase in the prices of housing services, furniture and
equipment, medical care and health expenses, new and used vehicles, and transport running costs.
The inflationary momentum which had built up in the course of 2002, was moderated by a more
conservative monetary policy stance and the recovery of the exchange value of the rand since about
the middle of 2002.
Inflationary pressures therefore waned in the final months of 2002 and the first half of 2003. By
January 2003 CPIX inflation has already declined to 10,0 per cent and receded to 6,3 per cent in
August 2003. CPIX is expected to recede to within the target range in the immediate (before
December 2003) future.
The exchange rate of the rand has shown large swings over the past five years. In 1998 the exchange
rate of the rand averaged R5,53 to the US dollar. On 28 August 1998 (with the Russian default on
their debt signalling what was probably one of the worst moments in the emerging-markets crisis) it
reached its weakest point during that year of R6,67 per dollar. After a period of relative stability in 1999
and 2000, a sharp depreciation in the exchange rate of the rand occurred during the second half of
2001. During that period the nominal effective exchange rate of rand depreciated by 34 per cent,
before recovering early in 2002. Subsequently the rand has been remarkably steady, and for the eight
months January to August 2003 the average exchange rate of the rand amounts to R7,90 per US
dollar.
The elimination of the oversold NOFP was the Bank's third major policy challenge over the past five
years. The Bank's latest Annual Economic Report mentions that "a milestone was reached on 16 May
2003 when the NOFP of the Reserve Bank recorded its first-ever positive balance, having been in an
oversold dollar position of more than US$23 billion as recently as 1998". This remarkable achievement
has received surprising little media coverage, but allows the Bank a shift in focus to the reduction of its
oversold forward book and increasing the official foreign exchange reserves position.
The fourth policy issue, namely the responsibility for banking supervision, has also seen a number of
developments. With the performance of this function come also a number of responsibilities. This was
evidenced by events early in 2002, when satisfactory solutions had to be found for the financial
difficulties experienced by a number of smaller banks and two relatively large ones (Saambou Bank
and BoE Bank). In the event the SARB acted in accordance with international best practice and
successfully avoided systemic risk and panic about the soundness of the South African banking
sector.
Commercial banks have an extremely important role to play in maintaining financial stability in any
economy. Financial stability is extremely fickle, and unfortunately often more easily lost than restored.
No central bank can maintain or restore the public's trust in the financial system without the
cooperation of commercial banks and the public.
It should always be remembered that the central bank has at heart the best interests of the financial
system as a whole. No country, bank or financial system can afford a systemic banking crisis.
5. Internal management issues
The SARB has had a clear commitment to the transformation of its staff complement and work
processes over the past five years. I announced in my first address as Governor at the ordinary
general meeting of the Bank held on 24 August 1999 that "... a beginning has been made in drawing
up a human resources plan which will deal with progressive employment equity in the workplace by
promoting equal opportunities and fair treatment". A year later shareholders were informed that the
Bank's transformation plan "endeavours to achieve a staff complement comprising a minimum of
50 per cent Black people and 33 per cent females by 2005". Last year shareholders were informed
that "in keeping with the objective of transforming the composition of the Bank's staff to reflect the
demographics of the country, an important milestone was reached in the past financial year when the
total black staff complement exceeded the white staff complement for the first time since the inception
of the Bank in 1921". As in many other areas of responsibility, the Bank is also proud of the progress
made with the transformation of its staff complement over the past five years.
6. Conclusion
Indeed over the past five years, many challenges were faced head-on by the Bank. Important
milestones were achieved and the stage is now set for further improvements in our work. Of
immediate importance is the achievement of the inflation target, maintaining banking stability and
transforming our staff complement further.
There are many more challenges ahead.
Thank you.