in comparison to imf estimates of reserve adequacy and our emerging market economy peers. the need to accumulate these reserves was driven by the imperative to reduce the country ’ s vulnerability to sudden large outflows of capital, something to which our economy is prone. we have made good progress in this regard in the past 10 years, with gross gold and foreign exchange reserves increasing from us $ 8 bn in june 2003, to current levels of us $ 47 bn. net reserves increased from us $ 1 bn to us $ 45 bn over the same period. during the past financial year, most of the moves in the level of reserves were a result of valuation changes relating to fluctuations in the gold price and exchange rate movements. direct accumulation was limited given the weakening of the rand over the period. however, our responsibility for managing these reserves has impacted significantly on the profitability of the bank. the financial statements presented to you today show that the bank has recorded a loss for the third consecutive year. for the 2012 / 13 financial year, a loss of r1, 5 billion was recorded, compared with r491 million in the previous financial year. it is important to elaborate on the nature of these losses, as they arise due to the unique nature of a central bank. the structure of the bank ’ s balance sheet is intrinsically linked to the diverse responsibilities of a central bank. as has been elaborated in a recent paper published by the bank for international settlements, central banks pursue national welfare and not profits. it follows therefore that profitability is not necessarily a good guide for measuring success, and a focus on profitability can lead to sub - optimal policies for the country as a whole. the bank ’ s activities and financial results should therefore be seen in a broader context and not within the artificial narrow confines of its balance sheet. the major source of our losses emanate from our accumulation and holding of foreign exchange reserves. when the bank purchases foreign exchange, it injects rand liquidity into the market. unless we neutralise this liquidity increase, it could have inflationary consequences. there are a variety of ways that we can do this through our open market operations, for example through foreign exchange swap transactions, conducting reverse repurchase transactions, or the issuing of reserve bank debentures. this process is known as sterilisation. however, while we are paying around 5 per cent ( linked to the current repo rate ) on these transactions, we earn very little on our holding

reserve system ”. ( par. 76 ) without going into the details, in the south african system the reserve bank uses its open market operations and other instruments of monetary policy to force banking institutions to borrow more from the discount window whenever it is regarded as necessary to apply a more restrictive policy. at some stage, the reserve bank will then also raise the bank rate which, in a situation of great dependence on the central bank, will force the private banks to follow with increases in their lending and deposit rates. many other central banks operating in sophisticated financial markets are now influencing short - term interest rates more directly with their operations in the markets. instead of overnight loans provided at the discount window, they enter into repurchase transactions with banking institutions, with the added advantage that it can be coupled with a tender system for central bank money, and a variable bank rate. the south african reserve bank will also have to introduce greater flexibility in the operating procedures for the implementation of monetary policy if we want to cope with the volatile international capital flows, exchange rate changes, and financial assets price movements. it is of some concern to the reserve bank that over the past year interest rates in the south african money market seem to have become more rigid. in the present system, the bank no longer gets reliable signals from market interest rates on changes in the underlying financial conditions. if necessary, the operational procedures of the bank will have to change to bring more interest rate flexibility into the money market. finally, the instruments used for monetary policy may also have to be adapted to the changing financial environment. in the past, the reserve bank, for example, often used the exchequer account of the government for the short - term withdrawal of surplus funds from the money market. the recent introduction of an improved system for tax and loan accounts held by government with private banks, rules out the extensive use of this instrument for monetary policy purposes. similarly, arrangements now under negotiation with the department of finance to relieve the reserve bank of the responsibilities for the primary issue of government bonds, and for the development of the secondary market in these bonds, will also change the bank ’ s position in the capital market. it opens up the way for the bank to have a more single - minded open market policy approach. the introduction of repurchase transactions in strictly defined acceptable underlying financial assets will also provide an instrument of monetary policy that is more malleable and can be adapted easier to the needs of the new financial environment of which south africa is now rapidly becoming an