mr. stals looks at the future of financial co - operation in southern africa speech by the governor of the south african reserve bank, dr. chris stals, at a conference on southern africa : resources, investment and trade, arranged by forum southern africa limited in london on 10 / 7 / 97. 1. the reintegration of south africa in the world economy good progress has been made over the past four years with the reintegration of south africa in the world economy. the political and social changes introduced in south africa paved the way for the removal of international economic punitive actions that partly isolated the country ’ s economy from the rest of the world during the ten years preceding the fully democratic election of a government of national unity in april 1994. even before the election took place, the rest of the world gave its support to the moves towards democracy by lifting sanctions, boycotts, disinvestment campaigns and trade restrictions. since 1994, the following major changes took place in south africa ’ s international economic relations : ( i ) south africa became a full participating member again in various multinational institutions such as the world bank, the international monetary fund, the united nations and the african development bank. ( ii ) agreements were entered into with the world trade organisation for a substantial revision over a five year period in the protective import tariff structure, and certain discriminatory export subsidies were removed. ( iii ) exchange controls were substantially relaxed to introduce full convertibility for current account transactions, to remove all exchange controls applicable to non - residents and gradually to lift the remaining exchange controls applicable to the outward investment of capital by south african residents. ( iv ) an extensive liberalisation programme of the south african financial markets included major changes in the capital market, e. g. to allow for foreign and corporate ownership of stock broking members of the johannesburg stock exchange, and the opening up of the south african banking sector for foreign competition. there are now 17 foreign banks with branches and subsidiaries in south africa, and about 60 foreign banks with representative offices. ( v ) a number of new bilateral, regional and international economic co - operation agreements were entered into, such as the southern african development community ( sadc ) and the arrangements with the european union for closer economic co - operation. these changes have had a material effect on south africa ’ s international economic relations and are reflected in a very visible way in the south african balance of payments. over the three years 1991 to 1993, the current account of the balance of payments

depressed domestic demand, whereas certain exports are beginning to react positively to the depreciation of the rand last year. short - term developments in the south african economy were therefore very much affected by the turmoil of the past year in the global financial markets, and by negative developments in international commodity markets. the current situation creates frustration for the monetary authorities, who have an understanding of the need for some stimulation of domestic demand, but also an obligation to protect overall financial stability in an unfriendly and volatile international financial environment. the strong link between internal economic developments in south africa and changes in the international situation was illustrated clearly when global financial markets became more stable towards the end of last year and in the early weeks of 1999. the strained south african financial situation simultaneously eased to such an extent that the exchange rate of the rand appreciated from about r6. 30 to the united states dollar in august 1998 to r5. 70 early in january 1999. domestic interest rates declined by about 3 full percentage points from the extremely high levels reached last year. in the past ten days, however, negative developments in the brazilian situation once again created new pressures in the south african market for foreign exchange, and put some brakes on the declining trend in interest rates. in the short term, the fate of the south african economy is now to an important extent determined outside of the country. should the international situation stabilise and improve during the course of 1999, the south african economy will be sure to follow. 2. structural economic adjustment as already explained, cyclical developments in the south african economy turned negative in 1997 and remained depressed throughout 1998. the business cycle will hopefully swing more positive again as the international financial situation becomes more stable ( in the second half of this year? ). there are, however, a number of fundamental or more basic deficiencies in the economy which were identified by government in its macroeconomic strategy for growth, employment and redistribution ( gear ), published in june 1996, and which also needs attention. – 3 – in the gear document, government recognised that the most important economic problem facing south africa at this juncture is the large and growing unemployment in the country. this problem not only provides a serious economic challenge for macroeconomic policy, but also contributes to adverse socio - political developments. for example, the seriously disrupting crime and violence situation in the country can be linked directly to growing unemployment. in its turn, the crime and violence makes economic recovery more difficult. the country is therefore trapped in a vicious