nofp of us $ 1, 8 billion in mid - 2002 to an overbought position of us $ 0, 9 billion at the end of july 2003. having removed this perceived vulnerability, the price discovery process in the foreign - exchange market has been displaying a better two - way trading pattern. with the oversold nofp now expunged, the bank has shifted its focus to reducing its oversold forward book and to seeking over time to strengthen the official foreign exchange reserve position. the balance on the oversold forward book stood at us $ 4, 1 billion at the end of july 2003, compared with us $ 7 billion at the time of the previous annual meeting of the bank. in accordance with the policy of a phased and gradual dismantling of exchange controls, the minister of finance announced further exchange control relaxations in his budget speech on 26 february 2003. these included a new dispensation for offshore portfolio investments, a mechanism for unwinding the pool of emigrants ’ blocked funds and an exchange control amnesty. stability in the banking sector the liquidity problems experienced by smaller banks and the eventual erosion of the deposit base of some of the bigger banks in the first half of 2002, were resolved in a satisfactory manner during the past year. in this process, however, certain consequences for the banking industry could not be avoided. the activities of two of the larger banks, saambou bank limited and boe bank limited, were merged with those of the big domestic banks. in addition, the reluctance of depositors to place funds with smaller banks caused some of these banks to cancel their banking registrations, while others redesigned their ownership structures and downsized their balance sheets. the turbulence experienced in the banking sector therefore resulted in a consolidation of activities before a return to stability was achieved. at the end of june 2003, approximately 83 per cent of total deposits by the public landed in the vaults of the big four banks. these changes have also made it more difficult to start new banks or for small banks to remain in business. this could affect the availability of operational capital for new entrepreneurs, which is highly essential for economic development. small banks are often more willing than bigger banks to finance high - risk ventures because they are more versatile and can more easily target niche markets. despite these developments, south africa ’ s banking system remains sound. banks operating in the country are well capitalised, with an average risk - weighted capital adequacy ratio of 12, 4 per cent at

new thinking on particularly the implementation of monetary policy. the present universal approach on monetary policy therefore takes account of the new electronic environment of instant communication leading to a more swift dissection of policy actions and immediate reaction by markets, and of the more general need in most countries to raise production capacity, and not to stimulate demand. in this environment, the appropriate role for monetary policy has been redefined as a responsibility for the creation and maintenance of stable financial conditions that will be reflected in low inflation. this is what central banks can do best to support governmental programmes for overall economic growth and development. in south africa, considering the many attacks made on reserve bank policy during this past year, there is still a major lack of consensus on what the prime objective of monetary policy should be. unless we can get consensus and support for the almost global approach of contemporary central bank policy, and unless we can agree to pursue these policies also in south africa, the road to the internationalisation of the south african economy will be rough and difficult. 2. challenge number two - - deciding on an appropriate framework for monetary policy given the objective of price stability, each central bank must design a framework or a consistent model within which monetary policy can be implemented, taking account of the structure of the financial system and of the economy of the country. various models are available to choose from, but whatever model is preferred, the final objective of monetary policy should always be the protection of the value of the currency. in the bretton woods system of fixed par values, the main intermediate objective of monetary policy was the protection of exchange rates, or the external value of the currency. by linking global exchange rates through fixed gold parities, there was a convergence of inflation, at a relatively low level, at least for the many countries that succeeded in maintaining fixed exchange rates over relatively long periods of time. needless to say, the system broke down in the late 1960s and early 1970s when more expansionary monetary policies were followed by some of the major industrial countries, and inflation escalated. today, some smaller countries still attach their exchange rates to a selected major international currency, and then accept the unavoidable consequence that the rate of inflation in the smaller country must converge with the rate of inflation in the economy of the anchor currency. a good example of this approach is provided by argentina with its convertibility law of 1 peso = 1 us dollar. a second widely - used model is the one of monetary targeting where an important monetary aggregate such as