gill marcus : the challenging global and domestic economic environment – implications for monetary policy and the economic outlook address by ms gill marcus, governor of the south african reserve bank, at the wesgro investor lunch, cape town, 19 october 2010. * * * introduction the global crisis which erupted in 2008 is unfortunately still with us. whereas it was relatively easy to get unanimity between countries with respect to coordinated responses to the severity of the crisis, it is proving to be far more difficult to achieve this common purpose during the current recovery phase. the recovery has been very mixed across countries and regions. the emerging markets in general, particularly those in asia and latin america, appear to be recovering strongly. by contrast, the us, the uk, the euro area ( excluding germany ) and japan are struggling to get growth going on a sustained basis. these countries ’ attempts to reinvigorate their growth are having implications for emerging markets, leading to what the brazilian minister of finance has recently described as a currency war. although south africa did not have a banking crisis, we nevertheless experienced the pain of recession along with most other countries. similarly, we have not been able to avoid the fall - out of the current phase of the crisis : the recent global developments have had a profound affect on the domestic economy through their impact on trade, capital flows and consequently the exchange rate. the economy has emerged from recession, but it is a fragile recovery. unfortunately our growth rates are not in line with those of many of the emerging market economies, but are more in line with those of the advanced economies. we need to face up to the challenges, not all of which are external. we face a number of domestic challenges, requiring a concerted and coordinated effort. in my talk today i shall address the challenges posed to the economy by these international developments and the impact on monetary policy. by way of conclusion i will offer some thoughts as to the type of structural or microeconomic reforms that are required to improve south africa ’ s growth and competitiveness. many of the problems of this economy are deep - rooted and require coherent structural reforms, and are not easily solved. recent global developments during 2009 the global economy began to emerge from the worst financial crisis since the great depression, and by the beginning of 2010 there was wide - spread optimism in the markets that the extraordinary steps that were taken by monetary and fiscal authorities to overcome the crisis would be reversed relatively soon. the focus at the time was about the appropriate pace and timing of

2005. this is a far cry from the upper 40 per cent that was recorded at the beginning of the 1990s. moreover, the number of countries registering double - digit inflation came down from 32 in 1995 to only 12 in 2003, and 21 countries had inflation rates of less than 5 per cent last year. monetary policy was assisted considerably by prudent fiscal policy in achieving these more favourable results. the international monetary fund calculates that the average budget deficit as a percentage of gross domestic product in africa has declined from 3, 9 per cent in 1995 to 1, 5 per cent in 2003. 3. monetary policy strategy although price stability is the overarching objective governing monetary policy decisions in almost every african country, different monetary policy strategies are followed depending on circumstances existing in the various countries. before the 1980s direct monetary policy measures were generally applied in african countries. these measures consisted of interest rate controls, credit ceilings, foreign exchange restrictions and fixed exchange rates. this changed in the last 20 years with deregulation and financial liberalisation in the rest of the world. since the beginning of the 1980s, african countries have generally moved to more market - based financial systems with greater autonomy and accountability applying to central banks. broadly there are three monetary policy strategies applied by african countries, namely exchange rate targeting, inflation targeting and monetary targeting. countries forming part of monetary unions have fixed exchange rate regimes with each other. for example, the currencies of namibia, lesotho and swaziland, as members of the common monetary area, are pegged to the south african rand. some countries that do not form part of monetary unions also prefer to link their currencies to those of other countries or to a basket of currencies. botswana has been doing this since 1976. most african countries still apply monetary targeting. of the 18 countries represented at the conference on monetary policy frameworks in africa that was held in pretoria, 14 targeted monetary aggregates. the operational variable used by these countries are the management of reserve balances or controlling the balance sheet of the central bank. by managing both the domestic and foreign sources of money, the growth in money supply is controlled. taking the current financial infrastructure of these countries into consideration, the management of reserve balances to influence monetary aggregates as intermediate targets is probably the most efficient way of conducting monetary policy. recently, inflation targeting is becoming more popular in africa. however, in a working paper of the international monetary fund that was prepared by mark r. stone, south africa