dr. stals looks at current developments in monetary policy in south africa address by the governor of the south african reserve bank, dr. c. stals, at a luncheon of the rotary club of durban on 17 / 3 / 97. 1. monetary policy and total economic activity at this stage, there is general expectation amongst economists in the private sector that monetary policy will be eased during the course of 1997. differences of opinion may exist on how soon the easing will begin, or by how much interest rates will decline as a result of the easier conditions. this assumption is based, firstly, on a projection of some further slow - down in the rate of expansion of the total domestic economic activity. last year, the rate of growth in gross domestic production declined to 3. 1 per cent, down slightly from the 3. 4 per cent of 1995. it must also be noted that the decline in the rate of growth in the non - agricultural sectors was even more pronounced, where the rate of increase in total real value added declined from 4½ per cent in 1995 to only 2 per cent in 1996. in the very important manufacturing sector, the decline was from 7½ per cent growth in 1995 to only ½ per cent in 1996. it was a strong recovery in the agricultural sector that maintained overall growth at the level of 3 per cent plus for last year. agriculture will not make the same contribution to growth in 1997 and for economic analysis purposes it makes sense to assess the future prospects for non - agricultural production before deciding on a possible course for monetary policy during the rest of this year. there were some tentative signs that total manufacturing production may have started with a new expansionary phase in the fourth quarter of last year when a seasonally adjusted annualised decline of 1 per cent in the third quarter switched to a 2 per cent expansion in the fourth quarter. this expansion in production was boosted partly by a rising demand from the rest of the world for south african products, following the depreciation of the rand last year. this important development can make a further contribution to the maintenance of reasonable growth in 1997. developments on the demand side of the economy also indicated a marked slow - down in total economic activity last year. the rate of increase in total domestic expenditure declined from 6. 5 per cent in 1994 and 5. 2 per cent in 1995, to 3. 0 per cent in 1996. in this case, the decline was more broadly based and the rates of increase in gross domestic fixed investment, private sector

##preciated steeply in the second half of the year. as a result, the nominal effective exchange rate of the rand decreased by about 34 per cent in the second half of the year. towards the end of 2001 the external value of the rand began to recover and the weighted exchange rate recouped about 20 per cent of its losses up to the end of may 2002. in the following two months the rand fluctuated around this new level but, on balance, declined by just more than 7 per cent. this brought the nominal effective exchange rate of the rand back to about 27 per cent below its level at the beginning of 2001. a number of factors contributed to the depreciation in the value of the rand during 2001. these included a weak export performance and a strong increase in imports and dividend payments to nonresidents. the resultant deficit on the current account of the balance of payments was accompanied by a net outflow of portfolio capital. this outflow stemmed from the perceived higher risk of investing in emerging - market economies, the problems experienced in argentina and later brazil, instability in zimbabwe, and unfounded expectations of imminent exchange - control relaxations in south africa. eventually, international investors began to regard the external value of the rand as a one - way bet, exporters delayed repatriating their foreign - earned currency and importers switched financing from foreign to domestic sources. in other words, there was a typical speculative bandwagon effect. after the authorities had reminded the market about the sound economic fundamentals in south africa in a statement on 20 december 2001, and it became clear that the exchange rate of the rand had over - reacted, this whole process was reversed. exporters stopped delaying the transfer of their proceeds, importers shifted back to foreign financing for purchases and international investors were again willing to invest large sums in domestic shares and bonds. international conditions calmed down somewhat and the world economy began to recover. at the same time the current account of south africa ’ s balance of payments moved into surplus, mainly owing to a decline in dividend payments to the rest of the world and a rise in exports. the depreciated external value of the rand has undoubtedly strengthened the price competitiveness of domestic producers and could lead to a strong export performance. substituting domestically produced goods for imported goods should further promote economic growth. the south african economy also proved to be quite resilient to the world economic slowdown in the period under review. despite a synchronis