that is during may, june and the first half of july 1998, they reduced their holdings again by r12 billion. both the inflows and the outflows of capital on this occasion disrupted the south african financial markets and complicated the implementation of monetary policy centred on the medium - term objective of maintaining financial stability in the interest of optimum economic growth. in the situation and against the background of a rather depressed domestic economy, the yield on long - term government bonds increased from 12. 7 per cent on 30 april 1998, to 16. 4 per cent on 6 july, before it declined again to 15. 5 per cent last week. the reserve bank ’ s fluctuating repo rate similarly showed wide fluctuations and increased from 14. 8 per cent in early may to a peak of 24. 0 per cent on 22 june, before settling down at a level of about 21 per cent. all banking institutions in the country were forced to raise their deposit and lending rates by about 6 percentage points since the end of april. the prime overdraft rate of the major commercial banks now stands at 24 per cent. with the latest measure of inflation at only 5 per cent per annum, real interest rates are at an extremely high level. the exchange rate of the rand also came under a lot of pressure. after being relatively stable for a period of about 18 months from october 1996 up to the end of april 1998, the rand depreciated from r5. 05 against the us dollar in the middle of may to r6. 62 = $ 1 on 6 july 1998. since then, the exchange rate appreciated again to fluctuate around the r6. 00 = $ 1 level for the last few days. at this level, the rand, measured against a basket of currencies, is still about 18 per cent down from where it was at the beginning of this year. some critics do believe that the removal of the exchange controls is partly to be blamed for this greater volatility in financial conditions. they advise south africa, therefore, to reintroduce some of the controls, for example, the two - tier exchange rate system. this view is not shared by the monetary authorities in south africa. despite the gyrations of recent weeks, we still believe that the advantages of participation in the financial globalisation process will, over time, bring more advantages to the south african economy than disadvantages. 7. concluding remarks the policies of the phasing out of exchange

economies. interest rates were brought down to very low levels in most developed countries and fiscal deficits widened. however, these measures were unable to prevent some major corporate defaults. although this exerted pressure on the world financial system, institutions were generally able to cope with the situation. japanese banks were affected by bad debts and low profits and some banks in europe also encountered problems. insurance companies and pension funds fared worse than banks. of further concern is the volatility experienced in exchange rates and its effect not only on the financial sector, but also on real economic activity. in particular, the us dollar has weakened substantially, which could have major repercussions for the world economy. domestic economic developments the weakness of the us dollar was a major factor in a significant recovery in the external value of the rand. having declined by 34 per cent on a trade - weighted basis during 2001, the nominal effective exchange rate of the rand recovered by 24 per cent in 2002 and by a further 12 per cent up to the end of july 2003. the performance of the rand was also related to south africa ’ s inherent economic strength and to the sound and consistent macroeconomic policies pursued by the authorities. improved international perceptions of these strong fundamentals were reflected in a significant narrowing in spreads on internationally - traded south african bonds, and was recognised by higher ratings of the country by two major international rating agencies, which further underpinned the rand ’ s recovery. the positive sentiment in the market was supported by attractive domestic interest rates and an increase in the country ’ s terms of trade. similarly, the real effective exchange rate of the rand recovered markedly since the beginning of 2002. this index, which reflects the trade - weighted exchange rate of the rand deflated by the production price differential between south africa and its main trading partners and competitor countries, rose by an estimated 16 per cent over the eighteen - month period up to the end of june 2003. even after this increase the level of the real effective exchange rate of the rand was still below the index values of early 2000, i. e. before the currency market turbulence. this indicates that south african producers are fairly price competitive, but the profitability of their international transactions has, of course, fluctuated considerably over the past three years. domestic output could not escape the impact of the still subdued global economy. growth in real gross domestic product slowed down from 3½ per cent in the first half of 2002 to 3 per cent in the second half and 1½ per cent