consumption expenditure and accumulation of inventories all receded last year. there was only one exception, and that was consumption expenditure by general government which rose by 5 per cent in real terms, compared with an increase of only ½ per cent in 1995. this slower rate of increase in total domestic expenditure established better balance between production ( supply ) and expenditure ( demand ). with both sides of the economy now growing at about 3 per cent per annum, there is better equilibrium and less friction in the economy, which contributes also to more stable conditions in the financial markets. it is important that this balance between aggregate demand and aggregate supply be retained - - both should gradually be raised to a higher level, but the upward movement should be in tandem. monetary policy has an important part to play in maintaining this equilibrium over time. any artificial stimulation of the economy through a premature easing of monetary policy will lead to further tensions in the balance of payments and in the financial markets, and will lead to further upward pressure on inflation. at this stage, economists predict some further slow - down in the rate of increase in private sector consumption expenditure with continued growth at the current levels in gross domestic fixed investment. an important factor in this projection therefore will be the behaviour of government consumption expenditure. it is in this regard that the provision made by the minister of finance in his budget speech of last week for an increase in total government expenditure of only 6. 1 per cent in 1997 / 98 is of vital importance. in real terms, that is after provision for depreciation, total government expenditure will indeed decline and therefore make an important contribution to the retention of macroeconomic equilibrium this year. 2. monetary policy and the balance of payments monetary policy decisions are obviously also affected by the overall balance of payments situation, and not only by developments in the domestic economy. last year, international economic relations dominated the south african economic scene. towards the end of the year, however, better equilibrium was also restored in the external accounts and this contributed to the expectation of an easier monetary policy in 1997. the current account of the south african balance of payments showed a substantial and growing deficit in the first half of 1996. in the second quarter, the seasonally adjusted annualised rate of the deficit reached r12. 9 billion and there was justifiable concern that it could increase even further. against the background of a slow - down in total domestic expenditure in the second half of the year, the growth in imports levelled off and, with some good increases in

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