international oil prices as well as in domestic food prices. these external shocks were responsible for a surge in the twelve - month rate of increase in the cpix from a low of 5, 8 per cent in september 2001 to a peak of 11, 3 per cent in october 2002. subsequently, the appreciation of the rand from the beginning of 2002 again had to be carefully taken into consideration in the formulation of monetary policy. the fluctuations in the exchange rate of the rand clearly illustrated the need for structural adjustments in the foreign exchange market in south africa. the reserve bank accordingly concentrated on eliminating its negative net open foreign reserve position and its oversold forward book. with the success achieved with these objectives, the focus of the bank has now shifted to a gradual strengthening of the official foreign exchange reserves. since the end of 2002 the official foreign exchange reserves of the country have increased from us $ 7, 6 billion to us $ 13, 0 billion at the end of october 2004. the higher foreign exchange holdings should help to stabilise the external value of the rand. 4. implications for monetary policy taking these changes in the world and more specifically in south africa into consideration, we now come to the crucial question on how will monetary policy be affected or what will happen to monetary policy in the next ten years. more in particular i want to concentrate on three questions in this regard, namely : will monetary policy still be effective? what should the primary objective of monetary policy be? what monetary policy framework should be applied? 4. 1 the effectiveness of monetary policy as in the rest of the world, e - money has not really taken off in south africa. although several potential products have been evaluated by the reserve bank, no roll - out on a significant basis has yet occurred. the failure of e - money to meet expectations can possibly be ascribed to the fact that cash remains a trusted and very convenient payment mechanism, debit and credit cards are widely used and e - money products generally do not allow for person - to - person payments. however, it is conceivable that this could change in the future and that e - money could to an increasing extent become a substitute for banknotes and coin. as benjamin m. friedman ( 1999 ) has pointed out it is possible, albeit at present highly unlikely, that e - money could be used as a means of payment as well as settlement and therefore erode the role of currency and reduce banknotes and coin in circulation. friedman also stated that the size of base money

- time gross interbank settlement. new developments in commercial banking include automated teller machines, credit and debit cards, telephone and inter - net banking, intelligent cards and card reading devices. in the 1990s a further advance in technology made it possible to store monetary value on a silicon chip embedded in a plastic card or in a personal computer. this was the first step in the development of electronic money or e - money. initially it was believed that this development would lead to a quick and dramatic change in the way that payments are made. such a change would have required large investments in infrastructure and the general acceptance of this new payments method by the public. it is thus not surprising that it did not take off in the way predicted by some analysts. however, initial setbacks to new innovations are a common experience and it is quite possible that the public could eventually be more willing to accept this new innovation. 3. effects on south africa ’ s financial structure these changes in the rest of the world did not affect south africa ’ s financial sector to any great extent during the 1980s, i. e. in a period in which the country became increasingly isolated from the rest of the world as a result of trade boycotts, embargoes and financial sanctions. the subsequent transition to a new political dispensation and the normalisation of the country ’ s international relations completely changed this situation. these circumstances forced the south african financial sector to move from a relatively isolated position to a world that had changed in many ways from the time when our financial institutions were still actively involved internationally. to cope with the challenges faced in this new environment it was important to improve the functioning of the domestic financial markets and to reintegrate them in the world economy in an orderly way. great efforts were accordingly made to bring the rules and regulations applying to financial institutions in line with international norms and standards. the re - entry of south africa in an integrated financial community also made it important to reconsider the strict exchange control rules applicable at that time. the country ’ s limited foreign exchange reserves prevented the immediate removal of all exchange control measures, which caused the authorities to opt for a policy of a gradual relaxation of capital account transactions. from 1994 south african financial institutions started operating on an increasing scale in major international financial centres and opened branches or subsidiaries in other african countries. at the same time foreign financial institutions were encouraged to conduct business in south africa by the creation of a level playing field between local and foreign service providers. in addition,