t t mboweni : the global economy and central banking in africa address by mr t t mboweni, governor of the south african reserve bank, at the national bank of belgium, brussels, 9 november 2004. * 1. * * introduction the global economy changed considerably in recent years with important consequences for central banking. during the last half of the previous century the world economy was characterised by a process of liberalisation, deregulation and eventually globalisation, i. e. a process through which an increasingly free flow of ideas, people, goods, services and capital leads to the integration of economies and societies. globalisation brought increasing prosperity to the countries that became involved in it. the free flow of goods, capital and people boosted incomes and raised living standards in many parts of the world. in addition, new technological advances reduced transportation, telecommunication and computation costs. these developments did not only lead to greater operational effectiveness, but also increased the ease with which national markets could be integrated globally. the more integrated world economy did not benefit all economies and all the inhabitants of the globe. mr horst kohler, the past managing director of the international monetary fund recently stated that : “ nearly 1, 2 billion people - one fifth of humankind - continue to live in absolute poverty, with incomes less than $ 1 a day. in many countries, durable economic and social progress remains elusive. in most of these countries, trade has decreased in the last 20 years and on average, economic growth has not kept pace with population growth. the situation in africa is particularly dramatic because it is aggravated by the aids pandemic. i believe that the fight against global poverty is the greatest challenge for stability and peace in the 21st century. ” it is true that disease, unemployment and poverty reduction remain the major challenges confronting policymakers in africa. for this reason it is encouraging that african leaders have embraced the new partnership for africa ’ s development ( nepad ) to confront the challenges facing the continent. nepad is a strategic development plan that addresses the economic, social and political dimensions of africa ’ s future development. it is a clear demonstration of the willingness of the leaders in africa to take responsibility for actions needed to advance development. the vision and way forward basically consist of creating the policy environment and institutions that are necessary to translate the political commitment into economic benefits. it is further encouraging that there has been some improvement in africa ’ s growth performance since the mid - 1990s, albeit from a low level. the average growth rate

prevented from rising. over the past six months, that is from 31 october 1996 up to 30 april 1997, the situation stabilised and the rand appreciated by 10 per cent as more foreign capital started flowing into the country again. against the background of the expansion in the domestic economy, and particularly the sharp increases in private sector domestic expenditure, pressures developed in the financial sector and total bank credit extended to the private sector increased by about 17 per cent during each of the past three years. this caused the m3 money supply to increase by about 15 per cent per annum, well above guidelines indicated by the reserve bank for an acceptable rate of increase in m3. the reserve bank was initially very tolerant with the relatively high rates of expansion in the financial aggregates, particularly with a continuous decline in the rate of inflation, which came down from 14 per cent in 1992 to 7½ per cent in 1996. inflation turned around from 5½ per cent over the twelve months up to april 1996 to almost 10 per cent in april 1997, mainly because of the depreciation of the rand in 1996. this forced the reserve bank to switch to a more restrictive monetary policy and to accept a substantial increase in interest rates. at this stage, the prime overdraft rate of banking institutions at 20 per cent is about 10 per cent above the current rate of inflation. the rates of increase in both bank credit extension and in the money supply are also beginning to show signs of a slow - down. a further important development in the south african economy was an almost explosive increase in the volume of activity in all the financial markets. the average daily turnover in the market for foreign exchange is now exceeding $ 7 billion. last year, a total turnover of $ 703. 5 billion was registered on the bond exchange of south africa, and of $ 27. 3 billion on the johannesburg stock exchange. foreign participation played a very important part in the development of the south african financial markets, but also contributed to greater volatility in these markets. it should finally be noted, as far as economic developments over the past three years were concerned, that, contrary to many predictions made at the time of the election of the new government, three successive ministers of finance succeeded in reducing the deficit in the budget of the central government from 8. 5 per cent of gross domestic product in 1993 to 5. 6 per cent in 1996 / 97. in the budget for the fiscal year 1997 / 98, the minister provided for a further decline in the deficit to only