Address by Dr Chris Stals, Governor of the South African Reserve Bank, at the Tenth National and Second ECSAFA Congress of Chartered Accountants, Durban.1. Phase One: Preamble to the adjustmentThe course of the South African economy, and especially of the balance of payments, during 1995 paved the way for the recent adjustment that took place in the exchange rate of the rand.Against the background of increasing domestic spending, the current account of the balance of payments has shown an increasing deficit. During 1994 this deficit was equivalent to only R2,2 billion. During the course of 1995 the quarterly deficit, seasonally adjusted and calculated at an annual rate, showed the following trend: First quarter ... R 8,7 billionSecond quarter ... R14,8 billionThird quarter ... R12,2 billionFourth quarter ... R15,0 billion For the year as a whole, the deficit was equivalent to R12,7 billion. The course of the current account of the balance of payments was, however, not exceptional when seen against the background of the business cycle. It is normal for imports to rise steeply during strong increases in domestic spending, as happened last year. In fact, total domestic spending already increased in 1994 by 6,7 per cent, and in 1995 by an additional 5,6 per cent. An increase of 10,4 per cent in the total gross domestic fixed investment in particular led to a sharp increase in the importation of capital goods such as machinery and equipment. This deterioration in the current account of the balance of payments did not, however, like so often in the past, give rise to any pressure on the country's gold and foreign exchange reserves, or on the exchange rate of the rand. On the contrary, owing to an exceptionally large net inflow of capital from abroad, the official foreign reserves continued to rise. In total, the country's official foreign reserves increased by R9,1 billion, which was distributed as follows over the four quarters of the year: First quarter ... R 3,1 billionSecond quarter ... R 1,1 billionThird quarter ... R 0,5 billionFourth quarter ... R 4,4 billion The increase in the fourth quarter, when the deficit on the current account was at its highest, was particucularly large. The increase in the foreign reserves was of course made possible by an unexpectedly large net inflow of capital from abroad. The net inflow totalled R21,7 billion and was distributed as follows over the year: First quarter ... R 5,5 billionSecond quarter ... R 5,0 billionThird quarter ... R 3,8 billionFourth quarter ... R 7,4 billion The net inflow was particularly large in the fourth quarter and throughout the year exceeded the deficit on the current account. The total net inflow of funds last year included, among others, an inflow of R6 billion through the Johannesburg Stock Exchange. A further amount of R4 billion flowed into the country in this way during January and February 1996. Owing to these trends in the most important balance of payments aggregates, the exchange rate of the rand was exceptionally firm during 1995. However, it is interesting to note that the average weighted value of the rand during the first five months of 1995, i.e. from 1994-12-31 to 1995-05-31, dropped by as much as 7,6 per cent. After this, however, from 1995-05-31 to 1995-12-31, it increased by 4,4 per cent. During January 1996 it increased by an additional 1,4 per cent, pushing the total increase in the value of the rand over the eight-month period from June 1995 to January 1996 to more than 6 per cent.It was difficult, on the basis of the underlying economic situation, to justify this increase in the value of the rand. The Reserve Bank intervened in the foreign exchange market throughout this period by buying large amounts of foreign exchange -- hence the increase of more than R9 billion in the country's foreign exchange reserves during this period. In this way the Bank prevented a further appreciation in the exchange rate of the rand.The action of the Reserve Bank in the foreign exchange market made it difficult for the Bank to abide by its monetary policy goa