2002 and by nearly 25 per cent in the first eleven months of 2003. such volatility in exchange rates seems to be a fact of life in most economies these days. fluctuations in the external value of currencies are unavoidable in the current international monetary system of generally floating exchange rates. even when currencies are pegged to another currency or to a basket of currencies, they still float against other currencies and fluctuate widely at times. large fluctuations in the exchange rate of the rand are clearly not healthy for the economy. the uncertainty caused by these fluctuations makes investment and export planning extremely difficult. what may seem to be a profitable venture can turn out completely different with a substantial swing in the external value of the rand. the reserve bank would obviously prefer to have greater exchange rate stability, but as already indicated fluctuations in the exchange rate of the rand seems unavoidable. the bank can only create an environment that favours exchange rate stability. one of the most important recent developments in this regard has been the improvement in the net open foreign currency position of the reserve bank. the oversold foreign currency position of the bank has always been perceived as a source of exchange rate weakness and instability. the bank's objective was therefore to eliminate this oversold position, which stood at us $ 23, 2 billion at the end of september 1998. during the past year this objective was finally achieved in may. at the end of october a positive net open foreign currency position of us $ 2, 7 billion was recorded. having removed this perceived vulnerability, the price discovery process in the market for foreign exchange should now display a better two - way trading pattern. in an attempt to further improve the functioning of the south african market for foreign exchange, the bank has shifted its focus to reducing its oversold forward book and to strengthening the official foreign exchange reserve position. considerable success has been achieved in bringing the oversold forward book down to lower levels. the balance on the oversold forward book stood at us $ 2, 3 billion at the end of october 2003, compared with us $ 6, 9 billion at the end of december 2002. in the mean time, the official foreign exchange reserve position was also increased to a level of us $ 7, 8 billion at the end of october 2003. 6. conclusion these improvements in the functioning of the foreign exchange market and the lower inflation rate should at least provide a basis for more stability in the value of the rand. however,

. domestic final demand increased at a rate of 4 per cent in the first nine months of 2003 compared with the same period in the preceding year. this continued high growth in domestic final demand was the result of increases in consumption as well as fixed capital formation. the growth in real final consumption expenditure by households also remained strong throughout 2003. the sustained high growth in private consumption expenditure was underscored by a rise in real personal disposable income owing to recent salary and wage increases, a reduction in income tax rates and more recently the decrease in interest rates. to supplement the growth in their disposable income, households became more willing to incur debt. consequently, households debt as a percentage of disposable income rose somewhat from 51 per cent in the fourth quarter of 2002 to 53 per cent in the third quarter of 2003. this level is still low compared to those of many other countries. the strong domestic demand was also supported by growth in real final consumption expenditure by general government at an annualised rate of about 4 per cent in the first three quarters of 2003. this was mainly due to government purchases of goods and services, while real spending on salary and wages of government employees was rather restrained. expenditure on real gross fixed investment continued to be buoyant throughout the first nine months of 2003. private business enterprises as well as the public sector increased their fixed capital outlays. the government and public corporations increased their capital expenditure on infrastructure expansion aimed at service delivery, while private business appeared to be making the most of conditions that favour expenditure on capital goods. such conditions included an exchange rate conducive to importing goods, a lowering in the cost of borrowing, rising prices in international commodity markets and considerably more stability on the inflation front. the strong domestic final demand was unable to prevent a decline in manufacturing output. having increased robustly in the first half of 2002, real manufacturing output started to grow at a slower rate in the second half of that year and then declined in the first nine months of 2003. this was mainly a reflection of lacklustre global growth trends and the recovery in the exchange rate of the rand. most of the subsectors of manufacturing were affected by a low demand for exports and increased imports as a greater proportion of domestic demand was met by competitively priced imports. as could be expected, this had a marked effect on employment. 4. inflation and monetary policy the inflation outlook improved significantly during 2003. the twelve - month cpix inflation fell from