t t mboweni : recent economic and financial developments address by professor t t mboweni, governor of the south african reserve bank, at the university of south africa, pretoria, 23 august 2001. * 1. * * introduction ladies and gentlemen, honoured guests. i wish to thank you for the honour you have bestowed on me by choosing me as the recipient of your award for excellence in managing the south african financial environment. in accepting this award and thanking you for extending it to me, i would like to make a few comments about the recent economic and financial developments in south africa. i will touch on the recent price developments, the exchange rate, and developments in other emerging markets. 2. recent economic developments towards the end of 2000 the south african economy had not been seriously affected by the world economic downturn. but by the first quarter of this year, it became clearer that we would probably be adversely affected by the slowing activity in the major world economies. as we mentioned in our latest quarterly bulletin, published in june, the recorded decline in export volumes contributed to a slowing down in domestic growth from 3 per cent in the fourth quarter of last year to 2 per cent in the first quarter of this year. although growth had already slowed from 4 per cent in the third quarter of 2000, the slowdown had largely been confined to the agricultural sector. but in the first quarter of this year, the weakness spread to other sectors of the economy. of some worry is that the sector that bore the brunt of the slowdown was the manufacturing sector. the growth rate in this sector slowed from an annualised 4. 5 per cent in the fourth quarter to a mere 1 per cent in the first quarter. this is somewhat puzzling because there appears to be strong demand for manufactured goods. domestic demand remained strong in the first quarter with household and government consumption expenditure rising and growth in real fixed capital formation and inventory investment accelerating. the welcome acceleration in inventory levels followed a steep drop in net inventory investment from the third to fourth quarters of 2000. this suggests that producers are positive about south africa ’ s future growth prospects and anticipate a sizeable increase in domestic demand. 3. price developments inflation in the prices of consumer goods and services moderated meaningfully in the first half of 2001. the year - on - year rate of increase in the consumer price index for metropolitan and other urban areas excluding mortgage cost ( cpix ) - the benchmark indicator for inflation - targeting purposes - has declined from

a payment in the australian retail payments system : with cash, cheque, credit card, debit card ( eftpos ) and electronic transfer. when we looked at how these methods of payment were evolving, we saw that credit cards were growing faster than the other means of payment. this was initially somewhat surprising as credit card transactions are more expensive than most other means of payment – that is, they involve a larger payment from the users of the payments system to the providers of the payments system. in effect, what was happening was that the most expensive way of paying was driving out the cheaper ways and, in the process, raising the average cost of the australian retail payments system. why was this possible? we concluded this was because there was an asymmetry between the price signals ( and the capacity to act on them ) faced by the two classes of payments system users – the cardholders and the merchants. for cardholders, the price signal they received was that credit card transactions were free, or could even result in receiving a payment in the form of'points '. furthermore, cardholders were able to act on this signal as they were the party that chose the method of payment at the point of sale. merchants, on the other hand, received a signal that the credit card was the most expensive way of making a payment ( via the merchant service fee that was paid to their bank ). but merchants had no power to influence the method of payment for the transaction – for that was in the hands of the cardholder. thus, the incentives in the system were designed to encourage the decision - maker to choose the form of payment that was the most expensive from the perspective of society as a whole. now it could be argued that merchants could have refused to accept credit cards in the first place. but that would have been a big decision, and the fact is that most merchants felt that they would forgo too many sales if they had taken that path ( particularly if their competitors did not ). they did not feel that they had much bargaining power vis - a - vis the credit card schemes and the banks. and until our recent reforms, they did not have the power to'pass on'the merchant service fee to the customer, that is, employ the'user pays'principle by insisting that if customers use an expensive means of payment they should pay more than if they use a cheaper one. merchants now have that power as a result of our reforms, but in most cases they are