Mr Mboweni speaks on the role of the
South African Reserve Bank in developing the economy
Speech given by Mr Tito Mboweni, Governor of the South African Reserve Bank at the Western Cape
Exporter of the year awards dinner on 1 September 1999.
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Many central bank governors fight a constant battle against public misconceptions about the central
bank's role in the economy. After only a short period in the job, I have realised that I, too, will have
my work cut out for me in explaining the South African Reserve Bank's responsibilities.
As I discovered last week when I took part in a phone-in programme on SABC radio, there are people
who mistakenly believe the Bank can provide them with personal loans, or loans for their businesses. I
had to explain that I am not a personal banker with a limitless cheque book.
I was also worried to find that some of the callers did not have a good understanding of the
relationship between interest rates and inflation. Once again, I realised the need for education and for
continued emphasis on the Bank's main task - the achievement and maintenance of financial stability.
There might be people who are getting bored with my message. But I think it is well worth repeating,
as even people with a good understanding of the economy sometimes expect us to be miracle-workers
who will bring new life to the economy.
When I was invited to speak here tonight, my hosts asked me to talk about the role of the central bank
in developing the economy, with a particular focus on exports. As was highlighted in the Governor's
Address last week, the central bank's main contribution to economic development and export growth
is to achieve price stability.
That must come as a disappointment to those exporters here tonight who hoped I would say something
about the rand's exchange rate against the currencies of SA's major trading partners.
The best that I can do on the topic of the exchange rate is to recount a story about the euro, which has
recovered somewhat from its weakness against the dollar. Please bear in mind that I tell the story with
my tongue firmly in my cheek.
Research published last week by 4Cast, a London-based economic consultancy, suggests that an
inverse relationship has developed between the performance of the euro and the frequency of
statements by European Central Bank officials about the currency. The periods during which central
bank officials kept quiet about the euro coincided with relative stability or appreciation of the euro
against the dollar. The researchers were worried that when the ECB officials return from their summer
holidays and start talking again, the currency could resume its slide to parity with the dollar.
I know there are people who might try to read some deeper meaning into that story. I tell this story
simply to illustrate that I believe "less is more" when it comes to comments on the rand.
The only comment I will make is to reaffirm that we will not set targets, formal or informal, for the
exchange rate. As you know, we have started making preparations for implementing inflation targeting
as our monetary policy framework. We believe the inflation targeting route is incompatible with trying
to force the currency into a straightjacket. And, in any case, fixed exchange rates are globally
becoming a thing of the past as more and more countries move towards flexible exchange rate
systems.
In the Governor's Address last week, we outlined our approach to inflation targeting and we reported
on the organisational changes being made to the monetary policy decision-making process.
We also noted that the South African economy had recovered remarkably well from the effects of
financial turbulence in Asia and Russia. Many tentative signs of a return to financial stability had
appeared in the economy.
This was again confirmed by July's money supply and bank credit figures which became available
yesterday. These figures show that for the first time since 1993, total bank credit extension increased
at a rate of below 10%. This is good news indeed.
The markets have by now digested last week's Address. We have noted that analysts and
commentators welcomed the decision to formalise monetary policy decisions by establishing a
Monetary Policy Committee, or MPC, which will comprise the governor, the deputy governors and
senior bank officials.
However, market participants are apparently disappointed by our decision not to publish the minutes
of the MPC meetings.
There are costs and benefits for the Reserve Bank to publish the minutes of internal meetings. In the
interests of greater policy transparency, we will issue brief statements to the public at regular intervals
to provide information on overall economic conditions and the monetary policy stance. These
statements will usually follow MPC meetings, which will take place every six weeks.
Frequent and predictable communication with the financial markets is not the only way in which we
hope to achieve better public understanding of monetary policy. Regular reporting to Parliament's
finance portfolio committee meetings, which are open to the media and the public, is another
important component of getting our message across. That is why I was pleased to accept the portfolio
committee's invitation to brief its members in Parliament and take questions on the Governor's
Address later this month.
The release last week of the Governor's Address and the Annual Economic Report was a good
opportunity to take stock of the economy after a particularly difficult time.
As exporters, you will know that global demand for South Africa's exports suffered a severe setback
in the second half of last year as a result of the turmoil in international financial markets.
As a result of the crisis in Asia, the share of South African exports destined for Asian countries,
including Japan, declined from more than 21% of total exports in the third quarter of 1997 to about
15% in the fourth quarter of last year. African economies were also experiencing hard times, and the
contribution of exports to Africa fell slightly to below 14% of total exports over the same period.
South African exporters did, to some extent, offset the effects of the recession in these economies by
redirecting trade flows to markets less affected by the crisis. Exports to the United States, for example,
increased by about 30% in rand terms between 1997 and 1998.
But the effects of the global crisis and continued buoyancy in imports were such that the annualised
current account deficit swelled to 2.6% of gross domestic product in the second half of last year.
Although the deficit was not large by international standards, it nevertheless raised concerns that the
level of spending, especially on public sector capital formation, could not be sustained.
Last year's tightening in monetary policy, and the improvement in international economic conditions
as the turmoil in financial markets subsided, caused a marked recovery in the current account this year.
The improvement in the current account reflected a revival in international demand for South African
exports and a significant contraction in local demand for imports.
Export volumes rebounded satisfactorily in the first quarter of this year, but lost some momentum in
the second quarter, when the current account slipped into deficit again.
It seems that the current account may remain in deficit for the remainder of the year, although exports
should still benefit from the lagged effects of the rand's depreciation, the resurgence of foreign
demand and an increase in international commodity prices.
As the lagged effects of interest rate cuts continue feeding through to economic activity and the
recovery gains momentum, the demand for imports can be expected to strengthen. The turnaround in
the inventory cycle, which appears to have begun in the second quarter of this year, will heighten local
demand for imports.
The deficit on the current account should be financed comfortably by net capital inflows. Barring any
unforeseen shocks on the international front, the South African economy has entered a period of more
rapid growth coupled with a fairly comfortable balance of payments situation.
But the expected increase in the economic growth rate from last year's paltry half-a-percent will fall
far short of the levels needed to make inroads into South Africa's high unemployment rate. Many of
our people remain poverty-stricken, living below the breadline in makeshift shacks that do little to
keep out the winter cold. To them, the concept of financial stability might be remote, but the only way
in which their lot can be improved on a sustainable basis is if the Reserve Bank does not deviate from
its course.
Globalisation of financial markets means that countries that are out of step with the rest of the world
will be punished swiftly and severely. For our part, we must continue policies and programmes to
contain inflation. We must also maintain sound and efficient financial institutions and markets.
In other words, the main thrust of monetary policy has to be the maintenance of financial stability -
that is, stability of prices, financial institutions and financial markets. Ladies and gentlemen, every
time you invite me to occasions such as these, expect to hear the same thing.
Thank you.