the willard group and the basel committee for banking supervision to create a more stable global financial environment. for the time being, however, they have to accept greater volatility in the financial markets as a fait accompli. challenges for monetary policy the market economy provides its own disciplines and its own mechanism for adjustment when disequilibrium develops in the system. the foregoing analysis of financial developments in countries afflicted by the turbulence in world financial markets last year provides a brief description of the market mechanism of self - adjustment. the outflows of capital forced a depreciation of the currency, higher interest rates and inflationary pressures in those countries from where foreign investments were repatriated. the challenge for monetary policy is to accommodate these adjustments, however unpopular they might be at the time, and even if they come in direct conflict with the contemporary needs of the domestic economy at that stage. despite the depressed conditions in the south african economy at the beginning of 1998, we had to accept a depreciation of the rand of almost 20 % last year ; we had to adjust to a sharp rise of about 7 full percentage points in the level of the cost of money ; banking institutions were forced to reduce the rate of lending to their clients, and the rate of inflation increased from 5 % in april 1998 to 9. 3 % in october 1998. painful adjustments in real economic activity were unavoidable. monetary policy had to flow with the flood. reserve bank intervention in the financial markets became necessary to smooth adjustments, prevent a crisis situation from developing in the foreign exchange market ( still subject to many exchange controls ) and facilitate the adjustment process by partly redistributing the cost of adjustment between private and public sector participants. monetary policy, however, could not avoid, and should not have tried to prevent, the painful but essential market adjustment process. with hindsight, south africa came out of the global financial crisis of 1997 / 98 relatively well, but not without some scars. in three areas, the south african economy showed its strength and resilience : • unlike in many other countries, south africa ’ s financial system managed to survive the turbulences of 1997 / 98 without any major failure. • south africa became an exception to the emerging market world by not approaching the imf for any special financial assistance. at this stage, south africa has zero loans outstanding by the imf. • financial stability returned to south africa relatively quickly after the major disruptions in the second and

finances of the imf. there is little doubt that international organisations such as the imf should become more accountable to their membership regarding their operations. it is my strong view that the financing of any organisation has an important bearing on its accountability and transparency. it is envisaged that the committee will meet four or five times over the next six months, and will table its report in early 2007. the bank continues to improve its international co - operation efforts with global partners. during this year the bank has signed memoranda of understanding ( mous ) with the central banks of argentina and ukraine. discussions on co - operation agreements have advanced significantly with the central banks of china and peru, and completion and signing off of such agreements are expected in due course. with regard to regional integration activities on the continent, the bank continues to host the secretariat of the committee of central bank governors ( ccbg ) in sadc. good relationships with central banks in the region have been boosted this year as three mous in the areas of information technology, exchange control and payment systems have been signed by central bank governors. the bank participated in the annual regional payment conference for countries in sadc, which focused on general payment system developments. in addition, three paymentsystem workshops were hosted for sadc countries during the period under review. the aim of these workshops was to evaluate the payment system of each sadc country in accordance with the financial sector assessment programme of the imf and the world bank. these evaluations and the report to the imf and the world bank will form the basis of the annual regional payment conference to be held later this year. the south african reserve bank college continued to play a key role in training staff members of central banks and financial institutions in africa. it also co - organised the imf financial programming and policies course and a financial markets analysis course presented by the joint africa institute. internal administration the annual report of the bank was distributed to shareholders before this meeting. the balance sheet totals of the bank show an increase from r129 billion at the end of march 2005 to r168 billion at the end of march 2006. the increase was mainly the result of the accumulation of official gold and foreign exchange reserves and was financed in the main by an increase in government deposits. the profit before taxation of the bank increased from r866 million for the previous financial year to r1 038 million for the financial year ending 31 march 2006. budgeted expenditure of the bank for the current financial