10, 3 per cent and for 2004 it is expected to decline to 8, 6 per cent. bearing in mind that average inflation in africa was around 40 % in the early 1990s, this is quite an achievement. the african success in containing inflation is in reality even better. the higher inflation rate is occasioned by the impact of a few countries that still have very high inflation. examples in this regard are angola, zimbabwe and the democratic republic of congo. nonetheless, if the average inflation rate of 10, 3 per cent for africa in 2003 is compared to 2, 7 per cent for developing countries in asia, it is clear that there is still room for improvement. consequently, the pursuit of price stability is a major challenge for governments and central banks in africa. the worldwide success in bringing inflation down to more acceptable levels cannot be ascribed to monetary policy alone. it is certainly also a consequence of other important factors such as more prudent fiscal policy, the easing of trade barriers, greater competition, productivity improvements and changing public expectations of inflation. while the causality regarding inflationary expectations is not totally clear, it does appear plausible that success in the quest for price stability is rewarded with jackson hole, wyoming, is the venue for the annual meetings of central bank governors, academics, and financial editors, organised by the federal reserve bank of kansas city. further success as inflationary expectations adjust downwards, influencing the overall price setting mechanism or chain. these expectations also depend on the credibility of the central bank. whatever other factors influence the inflation rate, one can hardly deny that the execution of monetary policy in pursuit of price stability is a core function of central banks in all modern economies. the credibility of central banks depends to a large extent on whether they are perceived as either consistently applying monetary policy in a fair, dynamic, flexible and socially responsible manner or whether they are perceived as institutions staffed by arrogant, narrow - minded unelected bureaucrats. almost in passing, one would like to refer to the phenomenon of “ dollarisation ”. in some countries foreign currency, usually the us dollar, is preferred to domestic currency. one is not convinced that this would happen if the central bank has earned its stripes as a consistent inflation fighter. there are of course other reasons beyond “ dollarisation ” why central banks should pursue price stability. there has been a growing consensus that high and variable inflation distorts decision making in the economy, leading to a misallocation of resources and ultimately to bad economic performance. inflation also tends

policy decisions. the appropriate stance of monetary policy is often judged by considering developments in indicators such as the real interest rate, the slope of the yield curve, the output gap, the natural rate of interest and the natural rate of unemployment. to determine some of these measures is difficult enough at the best of times. in the absence of correct information it is impossible. 5. the development of the financial system as was indicated earlier, there is no denying that price stability has become a core objective of central banks all over the world. it is also becoming increasingly apparent that well - functioning financial systems require financial stability as well. this could be described as the presence of soundly managed financial institutions and robust financial markets. central banks in emerging markets typically face a more fundamental challenge in the sense that their financial systems are under - developed. today some developing countries experience low rates of economic growth, partly because of under - developed financial systems and a concomitant lack of financial intermediation. financial markets, including the institutions involved such as banks, through the process of financial intermediation, serve as a conduit for the efficient and optimal allocation of financial resources and can accelerate the rate of economic growth. in essence, financial intermediation tends to raise the level of saving and investment as it reduces the costs associated with bringing lenders and borrowers together. as in the case with price stability, the central bank cannot accept sole responsibility for the development of banks and financial markets, but is well placed to shoulder a major portion of the burden. the scope of the central bank ’ s role in developing the financial system is far too broad for an exhaustive discussion in one address and a few related comments will have to suffice. the first comment is an example of what a central bank can do in practice to help markets develop. some years ago, as part of the development of the market in government bonds in south africa and prior to the appointment of primary dealers, the sa reserve bank acted as a market maker in the market for government bonds. this was an interim phase in the development of the market. the bank contributed to the market ’ s development by managing liquidity. while the bank is still involved in the primary market as the issuer of government bonds, we have no role left as a market maker. the government bond market has matured with a group of primary dealers having to act as market makers. the bank also played an active role in the early stages of the development of the spot