mr. stals elucidates monetary policy objectives in south africa in the environment of financial globalisation address by the governor of the reserve bank of south africa, mr. c. stals, at the monthly meeting of the bank for international settlements in basle on 11 / 5 / 98. 1. background major political and social reforms in south africa in recent years created new expectations, and many demands are being made on the government for the social upliftment of the people. in defining its macroeconomic strategy, the south african government first produced a reconstruction and development programme ( rdp ) in 1994 in which legitimate needs were identified. the total cost of implementation of the rdp, however, as could have been expected, by far exceeded what was affordable. this was confirmed by the publication in mid - 1996 of a macroeconomic strategy for growth, employment and redistribution ( gear ), which concentrated more on the supply - side of the economy. gear provided a programme for macro - economic restructuring that is intended to raise the growth potential of the country over a five - year period from 3 to 4 per cent to 6 per cent per annum. in the government ’ s macroeconomic strategy, monetary policy was tasked with the responsibility of maintaining overall financial stability, or of protecting the value of the currency. it was assumed that the objectives of neither the rdp nor gear would be attainable unless overall financial stability is maintained. the instruction to the reserve bank to secure financial stability also appears in the south african reserve bank act, and was recently written into the new constitution of the republic of south africa. in terms of section 224 ( 1 ) of the constitution : “ the primary object of the south african reserve bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the republic ”. the constitution also provides for the protection of the independence of the reserve bank : “ 224 ( 2 ) the south african reserve bank, in pursuit of its primary object, must perform its functions independently and without fear, favour or prejudice, but there must be regular consultation between the bank and the cabinet member responsible for national financial matters ”. the macroeconomic strategy of the government, and particularly the gear part of it, is often criticised and there are strong pressures, emanating mainly from labour organisations, for the total rejection of this programme. the disciplined monetary policies applied in terms of the above mandates from the government are also often denounced by these pressure groups. the reserve bank is from time to

. in 1987 / 88, for example, the rate of growth in m3 was close to 30 per cent, and the rate of inflation 20 per cent. in 1992, growth in m3 was reduced to 8 per cent, and inflation declined to a single digit figure for the first time in 1993. in recent years, however, with the major changes particularly in south africa ’ s international financial relationships, the money supply model lost some of its usefulness. over the past four years, the rate of increase in the money supply has persistently stayed around the level of about 15 per cent, being about 5 full percentage points above the annual guidelines of the reserve bank. over the same period, total bank credit extension increased by about 16 per cent per annum, a rate of growth that is also regarded as excessive by the reserve bank. and yet, gross domestic expenditure declined from 5 per cent growth in 1995 to 1½ per cent last year, and inflation remained well under control. after a depreciation of the rand of 22 per cent in 1996, inflation rose correspondingly from 5 per cent to almost 10 per cent a year later. over the past twelve months, however, inflation has come down again to the level of about 5 per cent per annum. these developments forced the reserve bank to reconsider its monetary policy model and to follow a more eclectic approach in which a strict financial ( monetary ) package is used as a basis for monetary policy decisions. this financial package includes : n n n n n movements in the money supply and its components m1, m2 and m3 ; changes in total bank credit extension, both to the government and the private sector ; the level of interest rates and the structure of the yield curve ; changes in the gold and foreign exchange reserves ; and movements in the exchange rate of the rand. in terms of reserve bank analyses, the main reasons for the breakdown in the money supply model in recent years have been : n n n n the almost explosive increases in volumes on the various financial markets ; the reintermediation in the banking sector of certain financial transactions, such as direct lending by foreign banks to south african non - bank private sector institutions ; the absorption of many new workers from the subsistence sector in the market economy ; and the effects of large and volatile international capital flows on bank liquidity, interest rates and the money supply. the debate in south africa at this stage about the monetary policy model is whether south africa should not, at this juncture, follow the example of many