1. INTRODUCTION

All of us are, without doubt, still shocked and horrified about what happened in New York and Washington on Tuesday (11 September 2001). The shock for me personally was compounded by the fact that I stayed at the Millenium Hilton Hotel in New York, opposite the World Trade Centre, from the second to the fourth of September, i.e. last week. Our hearts go out to the victims, their families, the American people generally and their President and leadership.

The economic impact of this tragedy is currently unknown but that there will be an impact is beyond reasonable doubt. A lot will depend on how events unfold in the coming days and months. The initial panic reaction in our market seems to be calming down and therefore one would expect that by next week the JSE Securities Exchange will see the All-Share Index back to where it was before the tragedy. One would also expect exchange rates to work the initial impact of this tragedy out of the equation.

The one unknown in this situation will be oil price. This is one factor which is so critical to our inflation targeting endeavours. Whilst the initial reaction of the oil price was to shoot up, it seems that some calm may also be returning to this market. The assurances by OPEC to do all they can to maintain oil price stability is something which gives us hope. But the jury is still out on this one.

These developments in the United States have come at a time for us when economic developments in South Africa are being closely monitored. Of fundamental importance in this regard was whether the slowdown in the US economy would have a major negative impact on our own economic performance. That the slowdown in the US economy is severe is not in doubt with the last published quarterly data indicating that GDP growth was only 0.2 per cent. Questions are naturally filling the papers: is the US economy going into a recession? What would the implications be for the global economy if this was to happen? What will happen to the South African economy?

The South African economy has been making some progress on the growth front. Significant structural changes have taken place in the South African economy since 1994 after the successful transformation to a new political dispensation. These changes followed a period of sanctions, trade boycotts and other measures applied by the international community to isolate apartheid South Africa. During these years there were attempts to achieve sustained growth and higher levels of employment by stimulating demand in the economy but often without taking account of the supply-side capacity of the economy to meet that demand. This led to accelerating inflation and increasing external deficits, which eventually had to be brought under control through restrictive monetary policy.

Expanding government expenditure was financed either through higher taxation or increased borrowing and this process tended to crowd out the private sector. Monetary and fiscal policy were not always synchronised. Persistently large deficits and an increasing ratio of government debt to gross domestic product gave rise to expectations of stubborn inflation, even in the face of relatively firm monetary policies. The private sector could not do much about generating employment and the ever-higher levels of taxation and borrowing weakened the opportunities for wealth creation.

The new government committed itself to creating an open economy in the belief that South Africa's future lay in being a competitive participant in a globalised environment. In recent years the new South African government has changed the focus of trade and industrial policy to the pursuit of employment-creating growth through improved international competitiveness. Government has concentrated on improving supply-side flexibility and moved away from demand-side interventions. The tariff structure was rationalised and import surcharges were abolished. Moreover, it was decided that effective price stability would become an important component of macroeconomic policy. Monetary policy had to focus on price stability, while government began to bring fiscal policy into line by limiting public-sector borrowing and public-sector debt to levels that could be sustained in the medium to longer term.

The pursuance of fiscal prudence led to a significant improvement in the national government deficit before borrowing and debt repayment, and also in government debt. As a ratio of gross domestic product, the deficit before borrowing and debt repayment amounted to 2,1 per cent in 2000 compared with 4,8 per cent in 1994. The total debt of national government as a percentage of total production also decreased from 49,2 per cent at the end of December 1994 to 46,9 per cent at the end of December 2000.

This improvement in the fiscal position was the combined result of low growth in expenditure and strong growth in revenue. There were significant gains in the collection of income tax and value-added tax as a result of better management and the more efficient practices and procedures used by the South African Revenue Service (SARS). The introduction of a new electronic administration and information system in December 1999 further improved SARS's capability to maximise revenue collection and minimise all forms of tax evasion. As a result, the government could reduce the effective tax rate on companies from 48 per cent of current income in the 1993/94 fiscal year to 37,1 per cent in the 2000/2001 fiscal year.

Of great importance to greater competitiveness in South Africa were the revisions to the Competition Act. The objectives of the new Act are to -

(1) promote the efficiency, adaptability and development of the economy;

(2) provide consumers with competitive prices and product choices;

(3) promote employment and advance the social and economic welfare of South Africans;

(4) expand opportunities for South African participation in world markets and for recognising the role of international competition in the country;

(5) ensure that small and medium-sized enterprises have an equitable opportunity to participate in the economy; and

(6) promote a greater spread of ownership, in particular to increase the ownership stakes of historically disadvantaged people.

Government has clearly stated its continued commitment to the privatisation process by selling strategic stakes and forming partnerships with the private sector for infrastructure development. The privatisation process is expected to benefit the fiscal budget, attract foreign investment and help to reduce prices and improve infrastructure. It could also lead to an injection of private sector capital, technology and expertise into the economy. Timing is obviously of the essence in ensuring that we maximise the benefits that may accrue for South Africa. Similar cost and efficiency gains are expected from the public-private partnerships aimed at bringing the disciplines of private-sector risk management and long-term contractual commitments to various areas of public service delivery.

The Regional Industrial Development Programme has been expanded to include a simplified scheme for smaller enterprises. This scheme is now again under review. The phasing in of supply-side support measures has begun recently with the introduction of the Industrial Development Corporation's World Player Scheme for modernising the plant and equipment in sensitive industries which face a significant decline in protection. The development of a full package of supply-side measures is the central focus of medium-term industrial and trade strategy.

If South Africa is to achieve higher levels of sustainable economic growth and increase its competitiveness globally, greater attention will have to be given to the measures proposed by the National Productivity Institute (NPI) to expand and develop productive capacity in South Africa. The NPI proposes that these measures should include -

(1) a national productivity agreement;

(2) effective application of the new skills development legislation;

(3) optimising the opportunities presented by the new trade dispensation between South Africa, the United States and the European Union;

(4) the beneficiation of raw materials;

(5) the innovative use of technology; and

(6) developing SMMEs and empowering historically disadvantaged groups.

One of the important responses to job-shedding in South Africa has been the finalisation of the Social Plan, agreed to by labour, business and government. South Africa has taken a dynamic approach to this problem. In the first instance all parties strive to prevent job losses and stimulate local economic development in areas hardest hit by such job losses. They also try to manage retrenchments humanely where these retrenchments are unavoidable. The NPI has a commendable objective of developing a capability for anticipating major job losses across all sectors of the economy through an early warning system. Also commendable are its efforts to establish a co-operative environment for strategies that will make industries and individual enterprises more competitive by improving productivity and generating efficiencies. The Social Plan is indeed a necessary and appropriate response to the negative consequences of economic restructuring.

Finally, land reform, labour market restructuring, education and skills development have focussed the attention of the public authorities. No policy area has been left untouched in these major endeavours to grow and develop our economy.

There are clear signs that our economy is responding to domestic and international developments.

Firstly, the growth performance of our economy has ensured that we can talk with some confidence that even this year, we are, all things remaining the same, poised for a positive annual rate of growth. There is some evident slowdown though. Although growth had already slowed from 4 per cent in the third quarter of 2000, the slowdown had largely been confined to the agricultural sector. But in the first quarter of this year, the weakness spread to other sectors of the economy. Of some worry is that the sector that bore the brunt of the slowdown was the manufacturing sector. The growth rate in this sector slowed from an annualised 4,5 per cent in the fourth quarter to a mere 1 per cent in the first quarter. This is somewhat puzzling because there appears to be strong demand for manufactured goods.

Domestic demand remained strong in the first quarter with household and government consumption expenditure rising and growth in real fixed capital formation and inventory investment accelerating. The welcome acceleration in inventory levels followed a steep drop in net inventory investment from the third to fourth quarters of 2000. This suggests that producers are positive about South Africa==s future growth prospects and anticipate a sizeable increase in domestic demand.

Secondly, on the inflation front, we have committed ourselves to our new inflation targeting monetary policy framework. The objective is to align South African inflation in the medium to long term with inflation rates of our major trading partners. As you all know, our inflation objective is to achieve, by the end of calender year 2002, an average rate of CPIX inflation of between 6 and 3 per cent.

Inflation in the prices of consumer goods and services moderated meaningfully in the first half of 2001. The year-on-year rate of increase in the consumer price index for metropolitan and other urban areas excluding mortgage cost (CPIX) - the benchmark indicator for inflation-targeting purposes - has declined from 8,2 per cent in August 2000 to 6,4 per cent in July 2001. This rate of increase is only 0,4 percentage points above the upper limit of the inflation target range mentioned above. When measured from quarter to quarter and expressed at an annualised rate, the short-term pace of CPIX inflation has almost halved from 7,8 per cent in the first quarter of 2001 to 4,5 per cent in the second quarter.

"Headline" CPI inflation or the year-on-year rate of increase in the overall consumer price index for metropolitan areas slowed down from 7,8 per cent in February 2001 to 5,3 per cent in July.

Increases in the prices of consumer services decelerated quite significantly. In the case of housing-related services, price increases moderated from a year-on-year rate of 8,1 per cent in February 2001 to 2,8 per cent in July. Housing-related services include mortgage rates, house rent and domestic workers' wages. Expressed at a seasonally adjusted and annualised rate, the rate of increase in the prices of all consumer services fell from 13,4 per cent in the first quarter of 2001 to only 4,2 per cent in the second quarter. Smaller increases in the prices of other services, apart from housing-related services, also contributed to the decline in the inflation in the prices of all consumer services.

The year-on-year rate of increase in the prices of consumer goods fell back from 8,7 per cent in August 2000 to 5,2 per cent in July 2001. Declines in the price of food, which had risen steeply in 2000, helped to bring down the inflation rate.

In contrast to the moderation in consumer price inflation, production price inflation has advanced at a firmer pace in recent months. Measured over periods of twelve months, the rate of increase in the all-goods production price index rose from 8,1 per cent in April 2001 to 8,6 per cent in May, June and July.

The year-on-year rate of increase in the prices of domestically produced goods which had receded from 8,0 per cent in November 2000 to 6,9 per cent in April 2001, accelerated to 8,2 per cent in July. Rising food price inflation, though still at a modest level, contributed most to the pick-up in inflation in the prices of domestically produced goods.

The higher inflation in the prices of domestically produced goods has been partly offset by a deceleration in the rates of increase in the prices of imported goods in recent months. Imported inflation, when measured over periods of twelve months, declined from 15,0 per cent in December 2000 to 9,2 per cent in July 2001. The decline in imported inflation over this period was primarily due to lower international oil prices and the increase in the value of the rand in May and June 2001. Coupled with declining inflation in trading-partner countries, this contributed meaningfully to the slowdown in imported inflation.

Thirdly, the performance of the Rand/US Dollar exchange rate has been of some concern in recent times and in the past few days, the events in New York and Washington have impacted negatively on us. The Rand has traded between R8,01 on 4 July 2001 and R8,60 today (13 September 2001) . Whilst I have often said that commentators should focus on the trade-weighted value of the rand, as a deterioration in the value of the rand against the US dollar might merely reflect the strength of the US dollar on the international exchanges, the traded-weighted value of the rand has also succumbed to negative sentiment. It is currently over 8 per cent weaker than at the end of last year.

Why is the exchange rate of the rand currently under pressure? The reasons cited in the market are the following: in the first instance, currencies perceived to belong in the emerging markets asset class have been adversely affected by, in particular, developments in Argentina, Turkey and Zimbabwe. There are concerns in the market that, notwithstanding the official aid packages, with their accompanying conditionalities, Argentina=s economic problems could prove difficult to resolve. Sentiment towards the rand has been clearly affected by fears of contagion.

Fourthly, a factor which has been mentioned in the market from time to time, i.e. the NOFP, has in the past two years been brought under control. Having reached levels of around $23 billion in July 1998, this position has now been worked down to around $4.8 billion as of today. This has been a major achievement by the authorities in moving towards the elimination of this perceived negative factor in our foreign exchange market.

Fifthly, our balance of payments position is sound. In fact, all things remaining the same, we may see a surplus on the current account of the balance of payments, a factor which should show the underlying strength and robustness of the South African economy. This fact should also be very positive for the improvement in the exchange rate of the Rand.

Finally, year to date, we have seen positive inflows of capital into South Africa through the bond and share markets. Today, the net position of bonds and shares is in the region of R6,1 billion, a positive factor for the Rand exchange rate as well.

Ladies and gentlemen, Rome was not built in a day and so it will be the case in putting our economy on a sustainable growth and development path. But the foundation has been laid. The progress so far is encouraging with the exception of employment creation which has been disappointing.

I would assume that the tasks for our economic intelligentsia is to interrogate all aspects of our economy, provide tentative solutions where problems still exist and show the way forward. The South African Reserve Bank stands ready to work with you in your research endeavours. We are open to research proposals on any economic topic. Our Research Department is being restructured continuously to meet the new challenges and one research mechanism open to you is for you to apply to become Research Fellows of the Bank.

I would like to congratulate you on this your jubilee conference and wish you well in all your endeavours.

A country that does not respect and nurture its intelligentsia has no future. Ours has to be different.

Thank you very much.