most recent forecast, inflation is expected to persist above the inflation target of 3 - 6 per cent, and is not expected to return to within the range before the end of 2009. unfortunately we see the risks to this forecast to be significantly on the upside. so exporters are likely to continue to face an environment of rising costs and high interest rates in the short term. we remain committed, however, to bringing inflation down to within the target range in the medium term. exchange rate issues south africa runs a sizeable current account deficit on its balance of payments. this implies that we import more from the rest of the world than we export. for 2007 this deficit amounted to 7, 3 per cent of gdp. this deficit has been sustainable because foreign investment attracted to the country has exceeded the deficit on the current account. given our strong infrastructural expenditure programme and high crude oil prices, our import demand is expected to remain strong. this means that we have to continue to rely on continued capital inflows, or else we need to improve our export performance. clearly, from a sustainability perspective the latter would be preferable. unfortunately our export performance has not kept up with imports, despite the significant increase in commodity prices. over the past few years, when the economy was growing at rates above 5 per cent, the bulk of net capital inflows were into the equity markets. the sustainability of these flows is, however, not only dependent on domestic developments. in the final quarter of 2007 we experienced significant net sales of bonds and equities by non - residents as a result of global risk aversion in response to the turmoil in global credit markets. these sales intensified in january and february as electricity supply constraints contributed to negative perceptions of our growth prospects. these developments impacted on the exchange rate which depreciated by about 20 per cent on a trade weighted basis in the first quarter of 2008. it has since recovered somewhat, but is nevertheless about 12 per cent weaker than at the beginning of this year. fruit and wine exports are particularly sensitive to exchange rate movements, and one of the consequences of the current financial market turmoil is that there has been a considerable amount of exchange rate volatility in international markets in general. since the beginning of 2008, for example, the us dollar has depreciated by about 6 per cent against the euro. so even if there were no domestic issues, the rand would still have experienced some volatility. the weaker exchange rate has

infrastructure in the country. the framework of monetary management has continued to be improved since 1977 to increase the effectiveness of monetary policy. indirect policy instruments are now the primary means of monetary management. in order to make the operations of the central bank more focussed, the twin objectives of economic and price stability, and financial system stability, were designated as the primary objectives of the bank in 2002. monetary policy operations were made more market based and active, especially after the introduction of the independent float of the exchange rate in 2001. monetary policy has concentrated on stability, while promoting economic growth. however, monetary expansion was somewhat above the expected path in 2004. the relatively higher monetary expansion during 2004 was mainly driven by the higher expansion in credit to the private sector as well as to the public sector. responding to these developments, the central bank tightened its monetary policy by raising policy rates in the fourth quarter of 2004. the policy focus was on market stability in the immediate aftermath of the tsunami. subsequently, after ensuring market stability, the central bank has conducted open market operations aggressively to mop up excess liquidity. the central bank will continue to mop up liquidity in the coming months. monetary growth is expected to be contained to 15 per cent in 2005. monetary policy will focus on restraining inflationary pressure. an area that has experienced rapid growth since liberalisation is the financial sector. this has not only contributed to economic growth in its own right, but has also facilitated growth in other sectors. the central bank has actively promoted financial sector stability and development by assisting in the deepening of markets, creation of new instruments and strengthening of the regulatory framework. prospects and challenges the foregoing forms the background for the economic policies of the government. i would now like to highlight several challenges that have to be faced. perhaps, the greatest challenge is to achieve a lasting peace. economic growth and peace are interlinked. therefore, the process to accelerate economic growth and the peace process need to move in tandem. further, structural reforms have to be continued. in this connection it is necessary to convince all stakeholders of the need for reforms to enhance the efficiency in the economy. macroeconomic management has to be strengthened further to contain macroeconomic imbalances. in this regard, we have had the benefit of considerable assistance from international financial institutions, in particular, the imf, world bank and the adb. not only have they provided funds at critical times, but they have also been most helpful in providing technical assistance and advice. sound