t t mboweni : overview of the south african economy address by mr t t mboweni, governor of the south african reserve bank, at the 87th ordinary general meeting of shareholders, pretoria, 20 september 2007. * * * introduction the primary goal of the south african reserve bank ( the bank ) is the achievement and maintenance of price stability. however, the role of the bank in the economy goes beyond a narrow monetary policy focus. low and stable inflation provides an important framework for economic growth, but regulation and supervision of parts of the financial sector, as well as the oversight of the payment system ensure that the wheels of the economy continue to turn efficiently. in the past year we have had to execute our mandate in an increasingly difficult and uncertain environment. the south african financial markets have not been spared the effects of the recent volatility in the financial markets and we have to be increasingly vigilant of the risks posed to the domestic economic landscape. at the same time we have to ensure good governance with respect to the internal workings of the bank. it is against the backdrop of this volatile economic environment that i report to you today. today we also release our annual economic report which covers developments in the domestic and international economy over the past year. in particular, we highlight the main economic developments which have affected our operations and policy implementation. the focus of this address is on the main operational areas of the bank including monetary policy and its implementation, gold and foreign - exchange reserves management, financial stability issues, the national payment system, banking regulation and supervision, international cooperation and internal administration. monetary policy this past year has been a challenging one for monetary policy. as i reported in august last year, from the middle of 2006 pressures on inflation emerged, and have since intensified. by december 2006, year - on - year cpix inflation measured 5, 0 per cent compared to 3, 7 per cent in april of that year. inflation remained within the target range until april 2007 when it increased to 6, 3 per cent from 5, 5 per cent in the previous month. since then it has remained outside the target range. initially the main drivers of this adverse trend were food and petrol, but more recently there has been evidence of a more generalised upward trend in inflation, including that of services prices. the monetary policy committee ( mpc ) responded to these developments by raising the repurchase rate by 50 basis points in june 2006, the first increase since 2002. this was followed by successive increases

need to adjust. and it has been clear from the outset that the necessary reforms and adjustment measures require patience. in the meantime, major progress has been made as most of the crisis countries have managed to improve their public finances and to solve their structural problems. current account deficits have largely been reduced and some countries are now running a surplus. price competitiveness in the crisis countries has also improved significantly. measured in terms of the deflators of total sales, competitiveness has improved by 6 % in portugal, 9 % in spain and 14 % in greece. to some extent, these figures can be attributed to the depreciation of the euro. nevertheless, the figures for the countries i have just mentioned are also positive when measured in terms of the euro area. needless to say, the job has not been finished yet. structural reforms have been implemented, but more needs to be done. monetary policy measures cannot substitute structural reforms. the eurosystem has done a lot to prevent the crisis from escalating but it cannot address the underlying problems of the crisis. structural reforms are the best way to generate sustainable economic growth and create employment. it is becoming increasingly clear that the efforts are bearing fruit : unemployment rates seem to have peaked, and the economies are growing again. this makes it all the more important for the achievements not to be compromised. it therefore worries me that greece might go backwards in terms of its reform agenda. greece ’ s newly elected government objected to complying with the financial assistance agreements and intended to withdraw some of the reforms that had already been adopted. there were even brief calls for further debt relief. however, after intense negotiations among the finance ministers of the euro area, the greek government settled for requesting an extension of the current programme. after the greek government had also committed to pushing ahead with economic and fiscal reforms, the finance ministers of the euro area approved a four - month extension of the programme. the details of a new financial assistance programme need to be worked out by summer. greece certainly needs further assistance from the rest of the euro area. however, further assistance can only be granted if greece continues with its efforts to restore sound public finances and competitive economic structures. to regain investors ’ trust, sustainability and competitiveness are necessary requirements. suffice to say, it is not enough to correct misalignments solely at the national level, either in greece or elsewhere in the euro area. we also need structural reforms at the european level. and here, a lot has