account deficit of around 1, 8 per cent of gdp. import volumes increased by 3, 3 per cent in the final quarter of 2003 while the physical volume of exports of goods and services increased by 2, 2 per cent. however, the trade surplus in february and march of this year improved as a result of an increase in exports with the 3 - month moving average ( seasonally adjusted and annualised ) of the trade surplus increasing from r17, 6 billion in january to r20, 5 billion in february. the moderate deficit on the current account is not an immediate cause for concern. at these levels the deficit is sustainable and has been comfortably financed through significant inflows on the financial account, which showed healthy surpluses in the final three quarters of 2003. the surplus in the final quarter amounted to r34, 6 billion. however, there is no room for complacency. it is well known that financial account reversals can occur very quickly, and if expenditure growth proceeds unchecked, the current account developments could prove to be unsustainable. the higher levels of domestic expenditure have been reflected in more buoyant money market conditions. most of the money supply aggregates have grown at a relatively robust pace. the average twelve - month growth rate for m3 in 2003 was 13, 0 per cent, and grew by 14, 9 per cent and 14, 0 per cent in february and march respectively. twelve - month growth in banks ’ total loans and advances to the private sector has remained at levels of around 12, 5 per cent since early 2003. growth in mortgage, instalment sale and leasing finance has been particularly strong over the past year. 4. recent labour market developments the unemployment situation in south africa remains a major source of concern. fortunately, quarter - to - quarter increases in employment were recorded on both the public and private sectors during the final two quarters of 2003, reversing the trend of the previous two quarters. from a monetary policy perspective, a concern of the bank has been the trend in wage settlements, which play an important role in the inflation process in south africa. central to the bank ’ s concern is the fact that wage settlements often tend to be set in a backward - looking manner. this acts as a constraint of the downward movement of inflation. the bank would like to see wages and prices being set on the basis of the inflation rate that is expected to prevail over the period for which wages are being set. although wage demands

orderly manner, and the direction of change will not be one way. this change in perception is to a large extent a result of the improvement in the overall international liquidity position. although the bank has been engaging in limited purchases of foreign exchange reserves for the purpose of bolstering foreign exchange reserves, this should not be misinterpreted as intervention in the market in order to target a specific level of the exchange rate. south africa ’ s foreign exchange reserves are low by comparison with other emerging market economies, and this perception makes the rand vulnerable to speculative attacks. the bank ’ s objective is to build up foreign exchange reserves in a prudent manner, and in such a way that has a minimum impact on the exchange rate. the bank does not have a target for the exchange rate, and at this stage the bank does not have a target for foreign exchange reserves or a target for the rate of accumulation of reserves. as at the end of april 2004, gross reserves stood at us $ 10, 1 billion while the net reserves or international liquidity position was us $ 6, 4 billion. this can be compared, for example, to the position at the end of december 2002 when gross reserves amounted to us $ 7, 8 billion and international liquidity position was minus us $ 1, 6 billion. 6. inflation developments developments on the inflation front continue to be positive. cpix inflation slowed down from a peak of 11, 3 per cent in october and november of 2002 to move to within the target range of 3 - 6 per cent by september of 2003 and has remained there since. it reached a low of 4, 0 per cent in december 2003 before increasing to 4, 8 per cent in february and then fell back to 4, 4 per cent in march 2004. the achievement of bringing inflation down to within the target range can be attributed to a number of factors including the monetary policy response to the inflation shock of late 2001, positive base effects and the sustained recovery in the exchange rate of the rand. the decline in food price inflation, which had been a major factor driving inflation up in 2002, was also an important contributor to the decline in the inflation rate. the upturn in the inflation trend in the early months of this year was not unexpected and in line with the bank ’ s inflation forecast. the bank ’ s inflation forecast which is published in the latest monetary policy review, shows that cpix inflation is expected to rise gradually towards the upper limit of the inflation target range before