Public finance

The Constitution of the Republic of SouthAfrica, 1996 (Act 108 of 1996), lays down aframework for the division of responsibilitiesbetween national, provincial and local gov-ernments. It prescribes an equitable divisionof revenue between the spheres of govern-ment, taking into account their respectivefunctions. It also creates an independentAuditor-General and an independent centralbank, and sets out the principles governingfinancial accountability to Parliament and theannual budget process.

The objectives of the National Treasury are to• advance economic growth, employment and

income redistribution through appropriatemacro-economic, fiscal and financial policies

• prepare a sound and fiscally sustainablenational budget and an equitable divisionof resources between the national, provin-cial and local spheres of government

• raise the revenue required by the fiscus effi-ciently and equitably

• manage the financial assets and liabilitiesof the State soundly

• promote accountability through effectiveand reliable financial reporting systems andinternal controls.

Since 1994, several major reforms have beenundertaken in the structure and organisationof South Africa’s public finances:• The introduction of a three-year Medium-

term Expenditure Framework (MTEF) hasbrought greater transparency and certain-ty to the budget process, and hasstrengthened the links between policy pri-orities and government’s longer-termspending plans.

• The statutory Budget Council, the BudgetForum and several supporting technicalcommittees oversee budgetary and finan-cial co-operation between the national,provincial and local spheres. The Financialand Fiscal Commission (FFC) plays animportant independent role in reviewingand advising on intergovernmental finan-cial relations.

• Following the creation of the South AfricanRevenue Service (SARS) as an autonomousagency, tax administration has been over-hauled, information systems modernisedand audit and debt recovery capacity re-inforced.

• Building on the work of the Commission ofInquiry into Certain Aspects of the TaxStructure of South Africa, a wide-rangingprogramme of modernising and reform ofthe tax system is in progress.

• A unit has been established in the NationalTreasury to support national and provincialpublic-private partnerships, complementedby a municipal partnership initiative of theDepartment of Provincial and LocalGovernment.

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The South African Mint has received a number ofawards for the design and quality of its gold and silvercoins. Many of these coins depict themes from SouthAfrica’s rich cultural and natural heritage. The companyis 100% owned by the South African Reserve Bank andsupplies the Bank with, on average, between 800million and 1,1 billion coins annually.

• Debt management has been put on asounder footing, including the introductionof auction marketing arrangements forgovernment securities and several success-ful foreign bond issues. As the SouthAfrican bond market has matured consid-erably, opportunities have been created formore active management of the debt port-folio to reduce risks and servicing costs. Aframework for the evaluation of projectlending proposals has been agreed upon.

• The governance of public enterprises hasimproved through a protocol on corporategovernance, which provides a point ofdeparture for normalising the financialaccounts and tax and dividend policies ofmajor State-owned enterprises. TheTreasury now plays a more active role incoordinating the borrowing plans of publicenterprises.

• International fiscal and financial relationshave been strengthened, both through

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Functional classification of consolidated national and provincial expenditure and social security funds (R million)

1999/00 2000/01 2001/02Estimate % of % of Estimate % of % of Estimate % of % of

total GDP total GDP total GDPGeneral government 20 207,8 9,0 2,5 22 275,8 9,0 2,5 25 708,7 9,5 2,6services and unallocableexpenditureProtective services: 35 667,5 16,0 4,4 40 975,3 16,7 4,6 45 778,1 16,9 4,6

Defence 12 021,1 5,4 1,5 15 242,4 6,2 1,7 17 308,3 6,4 1,8Police 15 163,5 6,8 1,9 16 421,2 6,7 1,8 17 833,3 6,6 1,8Prisons 5 418,8 2,4 0,7 5 986,8 2,4 0,7 6 473,5 2,4 0,7Justice 3 064,1 1,4 0,4 3 324,9 1,4 0,4 4 162,9 1,5 0,4

Social services: 105 675,2 47,3 13,0 116 577,2 47,5 13,0 126 216,6 46,7 12,8Education 47 648,5 21,3 5,9 52 763,5 21,5 5,9 58 509,1 21,6 5,9Health 24 937,0 11,2 3,1 27 194,8 11,1 3,0 29 624,0 11,0 3,0Social security and 27 214,8 12,2 3,4 30 412,1 12,4 3,4 31 626,6 11,7 3,2welfareHousing and community 4 963,6 2,2 0,6 5 186,3 2,1 0,6 5 303,7 2,0 0,5developmentOther 911,2 0,4 0,1 1 020,5 0,4 0,1 1 153,3 0,4 0,1

Economic services: 17 759,0 7,9 2,2 19 589,3 8,0 2,2 22 531,3 8,3 2,3Water schemes and 2 602,8 1,2 0,3 3 050,6 1,2 0,3 3 250,7 1,2 0,3related servicesFuel and energy 255,9 0,1 0,0 207,1 0,1 0,0 187,3 0,1 0,0Agriculture, forestry 3 473,8 1,6 0,4 4 499,0 1,8 0,5 4 723,4 1,7 0,5and fishingMining, manufacturing 1 201,2 0,5 0,1 1 400,8 0,6 0,2 2 023,4 0,7 0,2and constructionRegional development 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0Transport and 7 542,6 3,4 0,9 7 609,4 3,1 0,8 8 607,4 3,2 0,9communicationOther economic 2 682,6 1,2 0,3 2 822,5 1,1 0,3 3 739,1 1,4 0,4services

Interest 44 289,7 19,8 5,5 46 185,8 18,8 5,1 48 138,0 17,8 4,9Reserve 0,0 0,0 0,0 0,0 0,0 0,0 2 000,0 0,8 0,2Total estimated 223 599,2 100,0 27,5 245 603,3 100,0 27,4 270 372,8 100,0 27,4expenditure

Source: National Treasury

participation in the major multilateral foraand through regional initiatives in theSouthern African Development Commun-ity (SADC).

• The Public Finance Management Act, 1999(Act 1 of 1999), was passed by Parliament,laying a new foundation for financialaccountability in the public sector.

The Government has reprioritised its spend-ing to deliver services more equitably andaddress infrastructure backlogs. This is re-flected in commitments to financing low-income housing, the national school-feedingprogramme, water and sanitation projects,free primary health-care services, andenhanced small-business support.

Consolidated national and provincial rev-enue (including receipts of provinces, localgovernment, social security funds and na-tional skills development funds) amounted to26% of gross domestic product (GDP) in1999/00, and is projected to fall to 25% by2001/02. Consolidated government expend-iture increased from 27,5% in 1999/00 to27,6% in 2000/01 and is expected to be27,4% in 2001/02. Planned spending onpublic services has increased for 2000/01,reflecting higher GDP growth, robust revenueperformance and lower projected debt ser-vice costs. The Government intends loweringthe overall tax burden while strengthening taxadministration and promoting fiscal equity.

In keeping with the macro-economic strat-egy announced in 1996, the budget deficithas been lowered to below 3% of GDP. Themain budget deficit declined from 4,6% in1996/97 to 2,0% in 1999/00 and is expectedto increase slightly to 2,1% of GDP in2003/04. Since 1993/94, the public-sectorborrowing requirement has been reducedfrom 9,8% of GDP to 2,2% of GDP in1999/00.

Debt service costs declined from 5,5% ofGDP in 1999/00 to an expected 4,4% in2003/04. Debt cost projections have recentlybeen revised downward as a result of debtreduction and lower borrowing associatedwith State asset restructuring and the pro-ceeds of privatisation.

Financial policy frameworkThe Minister of Finance presented the Budgetfor 2001/02 on 21 February 2001. The high-lights were:• Cuts of R8,3 billion in personal income tax,

and higher exemption ceilings for intereston savings.

• The residence-based income taxation cameinto operation on 1 January 2001. Thismeans that people resident in South Africapay tax on income irrespective of where itis earned.

• The implementation date of Capital GainsTax (CGT) was deferred from 1 April 2001to 1 October 2001.

• The Government is well set to meet its tar-get for Consumer Price Index ExcludingMortgage Costs (CPIX) of between 3 to6% in 2002, with inflation expected to fallsteadily throughout 2001.

• Tax incentives of R3 billion over four yearsfor strategic projects.

• The National Treasury and the SARS areinvestigating economically and adminis-tratively efficient tax measures to encour-age job creation. This will be aimed atreducing the cost of hiring new workersand encouraging formal employment.Some R600 million has been budgeted forthis purpose. It will have positive effectson other government programmes, suchas the Unemployment Insurance Fund,and ensure that their benefits are morewidely available. The tax relief measureswould be fully operational from 1 October2001.

• VAT zero-rating for illuminating paraffin.• Below-inflation increases in the fuel levy

from 4 April 2001: 2,4 cents a litre on lead-ed and unleaded petrol, and 1,9 cents alitre on diesel.

• An increase in specific excise duties: beerand cider taxes by 6%, sorghum beer andsorghum flour by 5%, duties on other alco-holic beverages by 10%, and taxes ontobacco products by between 11,8% and20,2% to maintain the 50% tax incidence.

• Duties on soft drinks and mineral waterwere reduced by 25%.

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• Total spending of R258,3 billion is plannedin 2002, with revenue of R233,4 billion.

• A planned Budget deficit of R24,9 billion or2,5%.

• Economic growth forecast at a ‘robust’ 3,4%.• The asset swap mechanism available to

long-term insurers, pension funds, the unittrust industry and fund managers was ter-minated with immediate effect.

• Balance of payments deficit to averagearound 1% of GDP.

• The cost of servicing the national debt wasexpected to be R48,1 billion, or 4,9% of GDP.

• Vat and company tax remain unchanged.• Privatisation to contribute R18 billion to

debt reduction in 2002, R5 billion in2002/03 and R5 billion in 2003/04.

• A special allocation of R16 billion over thenext three years to strengthen social servicedelivery and enhance the capacity ofprovinces to deal with HumanImmunodeficiency Virus/Acquired ImmuneDeficiency Syndrome (HIV/AIDS).

• Some R7,8 billion increased infrastructurespending towards repairing flood-damagedinfrastructure, new investments in school-building, roads, water and sanitation pro-jects and rural development initiatives.

• Provincial spending to rise by an annualaverage of 7,5% for the next three years.

• The South African Police Service (SAPS)received 6,9% more to fight crime over thenext three years, while the Department ofJustice and Constitutional Developmentwas allocated an extra 12,7% over thesame period.

• The Department of Defence received thefirst instalment of a R30-billion investmentto modernise its equipment.

Personal income tax reductions mainly forworkers earning below R80 000 a year wereannounced, improving the equity of the over-all tax system. This was achieved by raisingthe primary rebate by 8,9% and changing thetax brackets, ensuring sizeable benefits forlower- and middle-income taxpayers.Workers earning less than R23 000 now payno personal income tax, and a worker earn-ing R70 000 pays about 12% less, increasing

his/her take-home pay by 3% (or an extraR140 a month).

The tax exemption on interest and dividendincome was raised by R1 000 to R4 000 forpeople under 65, and to R5 000 for taxpayersaged 65 and over. This provides further taxrelief to those living on modest fixed-interestand dividend incomes.

Debt managementDuring 2000, the National Treasury continuedto concentrate on reducing the interest bur-den on national debt and to manage risksprudently in volatile market conditions. InMarch 2000, bonds linked to the consumerprice index were introduced, further sig-nalling government’s commitment to achiev-ing its inflation targets. The increasingly activedebt management reflects the need to main-tain liquidity and integrity under conditions ofa declining government funding requirement.It is facilitated by the growing sophisticationand efficiency of the South African bondmarkets. Switch auctions, introduced inNovember 2000, buy-backs of bonds, and afacility to ‘strip’ bonds into separate couponand redemption cash flows, are among themeasures that will be used to maintain andenhance the liquidity of the Governmentsecurities market.

The Government has tapped the publicinternational bond markets regularly and is anestablished issuer, with a well-developed yieldcurve in both the Euro and Dollar currencies.The Government’s foreign borrowing strategywill continue to focus on• establishing sovereign benchmarks in key cur-

rencies in the international capital markets• broadening and improving the quality of its

foreign investor base• lengthening and smoothening the matur-

ity structure of its debt portfolio.A risk-management framework is being devel-oped. This entails the quantification and limit-ing of risks arising from exogenous factors andthe development of benchmarks for govern-ment debt costs. All intergovernmental cash iscoordinated through the Corporation for PublicDeposits as from 2001, contributing to lower

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borrowing costs at national and provincial level.This assists in optimising the Government’scredit risk management.

Legislative mattersDuring 2000 and the first half of 2001, sev-eral Bills aimed at reforming the Govern-ment’s financial management were intro-duced and Acts implemented:

The Public Finance Management Act, 1999The Public Finance Management Act, 1999,as amended by Act 29 of 1999, came intoeffect on 1 April 2000 for all departments,constitutional institutions and public entities,except for certain sections exempted ordelayed by the Minister of Finance.

The Act represents a fundamental changein government’s approach to the handling ofpublic finances, as it moves the emphasisaway from a highly centralised system ofexpenditure control by treasuries. It holds theheads of departments accountable for theuse of resources to deliver services to com-munities. It will also, in time, change theaccounting base from cash to accrual.

The Act emphasises• regular financial reporting• independent audit and supervision of in-

ternal control systems• improved accounting standards• greater emphasis on output and performance • increasing accountability at all levels.Flowing from the approval of a board imple-mentation strategy in March 2000, a detailedImplementation Plan was approved byCabinet on 20 September 2000. The firstphase focuses on critical improvements indepartmental financial management andensuring compliance with the new legislationand its regulations. The second phase isaimed at long-term qualitative improvements,including the full implementation of general-ly recognised accounting practices.

Accounting officers prepared departmentalimplementation plans and submitted these tothe National Treasury during 2000. Plans hadto address the immediate priorities facingaccounting officers, including:

• effectiveness of existing internal controls,based on an assessment of the risks facingthe department

• arrangements for in-year managementmonitoring and reporting

• the extent to which systems and processescan ensure the efficient and effective man-agement of revenue, expenditure, assetsand liabilities

• the extent to which the internal audit andthe audit committee are appropriatelycapacitated and functional

• delegation of responsibilities to relevantofficials

• preparations to recruit a suitable ChiefFinancial Officer

• mechanisms to ensure suitable oversight ofany public entities the department controls.

With effect from 1 June 2000, regulations interms of the Public Finance Management Act,1999, applicable to departments and consti-tutional institutions, have replaced the formerTreasury Instructions. They provide forincreased flexibility and place greater re-sponsibility for decisions on departmentalaccounting officers. These regulations per-taining to salary deductions and public en-tities have since been consolidated to formone set of Treasury Regulations, and werepublished in the Government Gazette witheffect from 9 April 2001.

The National Treasury recognises that theimplementation of the Act and its regulationsplaces considerable demands on accountingofficers and departmental managers. A Guidefor Accounting Officers was published inOctober 2000, providing an accessible ac-count of the Act’s requirements. It is supple-mented by several other Treasury publica-tions, including guidelines to departments onmonthly and annual reporting.

The National Treasury, in collaboration withthe South African Management Develop-ment Institute and the Institute for PublicFinance and Auditing, is developing a newapproach to financial management training.This long-term initiative involves detailedhuman resource development planning,course design and accreditation, and the build-

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ing of relevant education and training capacityto meet diverse training needs.

The National Treasury is finalising proposedprocurement regulations in terms of thePreferential Procurement Policy FrameworkAct, 2000 (Act 5 of 2000). Draft regulationswere published for comments in theGovernment Gazette and provincial gazettesduring June 2000. The comments receivedhave been incorporated, and regulations wereexpected to be published in 2001. It giveseffect to a constitutional provision stating thatthe Government must implement a procure-

ment policy in accordance with a system that isfair, equitable, transparent, competitive andcost-effective. The constitutional provisions donot prevent government from implementingpreferences for the advancement of previouslydisadvantaged people. Government depart-ments will have to evaluate tenders in terms ofan agreed formula, taking into account thetender price and other specific goals.

Taxation Laws Amendment BillThe Taxation Laws Amendment Bill, 2001,was tabled in the National Assembly on

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Budget estimates and revenue outcome, 1999/00 and 2000/01

1999/00 2000/01R million Budget Revised Deviation Budget Revised Deviation 2000–01

estimate estimate estimate estimate increase (%)on revised estimates

Taxes on income andprofits, including: 111 680 117 178 5 498 121 303 122 925 1 622 4,9Personal income tax 82 650 86 200 3 550 87 821 86 400 -1 421 0,2Company tax (other than mining) 19 690 20 000 310 22 668 26 025 3 357 30,1Tax on retirement funds 5 100 5 700 600 5 800 5 800 0 1,8Other 4 240 5 278 1 038 5 014 4 700 -314 -11,0Taxes on payrolland workforce 1 400 1 300 100Taxes on property1) 2 885 3 574 689 3 338 4 004 666 12,0Domestic taxes ongoods and services, incl: 71 075 70 980 -95 79 448 78 868 -580 11,1Value-added tax 47 200 46 540 -660 52 858 54 000 1 142 16,0Excise duties 9 350 9 095 -255 9 570 9 031 -539 -0,7Levies on fuel 14 444 15 162 718 15 970 14 900 -1070 -1,7Other 81 183 102 1 050 937 -113 512,0Taxes on international trade and transactions 6 625 6 275 -353 6 500 8 189 1 689 30,5Stamp duties and fees 1 621 1 590 -31 1 700 1 500 -200 -5,7Total tax revenue 193 886 199 593 5 707 213 689 216 786 3 097 8,6Non-tax revenue 3 546 3 019 -527 3 846 4 870 1 024 61,3Capital revenue 21 43 22 386 35 -351 -18,6Recoveries of loansand repayments 644 844 200 875 90 -785 -89,4Grants – – – – – – –Less: SACU payments -7 197 -7 197 0 -8 396 -8 396 0 16,7Main budget revenue 190 900 196 302 5 402 210 400 213 386 2 986 8,7

1) Including demutualisation chargeSource: National Treasury

23 March 2001. The Bill introduces CGT inSouth Africa. It was proposed that the imple-mentation date be 1 October 2001. The CGTwill introduce greater equity to the tax sys-tem. CGT is a tax on the capital gain of assetsat the time of disposal or deemed disposal.The capital gain is the difference between theselling and purchase prices of the asset. TheTax will be levied on individuals at a maximumeffective rate of 10,5% and on companies ata maximum rate of 15%. The Tax will improvethe efficiency and equity of the South Africantax system.

The Financial Intelligence Centre BillThe Financial Intelligence Centre Bill wasintroduced in Parliament in early 2001 andwas referred for consideration to the PortfolioCommittees on Finance and on Justice andConstitutional Development.

The Bill is aimed at combating money laun-dering activities, and establishing a FinancialIntelligence Centre and a Money LaunderingAdvisory Council. It imposes certain duties oninstitutions and persons who may be used formoney laundering purposes, and it providesfor incidental matters.

Financial and Fiscal Commission(FFC) The FFC makes recommendations to Parlia-ment and Cabinet on the equitable division ofrevenue between national, provincial andlocal governments on an annual basis.

It was decided in September 1999 that theFFC would embark on Project 2001, with theaim of producing recommendations tonational, provincial and local governments onan equitable sharing of the total revenue forthree fiscal years, beginning in April 2001.Two new proposals, dealing with the issues ofspending on social services and capital budg-eting at a provincial level, were released forpublic comment by the FFC, including therecommended Costed Norms Approach tothe Division of Revenue. The draft docu-ments, which formed part of the Project 2001research programme, were tabled inParliament in April 2000.

Budget CouncilThe Budget Council consists of the Ministerof Finance and the nine provincial executivecommittee members responsible for Finance.The Budget Council, as envisaged in Section41(2) of the Constitution, aims at strengthen-ing intergovernmental relations in addressingthe financial challenges facing provinces inSouth Africa.

The mission of the Council is to ensure thatthe country uses the available resources pro-ductively, efficiently and equitably to theadvantage of its people.

It recommends to the Cabinet the shareseach province should receive after taking intoaccount national priorities and FFC proposals.

Macro-economic strategyThe impressive recovery in the South Africaneconomy from global financial crises is indic-ative of a highly resilient economy. A range ofstrong economic indicators points towardsfurther growth acceleration over the next fewyears. This recovery reflects a strong improve-ment in economic fundamentals, whichinclude among other things:• the decline in the inflation rate, which is

expected to decline even further despitetemporary distortions caused by higherfood and oil prices

• sound fiscal policies and income redistribu-tion

• the benefits of a lower-interest-rate envir-onment

• benefits associated with stricter fiscal disci-pline, which will eliminate government dis-saving and pave the way for higher fixedinvestment spending.

There is a continued need for sound macro-economic management. In this respect, theGovernment aims to• take the leading role towards ensuring sus-

tainable growth through prudent eco-nomic management

• continue sound fiscal management• implement policies to enhance the do-

mestic savings performance of both thepublic and private sectors, with the aim ofimproving domestic investment

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• adhere to agreed targets in order to reduceinflation even further

• further open up South African markets fordomestic and international competition toenhance the competitiveness of the coun-try’s economy

• increase international market access fordomestic producers through regional andinternational trade agreements

• promote efficient financial marketsthrough an appropriate regulatory environ-ment. (See also Chapter: Economy.)

South African RevenueService (SARS)

The SARS, in terms of the South AfricanRevenue Service Act, 1997 (Act 34 of 1997),is an organ of State within the public admin-istration, but an institution outside the PublicService.

It aims to provide an improved, transparentand client-orientated service to ensure op-timum and equitable collection of revenues.Its main functions are to• collect

- all national taxes, duties and levies- revenue that may be accumulated under

any other legislation, as is agreed uponbetween SARS and an organ of State orinstitution entitled to the revenue

• protect the borders against illegal importa-tion and exportation of goods

• advise the Minister on all revenue-relatedmatters.

The Act established an advisory board, whichacts as a consultative body for the Ministerand the Commissioner of SARS on mattersconcerning the administration of the revenue-collecting system.

The SARS has made significant progress inenhancing its administrative capacity andovercoming important challenges to tax col-lection. It exceeded the printed revenue tar-get of R212,2 billion by R7,4 billion, as well asthe revised estimate of R215,5 billion by anadditional R4,1 billion in revenue for the yearended 31 March 2001.

In 2000, the SARS was tasked with imple-menting the most extensive set of tax reformsin South African history. Other achievementsinclude:• The implementation of new trade agree-

ments.• A successful campaign against tax fraud in

the retail industry.• Risk-based inspections at border posts. • The SARS became aware of serious tax and

duty evasion within the electronics industry,perpetrated by means of underevaluation,double invoicing, and bribery and corruptionof SARS officials. The SARS engaged the mainrole-players in that sector of the industry.

• The purpose was to obtain their co-operation so that self-auditing could beagreed upon and attained. This allowed fora shorter investigation period and a moreefficient use of SARS’s resources. Anothernoteworthy aspect of this investigation wasthat it involved all operational divisionswithin the SARS and also the SAPS and theNational Director of Public Protections(NDPP). A total of R200 million in assess-ments was raised. Criminal charges werelaid against eight people.

• The Constitutional Court upheld the pre-vailing right of SARS to collect outstandingtax while dispute resolution mechanismsare under way.

Sources of revenueThe main sources of income for the national

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The SARS launched a R130-million, three-year revamp in aneffort to improve efficiency, collect R14 billion in outstandingtaxes and improve relations with taxpayers. The newstructure will make the agency, which employs about 11 000people, resemble a modern, large-scale banking operation.

Part of the new system will be an upgrade of theinformation technology systems with the aim of permittingthe electronic submission of documentation.

Three separate categories will be created out of thefunctions currently centralised in 42 revenue offices aroundthe country. The three new divisions will be processing,compliance and taxpayer relations.

Seven compliance centres will be established to pro-actively audit high-risk cases, conduct special investigationsand recover outstanding debt. The compliance centres willalso handle CGT.

The new system will be rolled out gradually, starting in2001, and moving around the country in 2002 and 2003.

Information

Government are taxes, both direct and in-direct, on companies and individuals, and vari-ous duties, such as customs and excise duties.

The tax year runs from March 1 to the endof the following February.

In South Africa, income tax is levied onSouth African residents on the worldwideincome, with appropriate relief to avoid dou-ble tax. Non-residents are taxable on SouthAfrican-source income.

Tax is levied on taxable income, which,briefly, consists of gross income and less alldeductions authorised by the Income Tax Act,1962 (Act 58 of 1962), as amended. In thecase of individuals, tax is levied on taxableincome, which is determined in the samemanner as that of companies.

Dividends and interest earned by any natu-ral person under 65 years of age, up to R4 000 per annum, and persons 65 years andolder, up to R5 000 per annum, are exemptfrom taxation.

Interest is exempt when earned by non-res-idents who are absent from South Africa for183 days or more per year and who are notcarrying on business in South Africa. (Thisexemption does not apply to residents ofcountries in the common monetary area.)

In terms of the Income Tax Act, 1962 (Act58 of 1962), as from 1 March 2000 peoplewho owe the SARS money are charged inter-

est at a rate of 13%, while the interest rate atwhich the SARS refunds money it owes toprovisional taxpayers is 9%. Persons whoderive income from sources other than remu-neration, that is a trade, profession or invest-ments, as well as companies, must make twoprovisional tax payments during the course ofthe tax year. Provisional taxpayers may makea third ‘topping-up’ payment six months afterthe end of their tax year.

Tax on property donations is payable by thedonor on the value of the property that isdonated by him or her. It was announced inthe 2001 Budget that the rate of taxation bereduced from 25% to 20% from 1 October2001. The first R25 000 a year in donations isexempt from tax. Tax on royalties is levied ata rate of 12%.

Estate duty is payable on the taxable valueof the estate above R1 million at 25%.

Transfer duty is payable by purchasers offixed property. For companies, the rate is 10%.For individuals, the rate varies from 1% to 8%.

Companies were taxed at a rate of 30%for the 2000/01 tax year. In addition to this, asecondary tax is levied on companies at a rateof 12,5% on all income distributed by way ofdividends. A formula tax applies to gold-min-ing companies.

Customs duties are levied on a wide rangeof imports, while excise duties are collected

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National government revenue and expenditure as ratio of GDP

The graph illustrates the reduction of the fiscal deficit and national government revenue and expenditureas a ratio of GDP.Source: SARS

Tax revenue as % of GDP Total expenditure as % of GDP Total revenue as % of GDP

20

22

24

26

28

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1996/97 1997/98 1998/99 1999/00

on wine, beer, spirits, tobacco products,petrol and ‘luxury’ products.

The value-added tax (VAT) rate hasremained at 14% since 1993.

A number of essential goods are zero-rated. VAT is levied on the supply of goodsand services at all stages of the productionand distribution chain, as well as on theimportation of goods and certain services.

VAT is also levied on all financial servicesexcept premiums payable for life assurancepolicies; on contributions to pension, pro-vident, retirement annuity and medical aidfunds; and on compulsory charges built intothe selling price of units in unit trustschemes.

On 16 November 1998 a new VAT exportincentive scheme was introduced. This waseffectively the first step in addressing tax eva-sion through fictitious exports, which theSARS estimates is costing the fiscus aboutR100 million a month.

The scheme provides for refunds on VAT onexports. The refund to the foreign purchaserwill be made at the point of export to ensurethat the goods actually leave South Africa. Asfrom 4 January 1999, VAT has been imposedon all imports from South Africa’s neighbour-ing countries. This step is part of the effort toclamp down on tax evasion. The moving ofthe collection points to the borders ensures amore efficient collection of VAT. It alsoreduces VAT losses through round-tripping,where goods were exported to Botswana,Lesotho, Namibia and Swaziland (BLNS)countries and then re-imported and sold inSouth Africa without VAT.

The arrangements ensure effective control by• curbing fraudulent VAT refund claims on

exports• capturing and validating export and import

statistical information• anti-smuggling and control measures over

illegal, restricted and prohibited importsand exports.

The collection of VAT on imports is effected atthe port of entry and time of importationunless otherwise arranged through participa-tion in a deferment scheme.

Proposals aimed at streamlining the VATsystem and generating an additional R4 bil-lion in revenue were implemented in 2000.These included increasing the threshold ofannual turnover for compulsory VAT registra-tions from R150 000 to R300 000. A lowerthreshold of R20 000 annual turnover for vol-untary registrations of VAT vendors was alsoimplemented.

SuccessesThe SARS is intensifying its capacity to pro-secute tax defaulters. Qualified legal officershave been appointed at regional and localoffices to assist in this process.

Tax dodgers who are convicted face sen-tences of up to two years’ imprisonmentand/or fines of R1 000 per count of tax eva-sion. In addition to possible sentences forfraud, the Receiver of Revenue can also imposefines of up to 200% of the tax evaded.

The SARS has achieved considerable suc-cess in its base-broadening initiative, aimed atregistering persons, businesses and employ-ers and reducing the rate of non-compliancewith tax legislation.

Tax-base broadening also involves cultivatinga culture of voluntary compliance and changingthe adversarial relationship between the tax col-lector and the taxpayer. The SARS is makingprogress in this regard by being visible, accessi-ble and fair in its dealings with taxpayers.

The Minister of Finance announced anincrease in the skills levy, from 0,5% to 1% ofthe payroll. This increase was expected toraise collections from R1,3 billion in 2000/01to R2,8 billion in 2001/02.

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The Deputy Minister of Finance, Mr Mandisi Mpahlwa,and American Ambassador, Mr Delano Lewis, signed adevelopment co-operation declaration in December2000, to mark United States Agency for InternationalDevelopment (USAID) assistance to South Africa. USAIDprovided more than R200 million (US$26,2 million) indirect support to the South African Government fordevelopment priorities during 2000, bringing the totalgovernment-to-government development assistanceamount to more than R1,6 billion (about $226 million)since bilateral co-operation was established after the1994 election.

Information

A formal process to appeal against penal-ties or any other customs practice has beenestablished. This enhances the facilitation oflegitimate trade, and ensures higher levels ofcompliance.

Improved controls of Duty CreditCertificates detected fraud of R12,5 million.

The following trade protocol agreementswere implemented:• the SADC Protocol on Trade• South Africa-European Union (EU) Free

Trade Agreement• Africa Growth and Opportunity Act.A passenger risk profiling system was devel-oped. The use of pre-arrival information hasled to greater travel facilitation and higherdetection of customs violations.

CustomsControl at border posts has been improved.The number of ports or places of entry andexit for commercial goods by road has beenreduced from 52 to 19, and the infrastructurehas been upgraded at all 17 designated landborder posts between South Africa and theBLNS countries.

These border posts are Ramatlabama,Skilpadsnek, Kopfontein and Groblers Bridgein Botswana; Caledonspoort, FicksburgBridge, Maseru Bridge, Van Rooyenshek andQacha’s Nek in Lesotho; Vioolsdrif and Nakopin Namibia; and Mananga, Jeppes Reef,Oshoek, Nerston, Mahamba and Golela inSwaziland. Five railway stations (Upington,Mafikeng, Maseru Bridge, Germiston andGolela) were also prescribed as ports of entryand exit for clearance of cross-border move-ment of goods.

The number of airports with internationalstatus for cargo clearance was reduced from12 to 10. They are:• Johannesburg International Airport• Durban International Airport• Cape Town International Airport• Port Elizabeth Airport• Bloemfontein Airport• Nelspruit Airport• Upington Airport• Gateway Airport (in Pietersburg)

• Lanseria Airport • Mafikeng Airport.Seven seaports were redesignated for cargoclearance: • Richards Bay• Durban• East London• Port Elizabeth• Mossel Bay• Cape Town • Saldanha.

ExciseExcise forms part of the Indirect Taxes Sectionof the Operations Division. Changes are beingmade to ensure that, among other things,budgeted amounts are collected to ensurethat smuggling and tax evasion are eliminated. Drug seizures to the value ofR1,241 billion were made at various customsentry points. The SAPS and the SpecialOperations Division of the NDPP provided cru-cial assistance.

Double taxation agreementsIn the 2000/01 fiscal year, considerable pro-gress was once again made in reachingagreements with other countries for theavoidance of double taxation in respect ofincome accruing to South African taxpayersfrom foreign sources or to foreign taxpayersfrom South African sources. The present posi-tion is as follows:• Comprehensive agreements are in place

with Algeria, Australia, Austria, Belgium,Botswana, Canada, Croatia, Cyprus, theCzech Republic, Denmark, Egypt, Finland,France, Germany, Hungary, India, Indo-nesia, Iran, Ireland, Israel, Italy, Japan,Korea, Lesotho, Luxembourg, Malawi,Malta, Mauritius, Namibia, the Netherlands,Norway, Pakistan, the People’s Republic ofChina, Poland, Romania, the RussianFederation, Singapore, the Slovak Republic,Swaziland, Sweden, Switzerland, Thailand,Tunisia, the United Kingdom (UK), theUnited States, Zambia and Zimbabwe. Thetreaty with the UK extends also to Grenada,the Seychelles and Sierra Leone.

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• Limited sea and air transport agreementsexist with Brazil, Greece, Portugal and Spain.

• Comprehensive agreements have beenratified with Greece, Nigeria and Uganda.

• A comprehensive agreement has beensigned but not ratified with the Seychelles.

• Comprehensive agreements have beennegotiated or renegotiated, but notsigned, with Botswana, Bulgaria, Estonia,Ethiopia, Gabon, Germany, Kuwait, Latvia,Lithuania, Malawi, Malaysia, Morocco, theNetherlands, New Zealand, Oman,Portugal, Spain, Swaziland, Tanzania,Turkey, Ukraine, the United Arab Emirates,the UK, Zambia and Zimbabwe.

• Comprehensive agreements are beingnegotiated or renegotiated but have notbeen finalised with Bangladesh,Mozambique, Qatar and Sri Lanka. Wheretreaties are being renegotiated, the existingtreaties remain effective until a new agree-ment is finalised.

A number of other countries have expressedthe desire to negotiate double taxation agree-ments with South Africa.

Agreements for mutual administrative assistance betweencustoms administrations These agreements cover all aspects of assist-ance, including exchange of information,technical assistance, surveillance, investiga-tions and visits by officials. During 2000, thetext of agreements with the Netherlands andNorway was finalised. It is envisaged that acomprehensive network will be established inthe future, as a number of other countrieshave expressed the desire to negotiate similaragreements.

International VAT agreementsDuring 2000, an agreement for the avoid-ance of double taxation, exchange of in-formation and mutual assistance on VAT wassigned with Lesotho.

Another is in the negotiation phase withMalawi, and a number of other countries insouthern Africa have expressed the desire tonegotiate similar agreements.

TransformationThe SARS launched Siyakha, a transformationprogramme aimed at aligning the operationwith international best practices.

This is the first step toward the funda-mental overhaul and transformation of theSARS operation and structure. Siyakha, whichmeans ‘we are building’, was born out of aprocess of consultation with different stake-holders including the SARS and taxpayers.

Gambling and lotteries

The gambling industry in South Africa is regu-lated by the National Gambling Act, 1996(Act 33 of 1996). The Act provides for the• regulation and coordination of certain matters

relating to casinos, gambling and wagering• promotion of uniform norms and standards• establishment of the National Gambling

Board.In September 1999 the Minister of Trade andIndustry signed the National Lottery Licenceagreement with Uthingo Management (Pty)Ltd, the official lottery operator. It is expectedthat the national lottery will generate morethan R14 billion over five years, which will beused for reconstruction and developmentprogrammes, arts and culture, sport, charitiesand other causes.

The first lottery draw took take place inMarch 2000. More than 5 000 retailers, cov-ering all the magisterial districts in the coun-try, were appointed to sell tickets. Sixty-fournew millionaires were created in the first yearof the Lotto’s existence.

Part of Lotto sales revenue goes to goodcauses, including charities and governmentdevelopment projects. As part of the emer-gency funding under the National LotteriesDistribution Trust Fund, a total of R4,102 mil-lion was paid out to cash-strapped charitableorganisations between December 2000 andJanuary 2001. A total of 80 organisationsqualified for grants under the criteria set interms of regulations of the Lotteries Act,1997 (Act 57 of 1997). Grants ranging fromR1 000 to R500 000 were awarded to organ-isations throughout the country.

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In addition to organisational activities andlegal particulars, organisations had to provideverifiable proof that they were facing financialdifficulties as a result of the suspension ofprevious lotteries and scratch cards with theimplementation of the National Lottery.

By May 2001, some R350 million was avail-able for distribution. By that date, 215 applica-tions for funding had been received from chari-ties, three from sport and recreation bodies, andsix from arts, culture and national organisations.

State expenditure

The National Treasury plays a pivotal role inthe management of government expenditure.

The National Treasury determines thefinancial management norms and standardsand sets reporting policy that guides theAuditor-General in the performance of his/heraudit. It also assists Parliament through theStanding Committee on Public Accounts astheir agent in certain aspects of their recom-mendations and formulation of correctiveactions. The National Treasury closely mon-itors the performance of State departmentsand is obliged to report any deviations to theAuditor-General.

The Treasury, furthermore, maintains trans-parent and fair tendering processes, as well asaccounting, logistic and personnel systems. Itmanages and operates computer and Internetservices, sets and maintains standards andnorms for treasury and logistics, acts as bankerfor national departments, and oversees logist-ical control of stocks and assets.

Treasury

Treasury norms and standardsIn terms of Section 216(1)(c) of the Constitu-tion, the National Treasury must prescribemeasures to ensure both transparency andexpenditure control in each sphere of govern-ment by introducing uniform treasury normsand standards. These treasury norms andstandards aim at deregulating financial con-trols by granting accounting officers ofspending agencies more autonomy in finan-

cial decision-making within the ambits ofimpending financial legislation.

Budget evaluationsThe National Treasury plays an important rolein supporting the economic policy to whichthe Government has committed itself. Itdetermines the macro limit on expenditure,which is then matched with requests fromdepartments in line with affordability and sus-tainability of services.

Based on this limit, all national departmentsare requested to submit budget proposals forthe following financial year to the NationalTreasury by using the detailed budget manualissued by the Treasury.

Early Warning SystemThe Early Warning System was first estab-lished in 1997 to improve on the shortcom-ings of the earlier monitoring and reportingprocess on the Treasury’s spending trends.Any likely under- or overexpenditure isbrought to the attention of the Cabinet sothat the relevant Minister can ensure thatappropriate action is taken.

The introduction of the System has alsoassisted in monthly monitoring of the expenditure trends of provincial departmentsby having provincial treasuries reporting to theNational Treasury in a prescribed format. Theinformation derived from the early warningreports is used for advising the Budget Counciland the Cabinet. The Minister of Finance is alsokept informed on a regular basis of the earlywarning report results from the provinces.

Advisory servicesThe National Treasury and Department ofPublic Service and Administration representgovernment, as the employer, in the annualnegotiations on the salaries and service bene-fits of public servants.

Financial policies, systems andskills developmentThe National Treasury is responsible for thefinancial management systems and trainingfor government.

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The services delivered support the follow-ing areas:• financial systems, which comprise the Per-

sonnel and Salary System, LogisticalInformation System, Financial Manage-ment System, Basic Accounting Systemand Management Information System

• banking services and financial reporting forgovernment

• financial management capacity developmentin national and provincial governments.

Procurement The Constitution prescribes a fair, equitable,transparent, competitive and cost-effective pro-curement system. The State Tender Board func-tions in close collaboration with the private sec-tor. All procurement via the tendering systementails a thorough evaluation of all requests byconsumer departments as well as their recom-mendations for the awarding of tenders.

The National Treasury was elected to pilot aprogramme of procurement reform and sup-ply management to give effect to thePreferential Procurement Policy FrameworkAct, 2000. It was to make the tendering sys-tem accessible to black companies and small,medium and micro enterprises.

As part of the public-sector procurementreform, Cabinet approved general procure-ment guidelines that are applicable for thewhole public sector.

These guidelines prescribe five pillars onwhich all procurement should be based –value for money, open and effective competi-tion, ethics and fair dealings, accountabilityand reporting, and equity. Cabinet alsoapproved the introduction of the just-in-timedelivery principle, which will include optimis-ing and rationalising all government stores orwarehouses.

The alignment of the procurement systemsat national and provincial levels (to devolveaccountability to accounting officers as pre-scribed in the Public Finance ManagementAct, 1999) will in due course lead to the abo-lition of all tender boards. Over the medium-term, a common service-provider will replacethe (national) Office of the State Tender Boardand will, inter alia, be responsible for the man-agement of transversal contracts. Over thenext two years, all decisions regarding ad hocprocurement contracts at national level will bedevolved to accounting officers.

Auditor-GeneralThe Office of the Auditor-General is one ofthe State institutions supporting constitution-al democracy as set up by Chapter 9 of theConstitution. The Constitution guaranteesthe independence and impartiality of theAuditor-General.

The Auditor-General is appointed statutor-ily by the President as the independent audi-

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Terms of trade and exchange rate of the rand – percentage changes

Terms of trade1) Exchange rate2)

Period Including Excluding Nominal Real US Dollar British Euro Japanesegold (5037Q) gold (5036Q) effective effective Pound Yen

exchange rate2) exchange rate3) (5314Q)1994 3,2 2,5 -7,6 -1,6 -8,0 -9,7 -9,0 -15,61995 -1,5 -0,5 -7,2 -1,5 -2,2 -5,1 -10,5 -10,01996 1,4 -0,7 -11,2 -6,3 -15,0 -13,9 -12,3 -1,91997 -1,2 1,2 0,4 6,5 -7,3 -11,6 2,8 3,31998 -0,9 -0,7 -11,7 -9,2 -16,1 -17,0 -15,9 -9,31999 -2,4 -2,0 -8,5 -5,1 -10,3 -8,2 -5,8 -21,92000 -1,4 -1,5 -5,1 -3,0 -11,4 -5,6 2,0 -16,2

1) Change compared with preceding period2) Weighted average exchange rate against most important currencies3) Percentage changes of average

Source: South African Reserve Bank – Quarterly Bulletin

tor of the executive authority. The Office ofthe Auditor-General became independent ofthe executive authority on 1 April 1993, andoperates as a juristic body under appropriateparliamentary control, namely the AuditCommission.

The Auditor-General’s appointment, condi-tions of service, powers, duties and relatedmatters are covered by the Constitution andthe Auditor-General Act, 1995 (Act 12 of1995).

The Deputy Auditor-General is the chiefexecutive officer (CEO) and accounting officerand is responsible for the efficient manage-ment and administration of the Office. Sevencorporate executive managers assist the CEO.

The Office has a personnel complement of1 350, and a budget of R418,8 million, andeach year audits some 1 300 national, provin-cial and local government departments aswell as a number of miscellaneous accounts.

Government auditing involves the invest-igation and/or evaluation of financial man-agement practices, financial statements, performance, and compliance with require-ments by government and related institu-tions. The objective is to form an opinion onwhether the financial statements fairly pres-ent the results of the operations of an auditeeat a given time and whether laws and regula-tions have been complied with. It also formsan opinion on control to ensure that publicfunds and assets are safeguarded, accountingsystems are functioning properly, and publicmonies are spent effectively.

The Office contributed to significantimprovements to the regular reporting onnational government accounts. These include:• accounting for environmental assets, espe-

cially fresh water.• the formulation of principles and indicators

for municipal performance reporting.• the finalisation and imminent implementa-

tion of improved municipal accountingpractices.

• preparation of draft formats for the annualfinancial statements required of accountingofficers in terms of the Public FinanceManagement Act, 1999.

• accounting for assets and liabilities ondepartmental balance sheets, togetherwith development of principles for consol-idated annual financial statements.

• the Institute for Public Finance andAuditing, established in 1999 for the pro-fessional development of staff in govern-ment, is fully operational and is imple-menting an active programme of training.It has implemented a financial manage-ment improvement programme that is sup-ported by the EU.

In accordance with the Public FinanceManagement Act, 1999, the Auditor-Generalhas the power to investigate and audit theactivities of public entities without the necessary approval of the CEO or board ofdirectors, if he or she considers it to be in thepublic interest or upon receipt of a complaint.

All the companies listed in terms of the Acthave to report on their financial affairs andperformance.

Among these are the Post Office, Telkom,Eskom and Transnet. Provincial auditors areresponsible for the management of all auditsof provincial governments, specific statutorybodies and municipalities. They are alsoresponsible for related reporting to theprovincial legislatures and other provincialand local government institutions.

Financial sector

South African Reserve BankThe South African Reserve Bank and theMinistry of Finance form the monetaryauthority in South Africa. The Reserve Bankhas been given a significant degree of auto-nomy in terms of the Constitution and mustperform its functions independently,although the Bank must hold regular consul-tations with the Minister of Finance. Its man-agement, powers and functions are governedby the South African Reserve Bank Act, 1989(Act 90 of 1989).

The Reserve Bank formulates and imple-ments monetary policy and regulates the sup-ply (availability) of money by influencing itscost. Monetary policy is guided by the object-

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ives of the Reserve Bank, which are formulat-ed to ensure financial stability. Consistentcombating of inflation is the cornerstone ofthe Bank’s policy. A formal inflation-targetingmonetary policy framework has been adopt-ed since 2000.

Monetary policy is set by the Bank’sMonetary Policy Committee (MPC).

The Committee, consisting of the ReserveBank’s governors and other senior officials,held its inaugural meeting in October 1999. Itmeets every six weeks, after which it issues astatement indicating its assessment of theeconomy and policy changes, if any.

The Reserve Bank is responsible for• assisting the South African Government in

formulating and implementing macro-eco-nomic policy

• formulating and implementing monetarypolicy in such a way that the primary goalof the Bank is achieved in the interest ofthe community it serves

• ensuring that the South African money andbanking system as a whole is sound, meetsthe requirements of the community, andkeeps abreast of international financedevelopments

• informing the South African communityand all interested parties abroad aboutmonetary policy and the South African eco-nomic situation in general.

The Reserve Bank is managed by a board of14 directors, seven of whom are elected bythe shareholders of the Bank and representcommerce, finance, industry and agriculture.The President of South Africa appoints thegovernor, three deputy governors and threeother directors to the Reserve Bank’s board ofdirectors.

The Reserve Bank acts as the central bank ofSouth Africa and as banker to other bankinginstitutions. It provides accommodation tobanks and is the custodian of the statutory cashreserves, which all registered banks are requiredto maintain. It also provides facilities for clearingand settlement of inter-bank obligations.

On 9 March 1998, the Bank implementeda system of repurchase transactions (repos) asthe main instrument in managing the liquid-

ity in the money market. The repo rate is theprice at which the central bank lends cash tothe banking system. The repo rate hasbecome the most important indicator forshort-term interest rates.

The repurchase agreements entered intobetween the Reserve Bank and banks areconducted on the basis of an outright buy-and-sell transaction, with a full transfer ofownership of the underlying assets. The sys-tem also provides for a ‘marginal lending facil-ity’, which replaces the previous ‘discount win-dow’. This facility is available to banks at theirinitiative to bridge overnight liquidity needs.

The marginal lending facility forms an in-tegrated part of the South African MultipleOption Settlement (SAMOS) system, whichcame into operation in March 1998.

This enables banks to make payments toand receive payments from the Reserve Bank,through their settlement accounts held in thebooks of the Reserve Bank, electronically.Daily settlements of inter-bank exposures areeffected through the SAMOS system.

The movement to real-time settlementsbrought inter-bank settlement practices morein line with internationally-accepted stand-ards. In terms of this system, all registeredbanks are able to open settlement and loanaccounts at the Reserve Bank.

Payments through the system can only bemade if a bank has sufficient funds in its set-tlement account. Such funds can be obtainedthrough inter-bank transfers, re-purchasetransactions, other types of liquidity-creatinginstruments of the Reserve Bank, or the mar-ginal lending facility. The SAMOS system,however, allows the banks to receive fundsobtained in the inter-bank market directly intheir settlement accounts in the ReserveBank’s books.

The Reserve Bank has various instrumentsto achieve its objectives. These includechanges in the marginal lending facility; open-market transactions, including selling its owndebentures; changes in requirements withregard to cash reserves of banking institutions;and controlling the liquidity in the money market through repurchase transactions.

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The Bank undertakes national and interna-tional transactions on behalf of the State, andacts for government in transactions with theInternational Monetary Fund (IMF).

The Reserve Bank is the custodian of thegreater part of South Africa’s gold and otherforeign exchange reserves. Previously, all goldproduced was sold to the Bank, which de-cided on the marketing of the precious metal,as well as on currencies and institutions inwhich foreign exchange reserves were kept.From December 1997, the Bank started towithdraw from the marketing of gold – aprocess that was completed by 2000.

The Reserve Bank issues banknotes (printedby the South African Bank Note Company, awholly-owned subsidiary of the Reserve Bank)and controls the South African MintCompany (SA Mint).

Monetary policy

From about 1989, the main objective of mon-etary policy has been to secure a stable finan-cial environment within which economic de-cisions are no longer influenced by high andvariable inflation.

The Reserve Bank has therefore not appliedmonetary policy as a short-term counter-

cyclical instrument but has rather aimed atcreating financial stability, which is seen as anecessary precondition for growth and dev-elopment in the long run. To achieve theobjective of low and stable inflation, theReserve Bank adopted a policy framework,which was initially anchored by the setting ofguidelines for growth in the broad moneysupply (M3). In later years, the predictabilityof the relationship between growth in themoney supply and growth in the aggregatenominal income became less certain. Aschanges in the money supply became a lessreliable indicator of changes in nominalincome in the short-to medium-term, theBank decided to attach less significance to thegrowth in M3. Instead, movements in otherfinancial and economic indicators were alsothoroughly assessed during deliberations onpolicy issues. Because changes in money andcredit totals are major determinants of infla-tion in the long run, they were neverthelessstill seen as important variables, which couldbe closely monitored by decision-makers.

The framework for monetary policy wastightened and made more transparent byadopting formal inflation targeting, in linewith developments in many other centralbanks around the globe. At the reading ofthe Budget on 23 February 2000, the Ministerof Finance announced that his Ministry andthe Reserve Bank had agreed on an inflationtarget band of 3% to 6%. The objective is tobring inflation within this band by the year2002. For targeting purposes, inflation will bemeasured by a new consumer price indexcalled CPIX, which is derived by excludingmortgage interest costs from the headlineconsumer price index. Technically, the annualaverage rate of CPIX inflation for 2002 is tar-geted. The Reserve Bank has independence inadjusting its policies to achieve this target.

Despite the sharp rise in international oilprices in 2000, consumer price inflation inSouth Africa remained moderate. The rise inoil prices and the prices of imported goodsled to an increase in the CPIX inflation meas-ure to 8,2% for the year to October 2000. ByDecember 2000, CPIX decreased to 7,6%

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The SA Mint was awarded a tender in January 2001 tosupply low-denomination Euro currency coin blanks toseveral European countries. This came as Europe wasmoving towards the establishment of the Euro as asingle currency.

The SA Mint had obtained fixed contracts with theNetherlands, Ireland and Portugal, after two years ofcompeting against other mint companies for the supplyof Euro coin blanks. The contract is for the productionof one, two and five-cent pieces.

The contracts involve the supply of more than 200 million Euro coin blanks to each country. SA Mint isalready supplying Euro coin blanks to Germany. Othercountries South Africa supplies with blank coins includeEgypt, Israel, Lithuania, India, Morocco and Singapore.

SA Mint also mints coins with a face value for manycountries, including Argentina, Bangladesh, Brunei,China, Estonia, New Zealand, Namibia, Swaziland andSudan.

The company is 100% owned by the South AfricanReserve Bank. The SA Mint supplies the Bank with, onaverage, between 800 million and 1,1 billion coinsannually.

Information

and a steady decline during the course of2001 was expected.

Since early 1998, monetary policy has beenstrongly influenced by developments in theforeign-exchange market, but sight was neverlost of the overriding objective of financial andoverall price stability. In the wake of theemerging markets crisis, interest rates rose torecord levels during the third quarter of 1998.

Interest rates have fallen steadily sinceOctober 1998. By early 2000, the privatebanks’ prime overdraft rates had, for example,receded from a 1998 peak value of 25,5% to14,5%. Similarly, in January 2000, the MPCreduced the Reserve Bank’s repo rate to11,75% – more than 10 percentage pointsbelow its peak value in 1998.

During 2000, monetary policy was onlyadjusted on one more occasion. In October2000, the sustained rise in oil prices and aweakening of the exchange rate of the Randincreased the risks and fears of secondaryrounds of inflation, pushing the 2002 infla-tion rate above the 3–6% target range. To demonstrate the seriousness with whichthe Reserve Bank would counter such poten-tial overshooting, the repo rate was pre-emp-tively raised to 12%. The private banks, how-ever, kept their prime lending ratesunchanged.

Despite the generalised fall in internationalinterest rates during the first quarter of 2001,the MPC maintained the repo rate at 12%.Although the international oil price had sta-bilised by the end of 2000, concernsremained about the possible impact on infla-tion emanating from the continued weaknessof the Rand and the higher levels of domesticexpenditure.

Reflecting the generally stronger perform-ance of the South African economy, the year-on-year growth rate of the broad monetaryaggregate M3 accelerated from a low pointof 5,5% in August 1999 to 12,8% in March2001. Improved consumer sentiment wasevident in an acceleration in instalment salecredit, while stronger conditions in the prop-erty market underpinned a fairly rapidincrease in banks’ mortagage advances.

Financial Services Board (FSB)

The FSB is an independent statutory bodyfinanced by the financial services industryitself. It supervises the exercise of control overthe activities of financial institutions andfinancial services, excluding banks and mu-tual banks. It acts in an advisory capacity tothe Minister of Finance.

The FSB supervises the exercise of controlover such institutions and services in termsof 1 416 parliamentary Acts, which entrustregulatory functions to the Registrar of long-term insurance, short-term insurance, friend-ly societies, pension funds, unit trust com-panies, stock exchanges and financial mar-kets. These functions converge in the office ofthe Executive Officer, acting with the othermembers of the executive and heads of thevarious departments of the FSB’s administra-tive infrastructure.

Included in such functions are the follow-ing: regulatory control over the participationbonds industry, certain trust and depositoryinstitutions, as well as central security depos-itories responsible for the safe custody ofsecurities.

The FSB is also responsible for the financialsupervision of the Road Accident Fund.

Excluded from the FSB’s responsibilities aresome areas involving listing requirements orpublic issues, takeovers and mergers.

The Insider Trading Act, 1998 (Act 135 of1998), came into operation in January 1999and provides for the establishment of theInsider Trading Directorate at the FSB. The Actmakes it easier to impose criminal sanctionsand, in addition, the FSB can take civil actionagainst offenders.

In terms of the Insider Trading Act, 1998,the following entities nominated represen-tatives to serve on the Insider Trading Direct-orate: the JSE Securities Exchange (JSE), theSouth African Futures Exchange (SAFEX), theBond Exchange of South Africa (BESA), theLaw Society of South Africa, and the SouthAfrican Institute of Chartered Accountants. Inaddition, a person from the insurance andbanking industry and two business persons

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were also appointed to the Directorate. Allthe appointments were made by the Ministerof Finance.

The Act confers wide powers of investiga-tion on the FSB, including powers of inter-rogation, search and seizure. The findings ofthe investigations are placed before theDirectorate on a two-monthly basis. TheDirectorate has the power to issue civil sum-mons against offenders for the repayment ofan amount of up to four times any profitmade or loss avoided on illegal transactions.

A criminal conviction of insider tradingcan result in a fine of up to R2 million andimprisonment of up to 10 years.

The Executive Officer is provided with anarmoury of regulatory sanctions, includingthe cancellation of authorisation to supplyfinancial services.

The Officer has formal powers of investiga-tion to which criminal sanctions attach in theevent of obstruction. It can apply to court foran interdict or curatorship of financial institu-tions if required. He or she can, in certain cir-cumstances, also petition for the winding upor placing under judicial management of cer-tain financial institutions such as insurers andpension funds.

These powers of intervention do not, how-ever, take the risk out of an investment madeat a financial institution. All investments carrysome degree of risk, whether relating to busi-ness or general economic conditions.

The Inspection of Financial Institutions Act,1998 (Act 80 of 1998), affords the FSBgreater policing powers. The Act allows theFSB to obtain warrants for searching andquestioning third parties who might haveinformation about unregistered financial insti-tutions, such as those providing insurance orinvestment services.

The FSB is assisted by an advisory board onfinancial markets, and advisory committeeson long- and short-term insurance, pensionfunds and unit trusts.

It maintains a close relationship with allexisting industry associations, inter alia, inrespect of unit trusts, participation bonds,fund managers, insurance and pensions. It

liaises with international regulatory organisa-tions and is a member of the InternationalOrganisation of Securities Commissions, theInternational Association of InsuranceSupervisors, and the African Association ofInsurance Supervisors.

On the domestic scene, it liaises with otherbodies such as the Public Accountants andAuditors, Consumers Affairs Committee andvarious government departments, as well aswith prosecuting authorities such as theCommercial Branch of the SAPS, theInvestigating Directorate: Serious EconomicOffences, and the NDPP.

The FSB Amendment Act, 2000 (Act 12 of2000), seeks to change the Board’s functionsfrom ‘exercising control’ over financial institu-tions and services to ‘supervising’ their ‘com-pliance with financial regulatory laws’. It alsoadds the function of promoting investor edu-cation.

The FSB will phase out the regulation ofmaximum insurance commission in the me-dium to long term. The commission, payableto intermediaries by or on behalf of insurersfor the selling of insurance products in SouthAfrica, is regulated by imposing a maximumlevel of commission calculated as a percent-age of premium (also referred to as capping).

A financial system stability assessment bythe IMF and World Bank has indicated thatthe continuing regulation of maximum com-mission is a weakness in the South Africaninsurance industry and inconsistent withinternational best-practice.

The timing of decapping depends on a suc-cessful evaluation and implementation of theproposed Policyholder Protection Rules andConsumer Education Programme.

The Compliance Institute of South Africa,set up by the FSB, envisaged that new rulesrequiring disclosure of commissions andexpenses that go into the costing of productsalongside other product information wouldbecome effective in 2001. The FinancialAdvisory and Intermediary Services Bill willaffect all financial service institutions. Itrequires financial service-providers to beauthorised to operate in South Africa.

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The banking industry

Currently 60 banks, including 15 branches offoreign banks, and three mutual banks areregistered with the Office of the Registrar ofBanks. Furthermore, 63 foreign banks haveauthorised representative offices in SouthAfrica. The banking institutions collectivelyemploy 122 700 workers at 6 486 offices.

Four major groups dominate the SouthAfrican banking sector: ABSA Group Ltd,Standard Bank Investment Corporation Ltd,First National Bank Holdings Ltd and NedcorLtd. These groups maintain extensive branchnetworks across all nine provinces, andtogether hold 69% of the total assets of thebanking sector.

The major banks offer a wide range of ser-vices to both individual and corporate cus-tomers. One-stop relationship banking, withits emphasis on universal banking, instead ofisolated services, has gained importance.Nevertheless, several banks specialise in pro-viding merchant banking services, securitiesunderwriting or services in other niche areas.

South African regulatory authorities havepursued a market-orientated regulatoryapproach since 1980. Beginning in that year,previously applicable credit ceilings wereabolished, interest rates were freed, andbanks’ previously high cash-reserve and liq-uid-asset requirements were reduced.

The cash-reserve requirement was, how-ever, subsequently increased in March 1995,in order to tighten liquidity and to restrain thehigh level of credit extension.

Several new banks have been registeredand competition has intensified, both amongbanks and between banks and other financialservice-providers. With double-digit inflationup to the early nineties, the assets held in thebanking sector have expanded rapidly, fromR39 billion in 1980 to R819 billion inDecember 2000.

Profit margins were significantly reducedtowards the end of the eighties, when intensi-fied competition coincided with a relativelytight monetary policy. As a result, the industryconsolidated and rationalised, and several

institutions merged with, or were acquired by,other banks. Effective utilisation of expensivetechnology, expertise and infrastructure alsoplayed a role in the rationalisation process.

Considerable costs were incurred in con-nection with this rationalisation. A largeamount of non-performing debt was writtenoff or provided for as a consequence of therecession between 1989 and 1993 and theturbulence in 1998.

By 2000, however, industry-wide netincome before taxation had begun toimprove, rising to R11,6 billion, comparedwith R3,1 billion in 1992.

Industry-wide net income after tax rosefrom 0,7% of total assets in 1992 to 1,1% in2000. Industry-wide net income after tax as apercentage of equity dropped from 14% in1992 to 13,1% in 2000.

The change in focus of the regulatoryauthorities from direct control to deregulationhas been accompanied by an emphasis onproper capitalisation, sound risk-manage-ment procedures and greater disclosure.

South Africa adheres to the capital ad-equacy guidelines for banks, promulgated bythe Bank for International Settlements. Therequirement to maintain capital equal to thefull ratio of 8% of risk-weighted assetsbecame effective in January 1995.

By 2000, the banking sector as a wholehad a ratio of capital to risk-weighted assetsof 12,5%.

Many demands are now being made onSouth African banking institutions to extendtheir activities in South Africa in order toaccommodate the banking needs of theunderprivileged, and to provide more fundsfor housing, export financing, agriculture andsmall business development.

The considerable increase in demand forcommunity-based banking during recentyears led to the implementation of the MutualBanks Act, 1993 (Act 124 of 1993), in January1994. The Act, which aims to fill the gapbetween the informal and formal financialsectors, provides the broader community withaccess to sophisticated banking, whilst beingdirected towards community-based activities.

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The two permanent mutual building soci-eties existing at the end of 1993 became mu-tual banks (that is, banks without equity capital). Currently there are three mutualbanks.

The regulations relating to banks werecomprehensively revised and modernised dur-ing 2000, ensuring South Africa’s continuedadherence to best-practice. On-site supervi-sion became fully operational, and measuresto counter money laundering have beenincluded in the Prevention of OrganisedCrime Act, 1998 (Act 121 of 1998).

The microlending industry

According to the Department of Trade andIndustry, there are approximately 30 000microlenders operating in South Africa,with an estimated turnover of R6,5 billionto R8,5 billion annually.

A process of regulating and enhancing thecredibility of the microlending industry wasinitiated by the Minister of Trade and Industrya few years ago.

In May 1999, the Department announcedchanges to laws governing the industry.Amendments to the Usury Act, 1968 (Act 73of 1968), include three provisions: cappinginterest rates at 10 times prime lending rate,increasing the loan ceiling from R6 000 toR10 000, and creating a system to compelmicrolenders to become members of a regulatory authority. Players in the industrywere required to register with the MicroFinance Regulatory Council (MFRC) by 15 September 1999.

According to an Appeal Court ruling in July2000, microlenders will no longer be allowedto hold the bank cards and personal identi-fication numbers of their clients as security.

A National Loans Register for the sectorwas launched in November 2000 by theMFRC to enable assessment of the ability ofprospective borrowers to afford repaymentson loans. The Register will accommodate 1 000 MFRC-registered lenders with nearly 6 000 branches and a client base of morethan 3,5 million borrowers.

Insurance companies

Short-term (non-life) insurance is concernedprimarily with risk assessment. The contractsusually run from year to year and can be can-celled by either party. These contracts apply toengineering, guarantee, liability, motor acci-dent, health, property, transportation and mis-cellaneous insurance. In 1999, the total assetsof short-term insurers amounted to R60 billion(including the Road Accident Fund) accordingto the South African Reserve Bank.

In essence, long-term insurance consists oflife, assistance (which includes industrial andfuneral), sinking fund and disability insurance.Long-term insurance and pension and prov-ident funds are concerned with maximisinginvestment results, and life insurance is dom-inant. Once a contract has been entered into,it cannot be cancelled by the long-term in-surer. According to the South African ReserveBank, the total assets of long-term insurerswere R664,5 billion in 1999.

The Insurance Second Amendment Act,1998 (Act 51 of 1998), paved the way for thedemutualisation of mutual societies into pub-lic companies. The two largest mutual insur-ance companies are Sanlam and Old Mutual.Sanlam demutualised in October 1998, andwas listed as a public company on the JSE on30 November 1998, with about two millionmembers becoming shareholders.

Old Mutual demutualised in June 1999 andwas listed on the JSE and London StockExchange on 12 July 1999.

New Policyholder Protection Rules cameinto effect under Section 62 of the Long-termInsurance Act, 1998, and Section 55 of theShort-term Insurance Act, 1998.

These Rules provide protection for policy-holders over and above that contained in theActs. The Rules form part of consumer pro-tection as it ensures that there is proper dis-closure of the financial implications, risks andobligations when undertaking insurance con-tracts. Full details of commissions and chargesare now compulsory.

In terms of these Rules, it will be an offenceif intermediaries get policyholders to sign

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blank or incomplete forms, only to havesomeone else complete the details later.

South African Special RisksAssociation (SASRIA)SASRIA, previously known as the SouthAfrican Special Risks Insurance Association,was established in 1979 following the imple-mentation of political damage exclusionclauses on policies by local short-term insur-ers. SASRIA’s perils have been extended tocover damage caused by non-political riotand public disorder, including labour distur-bance, strike and lock-out, referred to as‘special risks’. SASRIA was converted into apublic company, wholly owned by theGovernment, under the Conversion of SASRIA Act,1998 (Act 134 of 1998). SASRIAoperates through agent companies (56short-term insurers) who issue special-riskspolicies to individuals and companies onSASRIA’s behalf.

The Government will maintain its owner-ship in SASRIA for the next five years. At theend of that period, or before if appropriate,the Government will reassess the scope forprivatising SASRIA and exiting the special risksinsurance market. During the five-year period, the Government will work with theindustry to establish a sustainable model toprovide special-risks cover.

The plan also allows for the restructuring ofSASRIA’s capital base to optimise its financialefficiency. SASRIA will pay the Government aspecial dividend of approximately R3 billionand in return, the Government will provide aR1 billion guarantee to be accessed only ifSASRIA suffers an extreme loss. The proposedcapital structure maintains SASRIA’s strongclaims-paying ability, and has been fully val-idated by the Government’s actuarial andfinancial advisors.

Following a comprehensive analysis ofSASRIA and the special-risks market, theGovernment’s advisors found that there wasstill significant uncertainty over the viability ofSASRIA’s privatisation and deregulation of thespecial-risks market.

A key concern of the short-term insurers is

their ability to commit to maintaining a presence in the special-risks insurance mar-ket in the event that capacity becomesunavailable in the international reinsurancemarkets. Under these circumstances, short-term insurers could find themselves forced tocancel or refuse special-risks cover, therebyleaving South African consumers and busi-nesses with inadequate insurance protection.

Other financial institutions

Development Bank of Southern Africa (DBSA)In terms of the Development Bank of South-ern Africa Act, 1997 (Act 13 of 1997), the pri-mary purpose of the DBSA is to promote eco-nomic development and growth, humanresource development and institutionalcapacity-building by mobilising financial andother resources from the national or interna-tional private and public sectors for sustain-able development projects and programmes.The DBSA operates in South Africa and in allSADC countries.

The Bank has gone through an extensivetransformation process over the past years.

Its mandate is focused on infrastructure,acting as a catalyst for investments in part-nership with the private sector. The Bank’scapital structure and financial policy havebeen changed, and there is a comprehensiveapproach to risk management.

The capital base of the DBSA has beenstrengthened by the Government callablecapital amounting to R4,8 billion, which canbe accessed as and when it is required.

The financial resources of the DBSA aremade up of the share capital contribution ofthe National Treasury, borrowings in thefinancial markets, repayments on loans grant-ed by it, and internally generated funds. Inaddition to these resources, it mobilises loancapital from other international sources.

In 2000/01, the Bank raised R1,5 billionfrom the capital markets and bilateral sources.The capital-market bonds were funded in thedomestic market through a R1-billion 16-yearfixed-rate note maturing in 15 June 2016.

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As part of its funding strategy, the Bank hasestablished lines of credit with reputable andhighly rated international institutions such asthe African Development Bank and theEuropean Investment Bank. It also funds itselffrom bilateral sources such as the Kreditan-stalt fur Wiederaufbau, Overseas EconomicCo-operation Fund (Japan) and the AgenceFrançaise de Developpement.

In a further move to strengthen the Bank’sfunding strategy, the Board of Directorsapproved the establishment of a R5-billionDomestic Medium-term Note programme tofacilitate the implementation of the Bank’sannual borrowing programme.

The combination of a strong capital base,good asset quality, improved risk managementand strengthened financial policies ensuredthe Bank maintained its domestic ‘Triple A’long-term and A+ short-term ratings from theinternational rating agency Fitch. It also suc-ceeded in obtaining international investmentratings BBB- and Baa3 from international credit rating agencies Standard and Poor’s andMoody’s Investor Services respectively. Theseratings are the same as the sovereign ratingsof South Africa, and should further enhancethe Bank’s resource mobilisation activities.

The Bank increased its lending to local gov-ernment to R8,0 billion and has become aprincipal source of funding for municipalities.Other highlights were the growing role of theBank in SADC countries, with approvals ofR5,5 billion (24%) made, engaging in 11agency functions in projects such as spatialdevelopment initiatives and the NationalElectricity Regulator.

The co-funded projects the Bank investedin are estimated to annually add R2,1 billionto GDP and to provide 13 200 sustainable jobopportunities over the long term (20 years).

Land BankThe Land Bank provides a full range of retailand wholesale financial services for farmersand agribusiness at competitive rates. As astatutory development finance institution, theBank fulfils a government mandate requiringit to

• support the development of all elements ofthe agricultural economy

• give special attention to the needs of dis-advantaged people in the sector

• benchmark its operating efficiencies and ser-vice delivery against financial sector norms

• ensure self-sustainability.(See Chapter: Agriculture.)

Participation mortgage bondschemesAbout 14 organisations act as managers ofparticipation mortgage bond schemes inSouth Africa. Investments totalled R4,1 billionon 31 December 2000, according to theSouth African Reserve Bank.

StokvelsStokvels are co-operative rotating savingschemes, which mobilise funds among most-ly black communities for a variety of purpos-es. Rotating saving schemes similar to stokvelsare also found in other countries such asSouth Korea, Jamaica, Egypt and Japan.

Unit trustsEquity unit trusts, so-called open-endedtrusts, are investment vehicles that provide ameans of participation in the equity, bondand money market for investors who may nothave the time, the money or the expertise toeffect investments successfully in markets ontheir own capacity.

The price of units is calculated and pub-lished daily. Unit trust management com-panies create units for selling to the public,either directly or through independent finan-cial advisers.

The management companies may createunits in the trust to meet the demand fromthe public, or may cancel units in the trustwhen the public sell back their holdings ofunits to the management company. The man-agement company is obliged to buy back anyunits offered to it and at a price determinedwithin 24 hours of receiving any notice of abuy-back from an investor.

Various unit trusts in South Africa offer sim-ilar ranges of investment plans, varying main-

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ly as to the minimum amounts accepted.There are two types of investment plans,

namely the open-account or lump-sum plan,and the regular savings plan, which caters forregular monthly savers.

At present, 34 management companiesmanage the assets of 323 separate unittrusts. Most of the companies are owned bySouth Africa’s leading financial institutions,but recently a number of independent institu-tions were registered. The market value of netassets of the unit trust industry amounted toR118,6 billion (excluding ‘fund of funds’ andinstitutional funds) at the end of 2000.

The unit trust industry competes principallywith long-term insurance companies, pensionand provident funds, and investment trustsfor such investments. The trust deed stipu-lates the investment objective of each portfo-lio and constrains the investment managersregarding the type of assets in which theymay invest. The other type of registered unittrust scheme is property unit trusts. Theymainly invest in shares of property-owningcompanies. Their units are listed on the JSEwhere investors can buy or sell them. By February 2000, there were nine manage-ment companies, managing 11 portfolios.The latest market value of all listed units isapproximately R4,686 billion.

Financial markets

Primary capital market activityDuring 2000, new issues of long-term fixedinterest securities were held back by the rel-atively small borrowing requirement of thenational Government and by the preferencegiven to funding through lower-cost Treasurybills rather than through more costly long-term bonds. Funding by public-sector bor-rowers through the issuance of fixed-interestsecurities in the domestic primary bond mar-ket amounted to a net value of R6,7 billionfor 2000, considerably less than the netamount of R9 billion raised in the same peri-od of the previous year.

Private-sector borrowers are increasinglytargeting the primary bond market to meet

their financing needs. Over the past year, theoutstanding nominal value of private-sectorloan stock listed on the BESA (excluding‘stripped’ bonds) increased almost three-fold from R3,8 billion in December 1999 toR11,2 billion in December 2000.

Although South Africa has been assessedas an investment grade country by two majorinternational credit-rating agencies, domesticborrowers were hesitant to access foreigndebt markets in 2000. Possible explanationsfor this could have been fear of the cost im-plications of potential declines in theexchange rate of the Rand, and also theincreased aversion to risk-taking in emergingmarkets by international investors. In the end,South African public-sector borrowers raisedR10,1 billion through the issuance of foreign-currency denominated bond issues in 2000,up from R9,5 billion in 1999. The Govern-ment raised an amount of about R6,9 billionthrough two issues, the last of which wasconcluded in June 2000. One of the publiccorporations mobilised R3,2 billion in March2000. In March 2001, the Government raiseda further EUR 500 million.

Exchange-rate concerns also dampenedenthusiasm for issuing Rand-denominatedbonds in the Eurobond market during 2000.South African issuers completely abstainedfrom issuing Rand-denominated bonds in theEuro market, whereas non-resident investorsmade net redemptions of such bonds to thevalue of R3,0 billion, compared with 1999when net issues amounting to R2,6 billionhad been made.

The total value of equity capital raised inthe primary share market by companies listedon the JSE increased to R74 billion in 2000,almost twice as much as in 1999. The largestcontribution in 2000 came from shares issuedfor the acquisition of assets not already listedof R44 billion.

Secondary capital market activityBond yields, which move inversely to the priceof bonds, declined, on balance, during 2000.The monthly average yield on long-term government bonds declined by 107 basis

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points from December 1999 to December2000. After increasing from 13,5% inFebruary 2000 to 14,8% in May, a generaldownward movement in bond yields fol-lowed, which was temporarily interruptedfrom August to October when, among otherthings, political developments in other partsof the southern African subregion, and con-cerns that higher inflation might follow therise in the price of crude petroleum, and thepersistent depreciation in the value of theRand, caused bond yields to retrace part oftheir earlier declines.

By about mid-October 2000, in the after-math of a decision by the Reserve Bank toraise the interest rate on repurchase transac-tions by 25 points as a gesture demonstratingits resolve to fight inflation, fears of higherinflation began to dissipate and it alsobecame evident that political events in otherparts of the African continent would not haveany serious repercussions in South Africa. Theannouncement of the Medium-term BudgetPolicy Statement on 30 October 2000 furtherreaffirmed government’s commitment to pru-dent revenue and spending policies, and sub-sequently bond yields resumed their down-ward movement, which continued into 2001.The monthly average yield on long-term gov-ernment bonds reached 11,8% in March2001 – its lowest level since 1983.

High volatility in bond prices caused theturnover in the domestic secondary bondmarket to rise from R8,8 trillion in 1999 toR10,5 trillion in 2000 – an increase of almost20%. In December 2000, the nominal valueof bonds in issue amounted to R418 billionwith a market capitalisation of R425 billion,which included 209 listed bonds of 31 issuers.

Non-resident investors reduced their hold-ings of domestic Rand-denominated debt in2000 because of increased aversion to risk-taking in emerging markets and heighteneduncertainties over future domestic interest-rate and exchange-rate movements. On a netbasis, non-residents sold bonds to the valueof R14,3 billion in 1999. Net outright sales, asopposed to repurchase transactions, amount-ed to R11,7 billion in 2000, compared with

R13,5 billion in 1998 during the emerging-markets crisis. Non-resident investors wereapparently somewhat less negative towardsSouth African debt securities in 2000 than inthe crisis year of 1998.

Share prices closed the year slightly lowerthan their opening levels. Year-on-year, thedaily closing level of the all-share price indexdeclined by 2,5% from the end of December1999 to the end of December 2000. Themonthly average price level of all classes ofshares increased by 13% from December2000 to February 2001, beating the previousrecord high of January 2000 by about 4%.

Volatile price movements through 2000boosted trading activity in the secondaryshare market. Shares to the value of R537 bil-lion were traded on the JSE in 2000, about20% more than the previous record set in1999. Liquidity, measured as turnover as apercentage of market capitalisation, reacheda new level of more than 35% in 2000 com-pared to 34% in 1999.

Non-resident investors were far less inter-ested in the South African equity market in2000 than in 1999. On a net basis, non-res-ident shareholders bought R17,4 billionworth of shares in 2000, down from R40,6billion in 1999. The negative turn in non-resident investor interest is best explained bya decline of 26% in the dollar value of shareprices from January to December 2000.

Money markets

The South African money market is welladvanced, with a fairly large number of banksand other institutions as active participants.Instruments traded range from traditionalones such as negotiable certificates of depositand Treasury bills to those that only recentlybecame popular, like forward-rate agree-ments (FRAs).

Banks are generally kept short of liquidity,ensuring that they have to borrow somefunds from the Reserve Bank, which makesthe Bank’s accommodation rate more effec-tive in influencing money-market interestrates in general.

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In terms of the Reserve Bank’s operationalprocedures, banks are accommodatedthrough daily repurchase transactions. To manage their liquidity needs efficiently,banks are also allowed recourse to their cash-reserve balances. Using so-called contra-accounts they may on a daily basis borrowagainst their cash reserve deposits or holdadditional cash reserves, as long as the aver-age level of cash reserves during the one-month maintenance period equals or exceedsthe minimum cash reserve requirement of2,5% of their liabilities.

In addition to the repurchase auctions andcontra-accounts, a marginal lending facility isalso available to the banks. It is seldom used,since the Reserve Bank charges a penalty rateof five percentage points above the repur-chase rate for such lending to the banks.

After fluctuating between R8,4 billion andR9,4 billion in the eight months from April toNovember 2000, the average daily liquidityrequirement of the private banks increased toR10,2 billion in December 2000. It easedslightly to R10,0 billion in January 2001 andR9,2 billion in February, but increased toR11,0 billion in April 2001. Between April andNovember 2000, the Reserve Bank kept thedaily liquidity requirement above R8 billion byactively implementing various interventiontechniques.

The intervention strategy of the Bank wasessentially aimed at counteracting the effectsof liquidity injections into the money market,arising from increases in the Bank’s net for-eign-asset holdings and deficits incurred onthe Bank’s transactions in the forward for-eign-exchange market. In its intervention inthe money market, the Reserve Bankincreased the outstanding amounts of foreign-currency swap arrangements withprivate-sector parties from R10,9 billion at theend of June 2000 to R22,1 billion at the endof April 2001. To reinforce its liquidity-drain-ing operations, the Bank also increased theoutstanding amounts of reverse repurchasetransactions in government securities fromR4,0 billion at the end of May 2000 to R5,0billion at the end of November. For similar

reasons, Reserve Bank debentures wereincreased from R3,0 billion at the end of thefirst quarter of 2000 to R4,0 billion at the endof November 2000.

During the festive season at the end of2000, money-market conditions were season-ally tightened by a considerable increase in thevalue of notes and coins in circulation outsidethe Reserve Bank. At the height of the holidayseason, notes and coins in circulation outsidethe Reserve Bank reached a peak value ofR34,7 billion on 27 December 2000 comparedwith the previous peak of R33,3 billion on 28 December 1999.

On balance, notes and coins in circulationrose by R3,2 billion from the end ofNovember to the end of December 2000. Thetightening effect of the increase in notes andcoins in circulation was alleviated to someextent by decreasing the reserve repurchasetransactions of the Bank from R5 billion at theend of November 2000 to R3,75 billion at theend of December. At the same time, ReserveBank debentures in issue were reduced fromR4 billion to R3 billion. When notes and coinsbegan to flow back to the Reserve Bank dur-ing January 2001, the reverse repurchase anddebenture levels were restored to theirNovember 2000 values. In February 2001, thevalue of reverse repurchase transactions out-standing was raised marginally to R5,4 billionand further to R5,7 billion at the end of April2001. Issues of Reserve Bank debentureswere increased to R4 billion in February 2001.

The Reserve Bank continuously met in fullthe liquidity needs of the private banks during 2000. The only exception was on 17 October 2000, when the market wasunderprovided by R50 million in order toapply upward pressure, raising the repurchaserate of the Reserve Bank by 25 basis points.Full provision of the liquidity needs of the pri-vate banks usually sends a signal that theReserve Bank considers the prevailing interestrate on repurchase transactions as appro-priate.

Unlike the sometimes volatile bond yields,money-market interest rates were exception-ally stable during 2000. The Reserve Bank’s

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rate on repurchase transactions was adjustedon only two occasions: from 12% to 11,75%in January 2000, and from 11,75% to 12%in October. The three-month bankers’ accept-ances rate moved in a range of 9,83% to10,93%, narrower by far than the typicalrange in the second half of the nineties.

At the beginning of October 2000, money-market interest rates began to rise somewhatwhen market participants became concernedabout the inflationary consequences of highinternational petroleum prices and the depreci-ation of the Rand. Money-market rates gener-ally edged higher when the repurchase rate ofthe Reserve Bank was increased on 17 October2000, but peaked before the end of Octoberand declined steadily over the ensuing period.The rate on three-month bankers’ accept-ances, for example, peaked at 10,31% on 26 October 2000 and then began to decline,reaching 10,23% on 28 February 2001.

When expectations of increases in money-market interest rates intensified in October2000, the rates on FRAs rose. For instance,the rate on 9x12-month FRAs (indicatingmarket expectations of rates on three-monthinstruments nine months hence) gainedalmost a full percentage point during thethree weeks to 26 October when theypeaked at 11,7%. News that the economywas performing better than had earlier beenanticipated and that inflation was not widelyexpected to accelerate, caused the 9x12-FRArate to recede to 10,15% by 28 February2001. With the concurrent rate on three-month negotiable certificates of deposit at10,53%, the FRA rates signalled marketexpectations of a slight decline in money-market rates over the next nine months.

Since February 2000, the private bankshave kept the predominant rate on mortgageloans unchanged at its lowest level in 12years, namely at 14,5%. The predominantrate on 12-month fixed deposits with banksremained unchanged at 8,5% from February2000 to May, but was raised in two steps to9,5% in July. Subsequently, this rate was low-ered to 9,25% in September 2000, butrestored to 9,5% in January 2001. These rate

movements narrowed the differentialbetween banks’ prime lending rates and therate on 12-month fixed deposits, on balance,from 600 basis points in February 2000 to500 basis points in January 2001.

Exchange control

Exchange control was first introduced inSouth Africa during World War II. This waspart of the emergency finance measuresadopted by the British Sterling Area to pre-vent large capital outflows and to protect foreign reserves.

The measures were applicable mainly toSouth African residents at first. From 1961,the capital transactions of non-residents werealso restricted. In subsequent years, thesecontrols were tightened or relaxed from timeto time, depending on domestic and interna-tional circumstances. Exchange control isadministered by the Reserve Bank on behalfof the Minister of Finance.

The Reserve Bank is assisted in this task bya number of banking institutions, which havebeen appointed by the Minister of Finance asauthorised dealers in foreign exchange. Thesebanking institutions undertake foreignexchange transactions for their own accountwith their clients, within limits and subject toconditions laid down by the Reserve Bank.

The Government is committed to an opencapital market and the gradual relaxation ofexchange controls. In new rounds of relax-ations, the private individual investmentallowance has been increased from R400 000to R500 000 and then to R750 000 inFebruary 2000.

Investment limits applicable to SADC coun-tries have also been increased enormously.The SADC countries’ limit of R250 million pernew approved investment has not only beenincreased to R750 million but this now appliesto Africa as well. The R50-million limit applic-able to foreign investments elsewhere in theworld was increased to R500 million per newapproved investment.

In support of investment• a new tax incentive is proposed for com-

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panies embarking on approved strategicindustrial projects

• more favourable tax depreciation rules forsmall businesses in the manufacturing sec-tor will apply

• substantially increased allocations for cap-ital spending by national and provincialdepartments are proposed.

JSE Securities Exchange (JSE)

The JSE was established on 8 November1887. In November 2000, it changed itsname to JSE Securities Exchange SouthAfrica. The JSE is governed by the StockExchanges Control Act, 1985 (Act 1 of 1985),under the responsibility of the FSB. The JSE inturn governs its listed companies and brokersby extensive rules and directives. The JSE isthe largest stock exchange in Africa, and hasa market capitalisation of several times that ofall the other African markets combined.

The JSE completed a major strategic reviewin March 2000, which identified 31 signif-icant strategic projects to be completed toposition itself as a world-class regionalexchange and as southern Africa’s gateway tothe world’s financial markets. This process,referred to as Gateway 2002, is well underway and responsible for the significantchanges being evidenced at the JSE.

On 12 October 2000, members of the JSEapproved a proposal to implement the firstphase of the restructuring of the JSE, to takeeffect on 1 December 2000. A board of dir-ectors, which represents a broad interestbase, was established and a CEO appointed.In addition, a new advisory committee struc-ture was put in place, which will benefit fromthe participation of a wider spectrum ofindustry specialists. Previously, the JSE wasdirected by an honorary committee of 16people with full voting rights and run by afull-time executive president. Portions of theJSE reserves and the accumulated surplus asat 30 November 2000 were capitalised in theform of JSE rights, thus forming a permanentcapital base. The JSE is in the process of eval-uating the merits of demutualisation.

The JSE is committed to promoting SouthAfrica both regionally and internationally. Inthis regard, it has led the process of harmon-ising the listing requirements of the membersof the SADC Committee of Stock Exchanges(CSE). The CSE envisages an integrated real-time national network of securities markets inthe region by 2006. The JSE has offered itstrading platform to these members, andNamibia has been trading on the Johannes-burg Equities Trading (JET) for the past threeyears. The JSE has also signed Memoranda ofUnderstanding with Namibia, Kenya, Ghana,Egypt, Nigeria and Mauritius, and hosted theannual conference of the African StockExchanges Association in September 2001.

The JSE uses order-driven fully automaticelectronic trading on the JET system. The orderbook is organised on the principle of‘price/time’ priority, where orders registered inthe book are ranked first at the best price andthen in time sequence of entry. The JET systemhas already resulted in significant im-prove-ments in trading volumes, transparency, price-formation liquidity and cost of trading on theJSE. The JSE recently signed Heads of Termswith the London Stock Exchange (LSE) to usetheir trading platfom. This will allow the JSE toimplement some new initiatives including newideas in respect of the less liquid stocks on theJSE, which could not be done on JET. In termsof this agreement, certain key business bene-fits will also accrue to both parties, includingreciprocal data distribution, access to the LSE’smost liquid stocks on the JSE system, an easi-er dual listing process for South African com-panies (without the JSE losing the benefits oftheir trading volumes), and the possibility ofremote membership.

A key extension of the LSE deal, althoughmutually exclusive, is the joint venture withglobal index-provider FTSE, announced on 3 May 2001. The JSE together with FTSE willprovide internationally-recognised indexproducts for the domestic and African mar-kets. A significantly enhanced and expandedindex series, to be named the FTSE/JSE AfricaSeries, will be developed for South Africanand African investors. The existing JSE indices

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will be brought in line with internationalinvestment standards based on free float,total return indices and the FTSE GlobalClassification System, by the end of 2001.The JSE and FTSE will also develop a range ofbenchmark and tradable index products.

Share Transactions Totally Electronic(STRATE), South Africa’s Central SecuritiesDepository for equities, is 50% owned by theJSE. The other 50% is owned by CentralSecurities Depository Participants, consistingmainly of banks. STRATE enables the conver-sion to electronic records of ownership(dematerialisation) and to simultaneouslydeliver on payment through contractual guar-anteed settlements. Settlement takes placefive days after trading (T+5) on a rolling basis,with the objective of achieving T+3 by theend of 2002. STRATE will also result in theelimination of market claims for entitlements,which will make it a world leader in thisaspect of its business. The new system is inline with international standards and riskparameters, for cutting costs and for elimi-nating the potential for fraud.

The dematerialisation process of equityscript required for the STRATE system com-menced on a limited basis in November 1999and was launched in earnest in March 2001,to be completed by the end of 2001.

A proposal to acquire the SAFEX’s principalassets and business was approved by themembers of both SAFEX and the JSE in May2001, respectively. The JSE firmly believes thatthe integration of South Africa’s financialmarkets will generate the desired criticalmass, cost-effectiveness and liquidity in theSouth African market, and will best positionthe JSE to compete internationally.

A re-write of the JSE listings requirements,effective from 1 October 2000, ensured totalalignment with international best-practice.Particular emphasis was put on improved dis-closure of companies and its directors, andcorporate governance issues, in order to fur-ther promote both local and internationalinvestor confidence.

The real-time Stock Exchange News Service(SENS) has been in operation at the JSE since

August 1997 to enhance market transpar-ency and investor confidence. The JSE listingrequirements obligate companies to dissem-inate any corporate news or price-sensitiveinformation on the Service prior to using anyother media outlet. SENS is carried by allmajor wire services. The JSE introduced signif-icant enhancements to SENS in 2001, toensure easier use and speedier publishing ofinformation by listed companies.

The JSE is keenly focused on product dev-elopment and innovative ways of meeting themarket’s needs. The JSE is particularly focusedon products which broaden the investor baseand bring greater liquidity and depth to themarket. In this regard, the JSE issued andlisted the first Exchange Traded Fund (ETF) inSouth Africa, and became the sixth exchangein the world to do so. With the Initial PublicOffering (IPO), a total of R2,6 billion wasraised, making it the largest IPO to date inSouth Africa. The ETF, named the SATRIX 40,enables an investor to buy a single JSE-listedsecurity, which gives investors the samereturn as buying shares directly in each com-pany in the JSE’s ALSI 40 Index. It wasdesigned to broaden the JSE’s investor baseand increase market liquidity.

South African FuturesExchange (SAFEX)

SAFEX is a registered financial exchangeestablished to regulate the trade of derivativeinstruments listed by SAFEX. The Exchangeoperates under a license, renewable annually,which is granted by the FSB. As a self-regu-latory organisation, SAFEX is governed by theFinancial Markets Control Act, 1989 (Act 55of 1989), and by an internal set of Rules andDirectives approved by the FSB.

SAFEX comprises two key divisions:Financial Markets Division, which covers theequity and interest rate futures and optionsmarkets, and the Agricultural MarketsDivision, which covers commodities futuresand options on maize, sunflowers and wheat.Each division is owned by a separate set ofmembers.

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Membership of SAFEX is currently as follows:• Financial Markets Division: 119 seats

(93 members)• Agricultural Markets Division: 84 seats

(56 members).An Executive Committee of up to 11 electedmembers, all with full voting rights, directsthe Exchange. Additional non-voting nom-inees are also appointed to the ExecutiveCommittee. The FSB attends all executivemeetings in its regulatory capacity. A full-timemanagement team headed by the CEO carries out policy decisions made by theCommittee. The members, who in turn rep-resent their clients, and can be clients of theExchange themselves, elect the Committeeonce a year.

For the year until end December 2000,total volume on all products amounted to24,6 million contracts. This represented a30% increase from 1999, almost double theincrease for 1998/99. This is deemed mostsatisfactory by international standards. TheFutures Industry Association currently ranksSAFEX as the 17th-largest-volume exchangein the world.

The combined resources of the two divi-sions have grown from an initial R3,4 millionin 1990 to just over R155 million by June2000.

The international nature of trading activityon SAFEX is becoming increasingly obvious,with approximately 50% of risk positionsbeing held by non-residents. This is despitethe fact that SAFEX has still been unable tosecure the approval of the CommodityFutures Trading Commission for products tobe traded by US-based institutions.

The Securities Exchanges Commissioncontinues to be concerned about the concen-tration of ownership on the JSE. Furtheradvances to the US regulations are beingmade in an attempt to reach an acceptablesolution, which will go along the line of free-float equity indices.

In the first half of 2001, SAFEX wasengaged in negotiations with the JSE on apossible takeover by the JSE.

Bond Exchange of SouthAfrica (BESA)

BESA is a self-regulatory and independentbody operating within the framework of theFinancial Markets Control Act, 1989, and aset of Rules approved by the FSB.

BESA is directly responsible for ensuring thestability, security and regulatory administra-tion of the bond market in South Africa, andregulates the bond trading activities of all itsmember firms. These firms hold seats on theExchange, ensuring that ultimate control ofthe Exchange rests with the general body ofmembers.

The Executive Committee, appointedannually in accordance with the Rules, directsthe affairs of the Bond Exchange. TheCommittee has specific responsibility forstrategic and business planning, the setting ofcorporate policies, the approval of significantcontracts and the monitoring of the ongoingoperations and performance of the Exchange.

Appointments to the Executive Committeeare made directly and independently by BESAmembers. The Committee comprises marketrepresentatives drawn from the membershipconstituencies as well as two general memberrepresentatives elected at every annual gen-eral meeting.

A team of professional management andstaff handle the day-to-day operations of thebusiness.

Listed securitiesAlthough primarily a government bond mar-ket, BESA also lists Rand-denominated debtsecurities issued by local government, publicenterprises and major corporates. By 31 March2001, the Exchange had granted a listing tosome 250 bonds issued by 32 borrowers, witha total nominal value of some R421 billion.

More than 80% of this debt had beenissued by central government. By compar-ison, there are about a half-a-dozen listedcorporate issues, including Telkom SA Ltd,ISCOR, ABSA Bank Ltd, Investec Bank Ltd,The Standard Bank of SA Ltd, SASOLFinancing, Stripco Ltd and INCA. Of the listed

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bonds, some 99% have been immobilised inthe Central Depository.

The evolution of sophisticated bond prod-ucts in South Africa has been hampered byrestrictive regulations, the relatively small sizeof the local market, and weak demand fromboth borrowers and investors. Vanilla bondsconstitute the majority of BESA’s listed instru-ments, and variations on this theme include:• fixed interest-bearing bonds with single

and multiple redemption dates• zero coupon bonds• CPI index-linked bonds• variable interest rate bonds/floating rate notes• domestic medium-term note programmes.BESA has appointed a Listings AdvisoryTechnical Committee (Listech) to provide on-going advice on the Exchange’s ListingsDisclosure Requirements and Rules. ThisCommittee will assist in ensuring that BESA’sregulations remain comparable with interna-tional requirements, rules and best-practice inorder to contribute to the strengthening ofinvestor protection and market confidence.

Main indicesThe Bond Exchange, in collaboration with theActuarial Society of South Africa, has intro-duced a trio of bond indices which provide asimple yet accurate measure of total returns ofrepresentative bond portfolios, and providebenchmarks for historical performance. Theseindices (introduced in August 2000) replacedthe previous bond indices used in South Africa.

The Total Return Indices comprise the • All Bond Index (ALBI), consisting of the top

20 listed bonds, ranked by market capital-isation and liquidity (the ALBI also has foursubsectors split by term to maturity)

• Government Bond Index, containing thosebonds of the ALBI in which the appointedprimary dealers are obliged to make a market

• Other Bond Index, comprising the remain-der of the bonds in the ALBI.

These indices are published daily by theExchange and are widely disseminated to allmembers, the asset management industryand the media.

Trading mechanismsIn South Africa, changing bond-trading pat-terns over the past few years have seen agradual and continuing shift away from openoutcry trading to screen/telephone trading. In1998, trade on the floor declined to less than10% of overall market volumes. As a result,the open outcry bond floor was closed inOctober 1998, and execution now takes placeon the Exchange’s Bond Automated TradingSystem (BATS) or via inter-dealer brokers (IDB),matched principal traders, and directly onscreens managed by data vending firms.

Implementation of BATS for member firmscommenced early in 2000.

This proprietary, wide-area system providesfacilities for immediate on-screen executionof outright trades and repos, and also allowsfor the reporting of block trades and tele-phone trades. BATS is a quote-driven systemand includes credit limit functionality, therebyallowing members to limit their exposures forall counterparties utilising the system.

By mid-2001, limited volume had beentraded on-screen though BATS, possibly dueto the fact that electronic trading is still some-thing of a novelty in bond markets and theIDB trading.

Primary dealersThe National Treasury introduced a primarydealer system in 1998 to promote the effect-ive distribution of government issues and tomaintain a liquid secondary market in select-ed South African bonds. The 10 primarydealer banks are required to quote continu-ous two-way prices in seven key governmentbonds on request, although liquidity hasbeen largely concentrated in two benchmarkissues – the R150 and R153 bonds. All prim-ary dealers must be members of theExchange.

Market performanceThe local bond market is one of the most li-quid emerging bond markets in the world. In2000, the local market turned-over the mar-ket capitalisation some 25 times. With theinclusion of the off-shore trading volumes,

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this measure of market velocity touched 27times the market cap.

The off-shore market comprises trades inRand-denominated bonds (listed on BESA),which trades are concluded off-shore directlybetween non-members, but which are settledeither in South Africa through the settlementagent network or via Euroclear and Clear-stream. Of the total bond turnover (local andoff-shore) recorded for 2000, being a figureof R11,6 trillion, some 25% was concludedbetween locally-based members and overseasclients, 4% was traded off-shore by non-members and settled locally, while some 3%was traded off-shore by non-members andsettled in Europe.

Clearing and settlementBESA adopted the Group of Thirty (G30) recommendations on clearing and settlementas a blueprint for the development of its ownclearing operations. With the introduction in1994 of a recognised clearing house, theUniversal Exchange Corporation Ltd, BESAmembers were able to benefit from electronic trade reporting, matching and set-tlement. This process takes place each tradingday, and is facilitated by the four settlementagent banks and the Central Depository Ltd,where some 99% (by value) of listed debtsecurities are immobilised.

With the change to a rolling+3 settlementsystem in November 1997, the Exchangeachieved full compliance with all the G30 re-commendations (the first Exchange in south-ern Africa to do so), and all but eliminated thekey settlement and post-settlement risksfaced by market participants. Although themarket remains essentially wholesale in char-acter and operates on a counterparty riskbasis, BESA has developed a risk-marginingmethodology. When implemented, this willallow for the accurate measurement of allopen exposures incurred by Exchange mem-bers across all markets.

By making use of a clearing house, a centralsecurities depository and the settlementagent system, the Exchange offers protectionfrom settlement failure and tainted scrip risk.

A Guarantee Fund with overall cover ofR225 million (US$1 = R8,05 by approximate-ly March 2001) provides protection againstretransaction price risk (in the event of mem-ber default) while fidelity cover held by indi-vidual members provides a minimum level ofprotection against fraud or theft perpetratedby employees of a member firm.

Investor protection• Regulation: BESA is a licenced Exchange,

and both the Exchange and its memberfirms must adhere to the Financial MarketsControl Act, 1989, and to a set ofapproved rules. As a self-regulatory organ-isation, the Exchange undertakes ongoingsurveillance over all aspects of bond marketactivity in South Africa.

• Price discovery: Trading takes place onBATS, via the more traditional screen/tele-phone mechanism or IDB screens.Investors can rely on the fact that theirtransactions are executed in an open andcompetitive securities market, whereprices are open to the scrutiny of marketparticipants.

• Ethics and dispute resolution: All memberfirms must adhere to a prescribed code ofconduct in respect of their bond tradingand the advertising of services. Trading dis-putes between members and clients mustbe reported to the Exchange, which pro-vides mediation and arbitration mech-anisms to ensure speedy resolution.

• Minimum admission standards: Applicantsfor membership must be incorporated inSouth Africa and must meet minimum capital and fiduciary standards. Registeredofficers and trading staff must comply withprescribed examination regarding ethicaland work experience requirements prior toreceiving authorisation.

• Capital adequacy standards: Member firmsmust maintain a minimum level of unim-paired capital to support their trading activ-ity. These solvency standards are based onthose of the EU and require members tomake specific provision for the counter-party, large exposure and position risks

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involved in bond trading. The standards arestrictly enforced.

• Fidelity cover: Although fewer and fewermembers handle the cash and scrip ofclients directly, all firms must still hold fidel-ity cover to cater for possible fraud or mis-appropriation by their employees. Theindependent auditors of member firmsmust report annually to the Exchange onthe adequacy of such cover.

• Immobilised securities: Investors areassured that the listed debt securities inwhich they invest have been screened bythe FSB. All new listings must be immo-

bilised in the Central Depository to obviatethe possibil-ity of tainted scrip being trans-ferred. Settlement takes place electronical-ly on a daily basis.

• Guarantee fund: BESA maintains aGuarantee Fund to ensure, as far as poss-ible, the performance of transactionsentered into on the Exchange.

The Fund provides members and clients withprice-risk cover against a member default, toa maximum aggregate of R225 million (US$1= R8,05 by approximately March 2001). Sinceinception, no settlement defaults or claims onthe Fund have been recorded.

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AcknowledgementsBond Exchange of South AfricaDevelopment Bank of Southern AfricaEstimates of National Expenditure 2001, published by the National TreasuryFinancial Services BoardJSE Securities ExchangeLand Bank of South AfricaNational Treasury Office of the Auditor-GeneralSouth African Futures ExchangeSouth African Reserve BankSouth African Revenue Service

Suggested readingAbedian, I., A., and T. and Walker, L. Promises, Plans and Priorities: South Africa’s Emerging Fiscal

Structures. Cape Town: Idasa, 1997.Budlender, D. The Women’s Budget. Rondebosch: Institute for a Democratic South Africa, 1996. Clark, I., Louw, E. and Myburgh, J. More Small Business Opportunities in South Africa. 2nd ed. Cape Town:

Zebra Books, 1996.Development Funding in South Africa: 1998–1999, Editors: V. Makinta and C. Schwabe. Pretoria: Human

Sciences Research Council, 2000.Dolny, H. Banking on Change. Sandton: Penguin, 2001.Fölscher, A. and others. Transparency and Participation in the Budget Process: South Africa: A Country

Report. Cape Town: IDASA, 2001.Fundamentals of the South African Financial System. Students’ Edition. Editors: L.J. Fourie, H.B. Falkena and

W.J. Kok. Halfway House, Gauteng: International Thompson Publishing, 1996.Falkena, H.B. Financial Policy in South Africa. Halfway House: Southern Book Publishers, 1991.Falkena, H.B. Fundamentals of the South African Financial System. Halfway House: Southern Book

Publishers, 1993.Human, P. and Horwitz, F. On the Edge: How the South African Business Organisation Copes with Change.

Cape Town: Juta, 1992.Jones, S. Banking and Business in South Africa. Basingstoke: Macmillan, 1988.Kelly, M.V. Financial Institutions in South Africa – Financial, Investment and Risk Management. Cape Town:

Juta 1993.Kok, P. and Pietersen, J. Financial Services. Pretoria: Human Sciences Research Council, 2000. (National Research and Technology Foresight Project).South African Financial Institutions. Editor: H.B. Falkena. Halfway House: Southern Book Publishers, 1992.Whiteford, A. and van Deventer, D.E. Winners and Losers: South Africa’s Changing Income Distribution in the

1990s. Pretoria: Human Sciences Research Council and Warton Econometric Forecasting Services, 2000.