South African Monetary Policy: Where are we heading?
Last Modified Date:
2020-10-01, 09:35 PM
Speeches > Speeches by Governors
Address by Dr E.J. van der Merwe, at the Conference of the Institute for Strategic Studies and The Graduate School of Management of the University of Pretoria. 1. INTRODUCTIONI have been asked to share my views with you today on where we are heading with monetary policy in South Africa in the years beyond 2000. Looking into the future on any matter is always a hazardous task. One can be inclined to be an optimist about the future like the American short-story writer Bierce Ambrose who said: "the future is that period of time in which our affairs prosper, our friends are true and our happiness is assured". On the other hand, one can also be inclined to be too pessimistic. I would rather fall in with the more realistic approach of another American writer, Tennessee Williams, who wrote: "the future is called perhaps ...".In making predictions about the future, the best one can do is try to determine what important changes are currently taking place in the world and then attempt to deduce what implications this "perhaps" may have. In the time allotted to me I have therefore decided to concentrate on:firstly, the major structural changes that have occurred recently or are still taking place in the international financial world;secondly, the effects that these changes have already had on the South African financial sector; andfinally, the possible implications that these changes may have on monetary policy in the future. 2. STRUCTURAL CHANGES IN THE FINANCIAL SECTORThree major structural changes can in particular, be distinguished in the financial markets of the world, namely:liberalisation;globalisation; andco-operation, convergence and integration.World War I and the Great Depression of the 1930s left the world with highly regulated domestic capital markets and a disintegrated international financial system. It is therefore not surprising that the highest priority was attached to restoring multilateral payments and current account convertibility towards the end of World War II, which led to the Bretton Woods Agreement and the General Agreement on Tariffs and Trade. In the period immediately after the war, the emphasis was placed on the liberalisation of trade and payments. Progress with these reforms was relatively slow and only started to gain momentum from the early 1980s. An indication of the subsequent increasing orientation towards open economic systems is provided by the rising number of countries that accepted the IMF's Article VIII obligations of currency convertibility for current account transactions from 35 in 1970 to 137 in early 1997, or to 76 per cent of the total membership of the Fund.In the 1980s, the authorities of the industrialised countries began to realise that with floating exchange rates capital mobility was not incompatible with the objective of stability in domestic economic conditions. They accordingly started with a process of liberalising financial systems, which was later also adopted by some of the emerging economies. At the beginning of this year almost 60 members of the IMF have accordingly already accepted both current and capital account convertibility.The movement to more liberalised financial transactions gained further momentum with the negotiations in the World Trade Organisation to liberalise financial services. Discussions, which had already started a few years ago, are planned to be completed by the end of this year and finalised in formal agreements between the members of the World Trade Organisation. In principle the negotiations are directed towards obtaining both access to foreign financial markets and treatment in those markets that is equal to, or at least as good as, that afforded to domestic firms. In practice, this means reducing a wide range of barriers commonly faced by firms seeking to offer financial services across the border of countries or through the establishment of local branches or subsidiaries. Amongst the barriers that still exist in the world are: restrictive and discriminatory licensing for foreign firms, ceilings on permitted investments and restrictions on