expected to prevail over the period for which wages are being set. this will not only ensure a faster decline in inflation, but also a lower cost in terms of output and employment. on balance, the inflation outlook is indeed promising. 4. balance of payments the current slowdown observed in the manufacturing sector is not simply a question of a recovering exchange rate, but more significantly the weak state of global demand. south african exporters will have to focus even more on improving competitiveness through productivity enhancements. the slowdown in exports, combined with a relatively buoyant import demand due to increased investment expenditure, resulted in a current account deficit of r6, 8 billion ( approximately 0, 6 per cent of gdp ) in the first quarter of 2003. this followed a surplus of r4, 3 billion in the fourth quarter of 2002. the most recent trade figures, however, suggest that although the current account deficit is likely to persist in the second quarter, it is not a major cause for concern. the financial account also recorded a deficit of r4, 2 billion in the first quarter which reflected in part activities of non - residents in the share and bond markets. during the first quarter of this year, nonresidents'total net sales of shares and bonds amounted to r7, 6 billion. in the second quarter however, non - residents were net purchasers of shares and bonds amounting to r10. 9 billion. 5. reserves management the south african reserve bank is responsible for managing the country's foreign reserves outside of the reserves held by private sector banks. the role of foreign reserves held by a central bank has changed considerably since the early 1970s. under the bretton woods system of fixed exchange rates, which was in place until the early 1970s, countries had to accumulate reserves in order to maintain fixed exchange rates. later on, many countries, including south africa, adopted floating or flexible exchange rate regimes where reserves were used to smooth temporary fluctuations in the exchange rate. with the adoption of an inflation - targeting monetary policy framework in 2001, south africa has abandoned the almost archaic practice of aggressive intervention in the foreign exchange market with the purpose of influencing the level of the rand's exchange rate. in addition, the bank and the national treasury made a concerted effort to eliminate the negative net open foreign currency position ( nofp ) from a high of a€ “ $ 23, 2 billion in september 1998. this goal was achieved in may 2003 and opened the way towards steadily

foreign exchange transactions. the size of the liquidity tranche has to be sufficient to provide for all operational requirements of the bank, and also to enable the financing of unpredictable cash flows. the stable portion of the bank's reserves over time, that is the portion that is not required for day - today cash needs, was allocated to the investment tranche of the reserves. this tranche is used to increase the return on the bank's reserves. a portion of the investment tranche is managed by a number of external fund managers and another portion is managed internally. investments are subject to conservative investment guidelines in order to limit fund managers'risk exposures, and the results are measured against pre - defined benchmarks at regular intervals. a risk - management section within the financial markets department continuously monitors the returns and risk exposures of both the internally and externally managed portfolios and promptly follows up any negative deviations. 6. exchange rate developments the behaviour of the rand continues to perplex many observers. following the 26 per cent recovery of the nominal effective exchange rate during 2002 as a whole, the rand continued on its recovery path, albeit characterised by periodic volatility. in recent weeks the rand has remained relatively stable, and as of this morning the trade - weighted appreciation of the rand since the beginning of the year was 13, 3 per cent. the behaviour of the rand has continued to confound many pessimists who argue that there is insufficient evidence which supports the recent value of the rand. the depreciation of the rand in 2001 was clearly overdone. prior to that, there was not a general view that the rand was overvalued. if anything, the current fundamentals are now in better shape than they were at that time, so it should not be a surprise that the rand is making such a significant recovery. although there can be no doubt that interest rate differentials have played a role in the recent recovery of the rand, even market analysts are sharply divided as to the extent of this effect. although many argue that if interest rates come down lower in south africa, the rand will retrace its value to significantly lower levels, others point to the fundamentals, and in particular commodity price developments, and argue that the rand is around'fair value'levels. it is perhaps significant that even though the recent decline in the repo rate exceeded market expectations, the rand in fact strengthened following the announcement of the rate cut. the focus of the south