represented the lowest annual average rate of inflation in south africa for the past 24 years. ominous signs developed over the past two years, however, with the rate of increase in bank credit extension escalating again to 18. 7 per cent in june 1996. the rate of increase in the m3 money supply also rose to 16 per cent in october 1996, while inflation gradually crept up from a low of 5. 5 per cent over the twelve months up to april 1996, to 9. 4 per cent over the twelve months up to december 1996. the current stimulus for inflation emanated mainly from the depreciation of the rand last year, but there is a danger that, if not checked at this stage, it could easily be converted into a new cycle of a continuous rise in the rate of inflation. the reserve bank was therefore forced once again during the past year to pursue a more restrictive monetary policy that led to an increase of approximately 3 percentage points in the level of interest rates. towards the end of 1996, the more restrictive policies began to produce results when both the rates of increase in bank credit extension and in the money supply slowed down. over the twelve months up to december 1996, bank credit extension to the private sector rose by 15. 7 per cent, and the m3 money supply by 13. 7 per cent, both marginally down from the peaks established earlier in the year. inflation is, however, still creeping upwards and it will take some time before the full effect of the depreciation of the rand will work itself out. in the meantime, it is of great importance that all other inflationary impulses in the economy, such as excessive rises in government expenditure or real wage rises in excess of productivity increases, and of course, a continuation of the excessive rates of increase in the monetary aggregates, must be avoided. the depreciation of the rand can bring many benefits for economic growth and development, provided the advantages for international competitiveness will not be dissipated very quickly by rising costs of production and a rising rate of inflation in the domestic economy. the year 1997 is indeed a testing period for the reserve bank and for the monetary policy applied by the bank. should the bank fail in its efforts to protect the value of the currency at this stage, the goals set by government for economic reconstruction and development, and the implementation of the government ’ s strategy for growth, employment and redistribution will not be attainable.

assets, measured in foreign currency terms, have not fallen. more importantly, the goal of a central bank is to maintain monetary and financial stability. and i want to assure you that the loss will not affect the capacity of the bank of thailand in delivering its mandate in any way. in the final analysis, monetary and financial stability alone can only provide a favorable environment for sustainable growth, but it is not sufficient to ensure that thailand will overcome the challenge of global dynamism over the long run. the critical challenge here is for the thai economy to make sustained gains in productivity through increased flexibility, efficiency, and competitiveness amid everchanging global economic conditions and structure. in this respect, we need to continue with financial and real sector reforms, and pursue policies that promote macroeconomic flexibility and sustained growth. ladies and gentlemen, i want to turn now to the banking sector and its challenges in the medium and longer terms. despite a challenging year, the banking system turned in a sound and robust performance, recording profit for the 5th consecutive year. strong earnings over the past few years, together with improved asset quality and recapitalization efforts have strengthened banks'capital base. the bis capital ratio is at a comfortable level and the npl ratio has declined. loan growth has moderated in line with the economy, while borrowers as well as banks, have exercised caution in light of prevailing uncertainties. improved financial strength and equally important, significant improvement in risk management at banks, have contributed to the resiliency of the system. this allows it to withstand the forces of change from globalization and intensified competition in the banking industry. banks will need to further build on this significant progress in order to meet the challenges going forward. these include macroeconomic challenges, growing pressure from increasing competition, and the changing regulatory environment. obviously, the ability to meet these challenges varies among banks. but we, as regulators, are well prepared to steer a steady course for the banking system as a whole. as you know, the first phase of the financial sector master plan has been completed. we have already seen significant consolidation and increased efficiency of the banking sector. we are moving onto the second phase of the master plan, which will further step up the pace of reform. this will increase the efficiency of the system and ensure that it can meet intensified competition that will come with globalization. let me emphasize that globalization is a pervasive process. given financial innovations, it can transcend national borders even without an explicit market opening. our