t t mboweni : south africa ’ s economic policy challenges address by mr t t mboweni, governor of the south african reserve bank, at the xvi meeting of the central bank governors ’ club 1, irkutsk, russia, 2 september 2006. * * * governors, honoured guests ladies and gentlemen 1. introduction i am grateful to the central bank of the russian federation for inviting me to address the governors ’ club today. i have been informed that one of the main objectives of the governors ’ club is to promote co - operation in the sphere of central banking among member countries. in the light of the rapid developments in the global financial system, there is little doubt about the benefits of associations such as the governors ’ club. i trust that the experience of south africa and the southern african region that i am going to highlight today will be informative to the objectives and activities of the governors ’ club. 2. south africa ’ s economic growth performance similar to the many countries participating at this meeting, the south african economy can be described as an economy in transition. it is the largest economy in africa with gross domestic product in 2005 measuring us $ 239, 4 billion ( r1523 billion ), compared to us $ 135, 8 billion ( r482, 1 billion ) in 1994. gdp per capita increased from approximately us3, 500 in 1994 to approximately us $ 5000 in 2005, in a country with a population of approximately 47 million people and an annual population growth rate of marginally below 1 per cent. because of the legacy of the apartheid, there is still a highly skewed distribution of income and wealth in the country. according to recent estimates, the gini coefficient is approximately 0. 65. one of the primary objectives of the current government is to rectify these inequalities. this is a particular challenge given the high levels of unemployment in the country. the most recent unemployment rate for 2005 was approximately 27 per cent, slightly higher than a year earlier. although south africa is a major commodity producer, and commodities or commodity - based products make up a significant proportion of our exports, the contribution of mining to gdp is relatively small at 6 per cent. the largest sector in the economy is the finance, real estate and business services sector which accounts for almost 20 per cent of gdp, followed by the manufacturing sector which accounts for just over 16 per cent. the agricultural sector is one of the smallest sector, contributing about 2, 4 per cent of gdp. only

however, the increase in reserves, together with the eradication of the net open foreign currency position, should contribute towards the stability of the currency and reduce uncertainty for both domestic and non - resident investors. 5. monetary policy challenges let me now turn to some of the monetary policy challenges currently facing south africa. the favourable inflation trend over the last couple of years has allowed for nominal interest rates to fall to levels last seen some three decades ago. between june 2003 and april 2005, the repo rate was lowered to 7 per cent, representing a total reduction of 650 basis points over the period. after remaining unchanged for 13 months, the repo rate was increased by 50 basis points at each of the mpc meetings in june and august this year. given the increase in inflationary pressures and the resultant deterioration in the risks to the inflation outlook, the monetary policy committee considered it necessary to tighten policy at the last two meetings. the main factors that have recently led to the heightening of the risks, namely the high levels of consumer spending, adverse movements in the exchange rate, a larger current account deficit, higher food prices and high oil prices. consumer spending has been increasing at robust levels for some time now. the low interest rate environment has fuelled rising levels of credit extension to the private sector. growth in bank loans and advances extended to the private sector measured at annual rates have recently increased to levels exceeding 20 per cent. while the inflationary effects are limited at this stage, the impact is manifesting itself via the deficit on the current account of the balance of payments, which had increased to 6, 4 per cent of gdp by the first quarter of this year. while the deficit is currently more than adequately financed by capital inflows, these are mainly portfolio inflows, which increase the risks of adverse movements in the exchange rate, especially if the current account deficit is perceived to be unsustainable. this situation makes the exchange rate particularly vulnerable to changes in investor sentiment and risk tolerance, which can result in a tapering off or even withdrawal of portfolio inflows. this issue is of particular relevance given the way in which international markets have been re - rating emerging market risk recently. in such circumstances, there is an increased risk of a significant exchange rate adjustment which could threaten the longer - term attainment of the inflation target. however, the best way to avoid this happening is by maintaining sound and prudent macroeconomic policies. while we do not target any specific level of the