##till and the international isolation of the south african government, which acted as a barrier to foreign investment and other capital flows to south africa. with foreign debt having to be repaid, south africa had no option but to run its affairs so that exports exceeded imports, thereby earning foreign exchange. the political transition in 1994 set the scene for normalisation of south africa's financial ties with the rest of the world. from 1995 south africa ran current account deficits but kept these contained at less than 2 per cent of gdp. the deficits were easily financed through net capital inflows, which were sizeable enough not only to pay for the excess of imports over exports but also to build up south africa's gold and foreign exchange holdings to a record level. late last year, holdings of gold and foreign exchange exceeded the equivalent of 15 weeks'worth of imports, against the internationally accepted norm of around 12 weeks. in spite of a low gold price, high oil prices and unfavourable conditions in certain trading partner countries in the wake of the emerging markets crisis, south africa has managed to record very small deficits on its current account in recent quarters. over the past decade both exports and imports have increased relative to gdp, as can be expected as part of the process of globalisation. south africa's authorities have added momentum to globalisation by phasing in lower import duties in terms of the world trade organisation agreements. this has been painful, but has enhanced south africa's international competitiveness and ability to grow on a sustainable basis. the volume of non - gold exports has risen at an average rate of around 7 per cent a year since the early 1990s - much faster than gdp growth - which enables the country to finance imports largely needed for investment purposes. debt levels during the decade we are looking at, government debt rose from 36, 4 per cent of gdp in 1989 to 50, 4 per cent in 1999, before receding to 48, 1 per cent in 2000. its most rapid rises were recorded when the government incurred large deficits from 1992 to 1994. however, south africa's debt levels stayed firmly below the 60 per cent level, which is deemed by the maastricht treaty participants as the level beyond which fiscal health is at risk. south africa's foreign debt receded from 26, 8 per cent of gdp in 1989 to just above 20 per cent in the early 1990s. as international borrowing was resumed from 1994, foreign debt rose significantly to 29,

9 per cent of gdp in 1999. but this is still quite low in comparison with other developing countries. the south african private sector's indebtedness to the banking system has risen over the past decade. from a level of 58 per cent of gdp in 1989, bank credit to the private sector rose to 67 per cent in 1999. this was a sign of increasing intermediation of credit and financial development in the economy - so - called financial deepening.. budget deficits similar progress has been made on the government's budget deficits. the relatively low budget deficits and high government expenditure during the fiscal years of the late 1980s to the early 1990s were largely achieved through increased tax revenues. however, in the 1991 / 1992 fiscal year the deficit doubled to 3, 7 per cent of gdp, as the recession impacted negatively on revenue while expenditure growth accelerated. there was no respite in the 1992 / 1993 fiscal year when the recession deepened and expenditure accelerated sharply after drought aid had been disbursed in the wake of the worst drought in half a century. this propelled the budget deficit to a record high of 7, 3 per cent of gdp, a level that was clearly not sustainable. after fluctuating around 5 per cent of gdp, the deficit fell below 3 per cent of gdp after the 1997 / 1998 fiscal year. this was achieved through a combination of budgeting in accordance with the country's most pressing priorities, strict expenditure control and improved tax collection. with a budget deficit of below 3 per cent, south africa's finances compare favourably with internationally acceptable levels. fiscal policy coupled with these improvements, the degree of transparency in fiscal policy was strengthened with the introduction of the three - year medium - term expenditure framework, which marked a departure from the one - year budget announcements. the three - year framework has provided certainty, a crucial factor for financial stability, and an opportunity for decisions to be informed by public debate. clear objectives are set out for fiscal policy, such as the elimination of government dissaving and reducing the tax burden on society. this prudent approach has kept south africa out of a debt trap where government's deficit, government debt and the interest cost of such debt spiral out of control. the strategy has also contained government's interest costs, enabling more funds to be redirected to the priority areas where the most pressing needs have been identified. although capital expenditure was initially a casualty of the strict control over government spending, it