31 August 2004

Reserve Bank Governor Tito Mboweni says that despite the external value of the rand being determined by supply and demand in the foreign currency market, the Bank will, over time, "remove all structural deficiencies" to attain a more stable exchange rate

Presenting the central bank's annual economic report in Pretoria last week, Mboweni said the Bank had purchased about US$10.4-million between early 2003 and 31 July this year in order to increase South Africa's foreign exchange reserves.

As a consequence of this policy, and by acquiring the proceeds arising from the government's external borrowing programme, the central bank had been able to expunge its negative net open foreign currency position in May last year, with the oversold forward foreign book being closed in February this year.

"We are convinced that over time the removal of these structural deficiencies should contribute to attaining a more stable exchange rate of the rand than that experienced in recent years", Mboweni said.

"This should hopefully also make the country less vulnerable to external financial shocks and improve the prospects for further upgrades in South Africa's international credit ratings."

The Bank said in its report that although the exchange rate of the rand continued to be volatile at times compared with other currencies - raising the ire of mining and manufacturing sector unions - the rand had resisted some of the volatility in the global market in the first half of 2004.

"An analysis of the behaviour of a selection of commodity currencies against the US dollar also revealed that the rand had been less volatile and even appreciated when other high-yielding currencies like the Australian dollar, New Zealand dollar and Turkish lira were plummeting" Mboweni said.

Describing the 2003/2004 fiscal year as a success, Mboweni said the CPIX (consumer price index excluding interest on mortgage bonds) inflation target range of 3-6 percent would apply at least until 2006.

Forecasting a positive inflation outlook, Mboweni said this was the reason the Bank's monetary policy committee had decided to lower the lending rate by 50 basis points earlier this month to 7.5 percent, bringing the official rate to its lowest level since 1980.

At the same time, the committee cut the Bank's repo rate by 50 basis points, taking SA's interest rate to 11 percent.

The report said South Africa's real economic growth had increased by 3 percent in the first quarter of this year from an annualised rate of 1 percent in the second half of 2003. This was mainly ascribed to a recovery in real economic activity in the primary and secondary sectors of the economy.

According to Statistics South Africa, gross domestic product grew by 3.1 percent in the first quarter of 2004, compared with last year's fourth quarter growth of 1.3 percent.

Source: BuaNews

SA economy South Africa is the economic powerhouse of Africa, with a gross domestic product four times that of its southern African neighbours and comprising 25% of the entire continent's GDP.

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