the current account deficit. to achieve this objective, the following monetary policy strategy was followed : not being in a position to fix the exchange rate at any predetermined level, a depreciation of the rand was unavoidable and had to be accepted as part of the solution to the problem. the bank sold some foreign exchange from its official reserves, not with the intention to fix the exchange rate, but rather to provide liquidity to the market and to smooth the adjustment process. as the reserve bank sold foreign exchange to the market to partly finance the overall balance of payments deficit, domestic rand liquidity was drained from the banking system. it was imperative for the effective working of the adjustment process that the reserve bank would not replace the lost liquidity through, for example, purchases of financial assets from the banks through more active open - market operations. the decline in the domestic liquidity had to be reflected in the level of interest rates. higher interest rates would not only serve to discourage the outflow of capital, but would also reduce the domestic demand for bank credit. the market trend for interest rates to rise could not be resisted. monetary policy was therefore directed towards a reinforcement of and active support for a market adjustment process that would eventually restore equilibrium to the balance of payments. it was well understood that this process would not be painless, that the depreciation of the currency, the drainage of liquidity and the rising interest rates would all demand costs and sacrifices that would not be popular, and that the monetary authorities would be blamed by some ill - disposed observers for the dilemma. any country that had established a good economic performance in one year on the basis of net capital inflow of r20 billion, and is then in the next year forced to perform on a net inflow of only r4 billion, is bound to go through some painful adjustment. south africa was no exception. 4. the success of the monetary adjustment programme important changes took place towards the end of last year, and particularly after october, in the underlying economic conditions that contributed to the financial disturbances of the preceding nine months. there was a marked slow - down in the rate of increase in real gross domestic expenditure. official national accounts statistics for the fourth quarter are not yet available, but preliminary indications are that all the major components of gross domestic expenditure increased at lower rates in the second half than in the first half of last year. total real gross domestic expenditure indeed declined somewhat from the first half to bring the rate of

stability. indeed, we are of the firm view that the best contribution that the bank ( through monetary policy ) can make towards the attainment of high and sustainable rates of economic growth and employment creation is keeping inflation at low levels thus contributing to the achievement and maintenance of overall macroeconomic stability. we target the inflation rate and not any other economic variable and currently our key task is to maintain cpix inflation – that is headline inflation less mortgage interest costs – within a range of between 6 to 3 per cent. since september 2003, cpix inflation has been contained within this range and has averaged 4, 0 per cent for the past two years. going forward, the south african reserve bank remains resolute in the implementation of our mandate and we are keeping a close eye on inflation developments. if, in the view of the monetary policy committee, the inflation target is being threatened by inflationary pressures, then the mpc will have the courage of its conviction to do the correct thing even as we enter the festive period. it is worth stating here that there is no rule that we are aware of which prohibits changes to the monetary policy stance just before christmas. as the case might be, the mpc will discharge its responsibilities in the event that inflationary pressures persist. once again our message is that we should all try to tighten our belts no matter how wide or narrow our waistlines might be. 5. conclusion let me conclude by posing a rhetorical question : in the face of these enormous socio - economic challenges, should the private sector stay in its comfort zone and focus only on growing shareholder value? most certainly not. many south african companies are already involved in large community social investment programmes. these could be expanded and become more focussed, as some do, on facing up to the challenge of improving the lives of ordinary people. according to a recent study 1 for every us $ 1 invested in water supply and sanitation, the direct and indirect benefits range from us $ 1 to us $ 34, depending on the region and level of intervention. indeed, investments targeting the poor have the highest marginal benefit. investing in water, we would suggest, is therefore good business. your support today will go a long way towards contributing to meeting the mdgs, particularly the reduction of poverty. thank you for your attention. making water a part of economic development – the economic benefits of improved water management and services : a report commissioned by the governments of norway and sweden as input to the commission on sustainable development ( csd