During 1982 and the first half of 1983 the South African economy made considerable progress in adjusting to the changed circumstances brought about by the international recession, the decline in the gold price after January 1980 and, more recently, the severe drought. Evidence to support this view was provided by the dramatic improvement on the current account of the balance of payments, the substantial rise in net foreign reserves from the middle of 1982, the emergence of surplus production capacity, the disappearance of most skilled labour constraints, and some abatement of demand pressures on prices. In this respect, the less accommodative monetary policy which the authorities applied in 1981 and 1982, in co-ordination with a policy of fiscal discipline, achieved important objectives.Up to the middle of 1983, however, the rate of inflation had not as yet declined to the desired extent. Admittedly, there was some slow-down of the increase in consumer and production prices.And more recently other indicators of inflation, such as the rates of increase in salaries and wages, unit labour costs and import prices, have also begun to point to stronger moderating influences on prices.But despite these favourable indications, the South African rate of inflation remained high and inflationary expectations firmly entrenched. Measured over a twelve-month period, consumer prices increased at a rate of 12,4 per cent in June 1983, about two-and-a-half times as high as the average for South Africa's seven main trading partners.Acknowledging these facts, including the surplus achieved on the balance of payments, the emphasis in economic policy in 1983 shifted more explicitly towards curbing inflation.To this end, it was deemed desirable to follow a less accommodative monetary policy so as to create an environment, in terms of the availability of money and credit and appropriate interest and'exchange rates, that would be conducive to the further reduction of inflationary pressures and the unwinding of inflationary expectations.Also with a view to curbing inflation, the 1983/84 Government Budget, presented in March 1983, adhered to the now established principle of expenditure restraint and sought to achieve a rate of increase in expenditure that would imply little increase in real terms. Equally important and more pertinent to the strengthening of monetary control, the Budget aimed at a relatively small deficit before borrowing in order to avoid any monetary financing.Recognising that changes in monetary aggregates may have been distorted by the banks' innovative practices and that care has to be taken in interpreting short-term fluctuations in South Africa's monetary aggregates, as currently defined and measured at month-ends, a fairly clear pattern of change was nevertheless observed in the rate of monetary expansion from about the middle of 1982.Under the impact of a considerable improvement in the overall balance of payments and an accompanying increase in net foreign reserves, monetary expansion gathered some pace during the six months to January 1983. During the first half of 1983 the money supply growth rate accelerated further, mainly because of the extent to which the government sector availed itself of net bank credit - a process which served to provide the banks with adequate cash reserves and therefore enabled them to expand their credit to the private sector as well. The end result was that, viewed over a period of twelve months, the increase in the broad money supply (M2) accelerated from 17 per cent at the end of 1982 to 22 per cent in June 1983, a rate of increase which exceeded the rate of inflation by a substantial margin and was not consistent with the policy objective of moderating the continuing high rate of inflation.Under the influence of the more rapid monetary expansion, interest rates started to decline in the third quarter of 1982. But the steep downward movement to the middle of February 1983 suggests that important other forces were also at work. Not only was there a cyclical weakening of the demand for credi