to be taken off the balance sheets, the banks recapitalised and sufficient trust built up so that banks can start lending again. there is no easy solution for achieving this, and no simple blueprint. countries will differ as to how they tackle this problem. but as long as banks are unwilling to lend, and demand remains subdued, the recovery cannot happen. the recent stress - tests conducted on us banks indicated that while banks still remain under pressure and some require further recapitalisation, the worst of the bad news may be behind us. 4. 3 fortunately our banking system is still allowing credit to flow, although much stricter lending criteria are being applied by banks. but unlike in europe and the us, our interbank market is working normally, the capital adequacy ratios are strong, and no bank has had to approach the south african reserve bank for any extraordinary assistance. although exchange controls irritate many, in this case the existence of these controls, in conjunction with appropriate supervision of the banks, spared us the need to have to find ways to bail out and recapitalise our banks. 4. 4 secondly, there has to be an improvement in banking regulations and supervision. those elements of the financial system that have been able to avoid regulation must be brought into the regulatory net, and ways must be sought to ensure that regulation does not promote procyclical behaviour on the part of the banks. but we have to be mindful of the danger of over - regulation. there is always the danger that a crisis can spur excessive regulation and stifle the ability of banks to operate normally in the future. a fine balance will have to be achieved between the dangers of over - regulation and allowing banks to undertake normal lending operations. we are likely to see a return to the more traditionally type of banking for some time. 4. 5 third, there have to be appropriate policy responses to restore growth. the g - 20 statement underlined the need for continued concerted and exceptional monetary and fiscal policy stimuli. with respect to monetary policy, in many countries, despite the low policy rates, banks are charging much higher spreads over the policy rates because of higher perceived risks. at the same time, households are trying to repair their balance sheets which have been adversely affected by declines in house and equity prices. in other words, the monetary transmission mechanisms are impaired, and what usually works in a relatively predicable way under normal circumstances, may not work in the same way

under current abnormal circumstances. the further danger we face is that as the balance sheets of the central banks expand rapidly, down the line there may be inflationary pressures. central banks will have to be ready to absorb this excess liquidity, but without killing off the recovery. 4. 6 the g - 20 recognises that even within the framework of a co - ordinated response, local conditions will shape the nature of the response of individual countries. while many countries responded with substantial interest rate reductions, these responses were carried out in the context of very low inflation in many instances, and the need to provide liquidity to ailing banking sectors. while the response of the south african reserve bank may appear to be less strong than in many other countries, it should be borne in mind that we started out with a relatively high inflation rate and a relatively healthy banking system. we are seeing a slowdown in the rate of inflation and, although it is relatively sticky, we still expect to be back within the target over the medium term. this has allowed for a 350 basis point reduction in the repurchase rate to date. a continuation of this slowdown of inflation, in part a result of the widening output gap, may allow for further monetary easing. 4. 7 as part of stimulus packages, many countries have focused on increasing expenditure on infrastructure. this cannot happen overnight. we have been fortunate that our infrastructural expenditure programme has been accelerating for the past few years, and has therefore come on stream at a time when it is most needed. this has been most fortuitous. anyone travelling on our national roads will have been frustrated by the inconvenience of the scale of the road upgrades, but we have to remember the positive side : that this infrastructural expenditure is helping to underpin domestic expenditure. furthermore, such expenditure will help to increase the potential output of the economy over time, and therefore raise the sustainable long term growth rate. according to national treasury estimates, public sector infrastructure expenditure is expected to average 9, 7 percent of gdp over the coming three fiscal years, compared to 4, 5 per cent in the 2005 / 6 fiscal year. during the current fiscal year, total expenditure by the sa national roads agency ltd ( sanral ) on roads is estimated at r19, 6 billion, compared to r2, 2 billion in 2005 / 06. i am sure your truck drivers will be pleased when all this construction is completed. 4. 8