CENTRAL BANK OF SEYCHELLES

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2 CENTRAL BANK OF SEYCHELLES ANNUAL REPORT 2007

3 CONTENTS Page Letter of Transmittal Board of Directors List of Charts and Tables Section One Highlights of the Seychelles Economy 1 Section Two Financial Survey 12 Section Three Government Finance 28 Section Four The External Sector 41 Section Five The Real Sector: Production, Labour and Prices 61 Section Six Operations and Administration of the Central Bank 80 Annex I Annual Accounts and Auditor s Report 96 Annex II Officers of the Central Bank of Seychelles

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5 CENTRAL BANK OF SEYCHELLES Board of Directors (as at 31 st December 2007) Francis Chang Leng - Governor and Chairman Jennifer Morel - Deputy Governor - Member Errol Dias - Member Francis Chang-Sam - Member Jean Weeling-Lee - Member Wilfred Jackson - Member Secretary to the Board Jean-Claude d Offay

6 List of Charts and Tables Chart No. Title Page Financial Survey 2.1 Net Foreign and Domestic Assets; Money Supply; Total Domestic Credit; Commercial Banks Credit; Commercial Banks Loans and Advances to Non-Government Sector; Loans by Development Bank by Economic Sectors; Central Bank advances to Commercial Banks; Credit and Deposits of Commercial Banks; Interest Rates; Government Finance 3.1 Government Finance Outcome; Major Revenue Flows in Current Receipts; Government Expenditure by Main Headings; Government s Capital Expenditure; Stock of Domestic Debt; The External Sector 4.1 The Overall Balance, Current Account and Capital & Financial Account of the BOP; Trade in Goods; Exports; Imports (f.o.b.); Exchange Rate Movements of the Three Main Currencies in the STTWB; The Real Sector: Production, Labour and Prices 5.1 Visitor Arrivals; Price Movements;

7 Chart No. Title Page Operations and Administration of the Central Bank 6.1 Notes and Coins in Circulation; Minimum Reserve Requirement; Minimum Local Asset Ratio; Average Tender Rate of 91-day bill; Total Stock of Outstanding Treasury Bills; Total Stock of Outstanding Treasury Bonds;

8 Table No. Title Page Financial Survey 2.1 Monetary Survey; Credit; Commercial Banks Loans and Advances to Non-Government Sector by Economic Sectors; Loans by Development Bank by Economic Sectors; CBS Advances to Commercial Banks; Liquidity Indicators of Commercial Banks; Interest Rates; Government Finance 3.1 Government Budget; Summary Government Budget; Revenue Government Budget; Expenditure Public Sector Capital Project Expenditure; The External Sector 4.1 Balance of Payments; Domestic Exports; Imports (c.i.f.) by HS Sections; Goods Procured in Ports; Services; External Reserves; Exchange Rates; The Real Sector: Production, Labour and Prices 5.1 Gross Domestic Product Production Account by Industry (at constant market prices); Gross Domestic Product Production Account by Industry (at current market prices); Estimates of Fish Landed; Production of Import of Crops and Livestock products; Tourism; Employment and Unemployment Rate; Average Monthly Earnings ; Annual Average Inflation Rates;

9 Table No. Title Page Operations and Administration of the Central Bank 6.1 Circulation of Notes and Coins; Bankers Clearing House Activities; Minimum Reserves and Local Assets Ratio; Treasury Bills; Treasury Bonds; Government Stocks; Technical Note Owing to rounding of figures, the sum of separate items may not always add up to the total shown. Abbreviations used in this Report are: R = Seychelles Rupee n.a = Figure not available.. = Negligible -/0 = Nil CBS DBS IBC IOT ITZ SEPEC SFA SMB SSF STB STTWB - Central Bank of Seychelles - Development Bank of Seychelles - International Business Company - Indian Ocean Tuna Limited - International Trade Zone - Seychelles Petroleum Company - Seychelles Fishing Authority - Seychelles Marketing Board - Social Security Fund - Seychelles Tourism Board - Seychelles Trade and Tourism Weighted Basket

10 SECTION ONE Highlights of the Seychelles Economy Overview 2007 was a year which clearly demonstrated both the opportunities and challenges that Seychelles face as a small open island State in economic transition. Whilst the prospects for medium-term growth were visibly strong, the country s susceptibility to external shocks was conversely prominently exposed. Since mid-2004, when the government embarked on a macroeconomic reform program within the framework of greater economic liberalisation, the country s economic performance has rebounded quite remarkably with real growth switching from a negative to positive trend. On the policy front, greater autonomy granted to the Central Bank and the fiscal authorities have moreover extended the scope and range of instruments available for more effective macroeconomic management. Increasing flexibility in economic management has enhanced the authorities ability to detect, assess and respond to economic events. This, coupled with progress in macroeconomic consolidation, has led to greater business confidence, resulting in strong investment inflows into the economy not only from foreign investors, but increasingly, from local investors. To build on the momentum of the emerging new economic order, and outline the dynamism and change in philosophy, the government launched its economic vision under the aegis of Strategy 2017 in March This vision takes a more forward-looking approach in doing business in Seychelles across all levels, and redefines the role of the government sector as facilitator of growth. Under the strategy, tourism, fisheries and financial services are identified as the economic mainstays and catalysts for future wealth creation. For each of those sectors, broad implementation plans have been drawn for the guidance of the respective government ministries, agencies and the business community. Critical to the success of the national roadmap, is the response of the private sector to exploit growth - 1 -

11 Highlights of the Seychelles Economy opportunities and undertake new business initiatives; in such connection its participation in the government s privatisation program will be a key, if symbolic, step of its willingness to take ownership of - and lead - the next economic growth phase. In support of the expansion in private business, government will need to fast track the ongoing process of revamping outdated regulatory practices and embracing policy changes necessary to spur the development of the expanding sectors 1. Against the above backdrop, the recent upswing in economic gains was reinforced in According to the preliminary estimates, the rate of growth in real terms was 7.3 per cent. The main growth impulses came from the tourism, construction, telecommunications and other services all of which can be linked with the transformation of the hotel sector and improved air access to the archipelago. During the year new records in tourist arrivals were achieved in both traditional and emerging markets. Such an outcome was achieved on the back of some gains in external competitiveness and is set to consolidate further in the years to come with the increase in industry capacity that is currently being undertaken. Compared to 2006, itself a record year, arrivals rose by 15 per cent to 161,273 generating a rise in income of 52 per cent in rupee terms. With the ongoing capacity expansion in the tourism industry, the construction industry remained in the upward phase of a boom cycle during the year. Major civil works on ongoing projects continued, whilst new developments, such as the Ephelia Resort of the Corvina/Constance alliance, were signed off in the second half of the year. In addition to resort development, residential construction was also at a peak level mostly by the government sector consistent with the country s housing development agenda. By most accounts, construction activity would have been higher still were it not for supply bottlenecks in essential quarry products, notably aggregate and crusher dust. Whilst there were strong gains in the real economy and some important consolidation in the monetary domain, other fundamentals, notably the external accounts, remained under severe strain. Although the balance of payments continued to strengthen in statistical terms, conditions in the official foreign exchange market generally tightened. This stated, some improvements were realised in the first half of the year but later on with the rapid rise in the international price of fuel and essential commodities, these were totally eroded as more resources were required to pay for these strategic items, thus displacing other critical payments such as raw materials and spare parts. 1 In recent years, the quality of the business environment has improved tremendously but residual weaknesses remain. Still, Seychelles currently ranks fifth in Africa in the Transparency International 2007 Corruption Perception Index whilst under the new Ibrahim Index of African Governance the country is ranked second after Mauritius. For further information, visit the websites: and

12 Highlights of the Seychelles Economy Thus, notwithstanding a general weakening in the external value of the domestic currency and the rise in tourism earnings, no visible improvement in currency availability could be discerned at retail banking level, leaving unmet demand to be satisfied outside the official market. However, some progress was achieved in the unification of the official and unofficial market in the sense that the parallel rate premium fell in percentage terms for the key US$ currency with the added observation of a general convergence of cross-rates in the unofficial market closer to prevailing international levels. In light of the stringency in the official foreign exchange market, for yet another year, a major share of the country s non-fdi imports was thus financed through the parallel market. From external data, such payments are estimated to have been in the order of R300 million (see Section 4, The External Sector). The revision in the exchange rate regime in October, encompassing the effective targeting of the currency at the mid-rate R8/US$ went some way to subdue activity in the parallel market, but not significantly, as its full effects are expected to feed through in a medium-term context and only until such time the monetary overhang (external arrears problem) is substantially eliminated. Hastening macroeconomic convergence against the prevailing challenging economic backdrop remained the policy dilemma of the year. From a conventional economics perspective, the Rupee, even after the recent correction, can be deemed to be overvalued given the undisputed existence of active parallel currency trading 2. However, it is the considered view of the authorities that simply moving the exchange rate to the parallel market rate will not immediately eliminate the parallel market. This assessment follows from the view that such a measure cannot possibly lead to the ondemand availability of hard currency at the banks through a corresponding rise in external earnings in light of imperfect exchange rate pass-through effects and capacity limitations in the export sectors. Any early gain in the external sector will thus need to follow more from demand compression arising from the inflationary consequences (real balance effect) of the currency movement. In the process, there are strong downside risks, especially on fiscal stability, stemming directly from the exchange rate change and indirectly from possible interest rate, price and wage adjustments which would in time be triggered by the exchange rate adjustment. Mindful of the above issues, the authorities continued to monitor the economy s responses to recent policy changes whilst deploying significant resources in better understanding the complex dynamics that underpin economic relationships in the imperfect markets of a small island developing state. 2 According to a recent authoritative estimate derived from an External Sustainability Approach, the country s Real Exchange Rate (RER) was between per cent overvalued (depending on assumptions on benchmark net foreign exchange target from +10 to -35 per cent of GDP) in This result was generated on the basis of 2007 current account data transactions which reflected average period exchange rates of R6.7/US$ and R9.2/ for the key trading currencies. It is thus highly probable that as the full effects of the October 2007 currency realignment pass through, the corresponding results for 2008 may show a correction of the overvaluation

13 Highlights of the Seychelles Economy Paradoxically however, one must concede that following trade liberalisation, imports funded through the parallel market have contributed immensely to the remarkable strengthening in the fiscal position since Through higher imports, tax collections, especially through the goods and services tax (GST) and trades tax, have surged, paving the way to some degree of debt consolidation and reduction. In 2007, total revenue amounted to R2,549 million most of which represented GST revenue and other taxes. These revenue flows helped the government achieve another year of fiscal surplus amounting to R65 million or 1.1 per cent of GDP. However, at this level, the fiscal outcome was well below its target of R327 million set at the beginning of the year. Nevertheless, this result was a commendable one given the external shocks that hit the economy, especially in terms of the rising price of fuel and other commodities. Despite the budgetary pressures in the second half of the year, the government continued with its debt restructuring process. Through an integrated debt and monetary restructuring exercise, involving the mobilisation of additional external resources, the government was able to reduce its domestic indebtedness and in the process, discharge a substantial portion of commercial arrears in the banking system. Following from this, there was a marked decline in the monetary mass in the banking system, thus reversing an emerging growth trend in domestic liquidity. The success of the operation is best illustrated that by the end of the year, M2(p) the broad money aggregate, showed a fall of 2.4 per cent relative to the previous year. This contraction was a welcomed development and was an important intermediate objective of the Central Bank to tighten liquidity conditions, improve the effectiveness of policy instruments, and contribute to the national macroeconomic adjustment efforts. As a result of the above developments, the Bank was able to reinforce its monetary and exchange rate policies in the last quarter of the year. On October 5, as earlier mentioned, the Bank announced a change in the exchange rate policy in a move to bring about greater stability and competitiveness to the national economy. In addition, there was an increase in the minimum deposit rate from 2.5 per cent to 3.5 per cent, which took effect on December 1. Viewed against external and price developments, the change in interest rate was more symbolic than material, but even so was highly significant from a signalling perspective as it conveyed a national drive to encourage more savings in the economy and the willingness of the Central Bank to embrace more active use of interest rate as an important tool for demand management in the short to medium term

14 Highlights of the Seychelles Economy The present set of policies being adopted by the Central Bank, though conservative in scope and depth, tie in well with other elements in the macroeconomic reform program; a further tightening during this transitional phase of the process could destabilise government finances, and needlessly unsettle other economic and social fundamentals (money, prices, wages, social cohesion, crime, etc.), and thus even delay correction of the imbalances in the external sector. However, whilst the Balance of Payments recorded another year of surplus, the current account maintained a deficit position, explained to a large extent by the high demand for FDI imports and the payment for oil imports; additionally, it reflected the acquisition of a fourth oil tanker by the local oil company SEPEC. Arguably, a narrowing in the current account deficit will follow once all the FDI inflows are fully transformed into an expansion in external earning capacity but over the interim, prudent economic management requires that the level of non-fdi domestic demand be maintained within the natural financing constraint of current earnings such that external borrowings for funding energy and consumption imports are minimised. With the orientation of the exchange rate policy towards competitiveness, the export sectors, namely tourism and fishing, the outlook for a strengthening of the external accounts are in this sense, positive. For a second consecutive year, the labour market continued to remain tight with many vacancies staying unfilled, especially in tourism, construction and professional services such as in the financial sector. In many instances businesses had to import labour to be able to maintain the pace of demand for their services. This was particularly the case for tourism and construction where both sectors continued to operate with hundreds of unfilled vacancies. The total number of people employed at the end of the year stood at 41,948, a rise of 6.0 per cent relative to Given this increase, the unemployment rate fell to 1.9 per cent, the lowest since records have been maintained. As stipulated in the last Annual Report, 2007 price prospects were very uncertain at the beginning of the year in view of instability in the world economy and currency markets. As the year unravelled, these uncertainties came to the fore, especially the impact of higher import prices on the domestic price-level, a development compounded by the exchange rate correction and the change in government pricing policies. Whilst in the first half of the year, the rise in prices was moderate, in the following six months, there was a rapid pace in the change in overall domestic prices. By year end the annual average inflation rate as stipulated by the Consumer Price Index stood at 5.3 per cent with a year-on-year growth of 17 per cent. During 2008, movements in prices is expected to be stronger as the full impact of the currency adjustment and changes in world prices and government pricing policy feeds through the general spectrum of the economy

15 Highlights of the Seychelles Economy Monetary Developments Following from the major policy decisions and actions which took effect in the second half of 2006, the Central Bank monitored very closely the outcomes of the key economic indicators especially those of the money supply, credit and BOP performance. In addition, it continued with the foreign exchange liberalisation roadmap, which in 2007 concentrated on the further reduction of the pipeline deposits. Towards the end of the year, the Bank undertook a major assessment of the macroeconomic policy landscape, analysing present economic dynamics within the limitations of policy instruments, before cautiously announcing changes to its monetary and exchange rate policies. Effective October 5, the exchange rate policy was judiciously adjusted to maintain the value of the domestic currency vis-à-vis the US dollar at the mid-rate of R/US$8. This change concluded the end of a process, involving a progressive adjustment of the currency which began in October 2006 intended to enhance the international competitiveness of the fisheries and tourism sectors as well as creating a more stable environment to facilitate both local and international investment. In addition to the above policy move, the Bank increased the minimum interest paid on deposits by one percentage point to 3.50 per cent which became effective as of December 1, In a separate measure, the Central Bank announced its intention to introduce a secondary market for Treasury bonds. This was conceived as an enabling platform to improve money market dynamics by offering investors greater flexibility and choice in their investment decisions. To further increase investor confidence and promote the orderly development of financial services in Seychelles, a Securities and Financial Markets Division was created within the realm of the Central Bank. This division will oversee regulation and supervision of non-bank financial services such as mutual funds, securities dealings and insurance business in line with international best practices. Apart from the assessment and implementation of policies, the Bank also sought expertise from international institutions in its efforts to develop new policy tools and regulation/supervisory techniques and additionally, enhance its capacity in economic management for a country undergoing complex multi-dimensional transformation. In that endeavour, the Bank received the technical assistance of an IMF mission from the Monetary and Capital Markets Department in November. From that visit an 18-month action plan was drawn which will be implemented from the beginning of Similar assistance for other sectors will be requested in the future. Fiscal Developments The achievement of a strong sustained fiscal outcome is one of the key elements of the government economic reform agenda. Debt reduction and consolidation are especially critical not only in promoting macroeconomic convergence, but in reducing fiscal vulnerabilities to adverse interest and - 6 -

16 Highlights of the Seychelles Economy exchange rate movements. In the short term restructuring and improving the debt profile can provide some fiscal relief, but ultimately, debt can only be reduced through annual budget surpluses. However, whilst the government may have committed to a prudent fiscal strategy, a successful outcome is often highly conditional on favourable external conditions. This was clearly evident in 2007 when energy and commodity price shocks compounded by an exchange rate policy change, derailed the fiscal efforts by a significant degree. For a fifth consecutive year, the budget performance registered an overall surplus of R65 million with a primary surplus of R482 million. The overall outcome was however short of the target of R327 million, much of the slippage being attributable to the impact of the aforesaid external shocks. Nonetheless, the revenue streams remained strong during the year, driven largely by the stronger economic growth. Total revenue inclusive of grants amounted to R2,549 million, collected mostly from goods and services tax (GST), income/business tax, trades tax and dividends and interests. GST collections increased slightly above its target to reach R884 million. This outcome was in line with the improved economic activity, especially from tourism and related services, which translated in stronger revenue generated from imports. Further evidence of enhanced tax buoyancy came in the form of business/income tax which performed significantly above expectations and was above its forecast by R44 million. From an expenditure perspective, the fiscal performance was somewhat disappointing with excess spending recorded on both current and capital outlays with only net lending posting a net repayment. Current spending was above its approved limit by R316 million, whilst capital expenditure exceeded target by R135 million. The overruns in current outlays were related mainly to increased subsidies extended to the parastatals, namely the Public Utilities Corporation (PUC) and the Seychelles Marketing Board (SMB), associated with the rising prices for fuel and commodities on the international market. Against the constraint of an unchanged tariff/price structure for electricity and certain basic commodities, these two companies experienced rising operational costs which forced them into loss positions, forcing them to resort to government for assistance. However, in the second half of the year, the government engaged in a full re-assessment of the policy environment centred on fixed prices for certain strategic commodities, including energy products. This resulted in the adoption of a market-driven pricing policy, with the first announcement being made in respect of fuel prices at the pump in September. From that month, the domestic prices for fuel was increased to reflect international costs and were now to be revised on a quarterly basis to reflect the movements in the international oil market. This was construed as a signal that the - 7 -

17 Highlights of the Seychelles Economy government was now prepared to change other commodity prices that were under its control either directly or indirectly so as to minimise or eliminate unsustainable cost burden on the budget. This new price policy was announced in the Budget 2008 presentation in December to the National Assembly. Prices in line for review included certain goods imported and/or produced by the SMB as well as the utility charges of PUC. The new prices will be announced early in the new year by the two respective companies. In terms of capital expenditure, the expenditure overrun was in respect of increased cost, especially in the financing of housing. This reflected the cost inflation in the procurement of imported material arising both from higher cif import price and the exchange rate movement. Despite the higher costs, government remained committed to its housing development programme in line with its electoral pledge. On the domestic side, various domestic building materials and transportation costs similarly rose after the adjustment in the price of vehicle fuel. External Sector Developments For a second consecutive year, the Balance of Payments registered a surplus. Based on provisional estimates, the overall balance amounted to a surplus of R190 million (US$28 million). This outcome though lower in magnitude compared to the previous year was again driven by the performance of the financial account. Given the characteristics of the Seychelles economy, the current account is invariably in a deficit position and for 2007, the shortfall widened from R738 million (US$132 million) in 2006 to R1,820 million (US$272 million). The deterioration in the current account balance was largely explained by the increased shortfall in the trade balance, which arose out of a surge in imports. The rise in the level of imports was closely related to the increased level of economic activity, especially in terms of foreign direct investments (FDI) in the tourism sector. A record rise in FDI-related imports was thus recorded. Furthermore, with the rise in the price of fuel as well as other commodities on the international market, and the depreciation of the rupee, the import value of merchandises in domestic currency terms correspondingly increased. The acquisition of the fourth tanker by the local oil company SEPEC similarly influenced the year s current account outcome. Nevertheless, despite the widening in the trade account, the shortfall was somewhat outweighed by the good performance of the services account which increased its surplus from R862 million (US$156 million) in the previous year to R1,165 million (US$174 million) in The record number in tourist arrivals led to record earnings and significantly strengthened the services account in the process

18 Highlights of the Seychelles Economy In the financial account, the year was subjected to a further rise in financial flows, namely in the form of FDI mostly targeting the tourism industry. Flows for the year rose to R1,663 million (US$248 million) compared to R804 million (US$146 million) in Such flows are expected to continue given the list of projects that are ongoing or in the pipeline. Real Sector Developments Most key economic indicators point to another year of strong growth in Provisional GDP data suggest a real GDP growth rate of 7.3 per cent, down a percentage point from the previous year. Growth momentum was underpinned by a record tourism performance, and an ongoing boom in investment activity, namely in the construction of new tourism projects. Tourism arrivals increased by 15 per cent relative to the previous year to peak at 161,273 and recorded a rise in earnings of 52 per cent. In the year, some US$248 million was reportedly spent on FDI projects in the country, of which an estimated 15 percent of the amount would represent direct local spending. On the production side, there were mixed outcomes. Agriculture fared much better than in the previous year but there was a decline in activity in manufacturing. For agricultural output, there was a broad-based increase in production to meet the rise in domestic demand, especially from the tourism sector. On the other hand, the foreign exchange shortage at banking sector level continued to disrupt output in the manufacturing sector, a situation aggravated by the increasing need to finance fuel imports in view of rising international oil prices. The decline in output of the manufacturing sector was however mostly due to unfavourable climatic conditions, which occasioned a drop in tuna catch and hence resulting in a fall in the production of canned tuna. Further evidence of the firming up of economic growth was observed in labour market statistics. At the end of the year 2007, the total number of persons employed stood at 41,948, representing an increase of 6.0 per cent over As a result of the increase in employment, there was also a decline in the unemployment rate from 2.6 per cent to 1.9 per cent. Given the level of vacancies outweighing the supply of labour, it could be concluded that at this level of unemployment, the economy has attained its full employment level thus increasing prospects for wage inflation. For the economy to maintain its growth trend, increased dependence on foreign labour is unavoidable and must be seen as an integral component of the 2017 Strategy. One downside risk in the real sector during 2007 was the emergence of inflation tendencies. With the recent rise in the price of fuel and other commodities internationally, the consumer price index (CPI) increased significantly, corresponding to an annual average inflation rate of 5.3 percent. Price pressures accelerated after the October currency realignment with the end-december CPI rising to 17 percent on a year-on-year

19 Highlights of the Seychelles Economy Outlook for 2008 In the absence of debilitating external shocks, the short to medium-term outlook for the domestic economy remains generally positive. The year closed with confidence in the economy at a high level, as evidenced by record investment commitments. The underlying trend in tourism continues to strengthen even ahead of the programmed level whilst in the fisheries sector, tuna catch levels are expected to normalise as the El Nino climactic conditions dissipate. In the financial services arena, the enabling legislations and regulatory framework are in place to support a growth in international business, including an expansion in offshore banking services. Against this backdrop, the vision of Strategy 2017 is thus seemingly realisable. However, many challenges remain to secure the credibility of the development roadmap and ensure its successful closure. Above all, growth cannot indefinitely be sustained under the distorted environment of the prevailing monetary and external disequilibria. These must be tackled with utmost priority within a realistic timeframe whilst successfully rolling back official debt in both nominal and relative terms. In addition, adjustment must be achieved with the least collateral damage to social cohesion, resource sustainability and the environment since these are the bedrocks of the country s economic pillars. These salient points, in a nutshell, set out the policy agenda for 2008 and beyond. The policy challenge is to a large extent made easier by the underlying strength of FDI activity. To ensure that such growth momentum continues, investment commitments must be transformed in additional realised export capacity and in this connection, the constraining lack of domestic quarry products and other critical products must be earnestly resolved. In addition, government regulatory agencies must adopt a more proactive business-friendly approach in the discharge of their functions so as to minimise bureaucratic bottlenecks in the planning and construction process. Improvements in this regard would ensure that projects are completed on schedule and on budget, rather than be needlessly delayed as in earlier instances, to the detriment of the country. On a positive note, certain concrete steps have been initiated by the government to address these supply-side concerns. Of major significance is the plan to set up the Seychelles University which will provide for future manpower needs, especially for the services industry. In addition, other committees have been instituted to identify the input needs for the construction industry over the plan period as well as the labour requirement needed to support the realised investments. As in 2007, the year closed with continued uncertainties with regards to the future evolution of energy prices amidst threats of world economic slowdown, following the international liquidity squeeze resulting from the collapse of the sub-prime mortgage market in the USA. Prospects are

20 Highlights of the Seychelles Economy further clouded by the associated turmoil in the currency and equity markets as well as in the price volatility in commodity markets. Such risks only serve to glaringly expose the vulnerability of Seychelles to the vagaries of international economic developments. Without a substantial softening in international energy and food prices, the country s adjustment roadmap faces the strong risk of derailment as resources are shifted from growth activity to the national priority of ensuring energy and food security

21 SECTION TWO Financial Survey 2. Overview The effects of the monetary policy revisions implemented by the Central Bank in the second half of 2006 crystallised during the year These were mostly visible in the movements of key monetary fundamentals which overall pointed to a tightening of monetary conditions and thus providing the enabling condition for more effective macroeconomic convergence within the framework of the ongoing foreign exchange liberalisation process and a more competitive domestic currency. Against the above backdrop, the Central Bank acted as a key facilitator of the reform process. Relative to recent years, the use of monetary policy tools became more important even if they remained limited in scope and effect within the stylised context of a small island developing state (SIDS). Nonetheless, some normalisation in monetary conditions was achieved during Measured in its broadest sense, M2(p), the money stock contracted significantly in 2007, a result which was partly promulgated by a key event in the foreign exchange liberalisation process which started in October This manifested as a notable contraction in pipeline deposits in respect of foreign exchange demand for goods which have already entered the country. From R384 million in December 2006, the stock of pipeline deposits fell to R92 million at the end of December The clearance of external arrears from the system which occurred in the month of August was made possible through resources released in the banking system by the authorities, which resulted in a drop of 16 per cent in the broadest monetary aggregate. At the end of 2007 however, the monetary situation recovered somewhat with the decrease amounting to a lower 2.4 per cent relative to the corresponding end-2006 level. The stock reduction in the broad monetary aggregate was an important intermediate policy objective in the Central Bank s roadmap to rollback the longstanding monetary overhang and restore equilibrium in the money market. This would in turn improve the effectiveness of monetary instruments in

22 Financial Survey influencing macroeconomic fundamentals. From an external account perspective, an effective tightening in monetary conditions would reduce aggregate spending and hence promote external convergence through a moderation in import demand. On the asset side of the monetary survey, a contraction of 20 per cent in net foreign assets of the banking sector was recorded whilst conversely domestic assets increased by 8.4 per cent. The deterioration in the foreign asset position was wholly driven by a decline in the Central Bank s net external holdings which fell from R653 million to R323 million. In contrast, the position of commercial banks improved from negative R115 million to positive R109 million on account of strong inflows from the tourism sector. As regards to the expansion in (net) domestic credit, this was due to the net effect of a growth in credit accommodation to the private and parastatal sectors coupled with a drop of 3.8 per cent posted under claims on the government. At the end of the year 2007, the government accounted for 53 per cent of the commercial banks lending portfolio. This was a remarkable decline relative to the 63 per cent in 2006, a development consistent with the government s objective to shift its role in the economy from economic operator to that of a facilitator. In nominal terms, commercial bank lending to government actually fell over the year. However, the government s international indebtedness increased, in part on account of an additional US$30 million bond issued on the capital market in August. With the new issue, the total stock of funds raised through the floatation of international paper increased to US$230 million. In line with the earlier practice, the rupee proceeds arising from the sale of the US$30 million of hard currency to the Central Bank were mainly used to retire domestic debt which significantly explained the decline in government domestic debt in 2007 compared to In terms of the opportunity cost of holding money, an overall hardening in conditions was observed. In some small measure this was influenced by the increase in the minimum deposit rate from 2.50 per cent to 3.50 per cent announced in October 2007 which became effective in December Such a move was anticipated by the market following growing signs of a tightening in banking sector liquidity. As such, over much of the year, the trend in interest rates was upward on most categories of deposits with instruments with a maturity of above seven days to 3 months, showing the maximum average weighted increase of 0.65 percentage points. Against this backdrop, the yield in the market for government securities (Treasury bills) offered on tender understandably rose, by 0.48 percentage points on the average

23 Financial Survey Buckling the underlying trend was the observed reduction in the return on time deposits with a maturity of above 12 months. Such a movement occurred alongside a noticeable reduction in this category of deposits, following the liquidation of sizeable balances used to fund the clearance of external commercial arrears from the system. The premature withdrawal of such long-dated term deposits explains the reduction in yield on this deposit category on an average weighted basis. Notwithstanding the overall progress made in the monetary domain, the banking sector remained fairly liquid with quite a considerable level of cash overhang. The progressive elimination of such overhang, estimated at about US$70 million, will be critical for restoring monetary equilibrium, improving the effectiveness of monetary instruments and strengthening confidence in the domestic currency. The successful achievement of this will not only encourage savings at a national level but in the process curb consumption activity and thus reduce adverse pressures on the external accounts. 2.2 Net Foreign and Domestic Assets The banking sector s net foreign assets position remained positive in 2007 for the second consecutive year. However, from R539 million, such assets fell to R432 million, an outcome wholly attributable to the decline in the net balance of the Central Bank which dropped from R653 million to R323 million. The drawdown on external resources reflected the considerable settlement of external debt service obligations and other national payments (health, education, petroleum, etc.) which far exceeded the level of foreign exchange inflows to the Central Bank reserve accounts. In addition, some resources were deployed to clear requests under the pipeline scheme within the framework of the foreign exchange liberalisation process. Chart 2.1: Net Foreign and Domestic Assets ( ) R million 7,000 6,000 5,000 4,000 3,000 2,000 1, , Years Net Foreign Assets Domestic Assets % Change in Total Assets Percentage Source: Central Bank of Seychelles

24 Financial Survey On the other hand, the external position of commercial banks showed an improvement from negative R115 million to positive R109 million between the end of December 2007 and 2006, respectively. This commendable turnaround was primarily associated with the increase in foreign exchange inflows through the domestic economy, primarily on account of the strong performance of the tourism sector. On the domestic front, the monetary survey showed an expansion in credit creation from R4,870 million in 2006 to R5,277 million (8.4 per cent). The source of the expansion was the private and parastatal sectors. Over the same period, government reduced its reliance on domestic financial resources, an outcome which must however be contrasted against a corresponding increase in external indebtedness. The decline in net claims on the government amounted to R126 million (3.8 per cent) whereas the growth in claims on the parastatal and private sectors was of the order of 42 per cent and 33 per cent respectively. In regards to parastatals, the increased demand for credit was mainly to meet the cash flow requirements of certain entities, which incurred massive operational losses arising out of adverse currency movements and commodity and energy price shocks. This was particularly the case for PUC, the utilities company which suffered losses as it maintained an unchanged tariff structure against the backdrop of a major increase in production costs. As regards to the growth in claims on the private sector, this was consistent with the period s reported increase in economic activity, notably in the tourism and peripheral sectors. From an economic perspective, the shift in the sectoral allocation of banking sector resources to the private sector is a most welcomed development as overall it mirrored an expansion in economic activity. On the other hand, the growth in credit to the parastatal sector is of serious concern as such additional resources were required to cover operational losses rather than to support a growth in output. 2.3 Money Supply In encouraging contrast to the upward trend in the money supply observed in the previous years, a contraction in liquidity was registered at the end of This was of R110 million or 2.4 per cent, with the contractionary impulse originating wholly from the foreign side of the monetary framework. However, whilst the broad monetary aggregate declined, this occurred in the relatively least liquid component of the money supply with M1, which is composed of the most liquid monetary aggregate showing an increase of R210 million (15 per cent) relating to growths under both currency with the public and demand deposits. Currency with the public grew from R393 million in 2006 to R408 million in 2007, a movement which was consistent with the reported increase in economic activity and

25 Financial Survey the need to hold higher transaction cash balances in view of increasing inflationary tendencies evident from the second half of Table 2.1 Monetary Survey (R million) Net Foreign Assets Central Bank Commercial banks Domestic Assets Claims on private sector Claims on parastatals Claims on government (net) Money Supply, M2(p) Money Supply, M Money, M Currency with public Demand deposits (of which public entities) Quasi-money Time deposits (of which parastatals) Savings deposits Foreign Currency deposits Pipeline deposits Other items, net Figures do not necessarily add up due to rounding. 1 End-of-period data. 2 Excludes government balances. Source: Central Bank of Seychelles As regards to demand deposits, following their decline to R999 million in 2006, these increased by R195 million (20 per cent). It is as yet not clear whether this is a temporary development or a general portfolio shift in deposit composition in response to the changes in underlying economic fundamentals. However some preliminary evidence would suggest that this could have occurred as a result of an increased conversion of foreign currency deposits into domestic currency. The movement in quasi-money was from R2,884 million to R2,856 million, showing a contraction of R28 million (1.0 per cent) against 2006 s corresponding level. This was due to a significant decline of R463 million (36 per cent) in the balance of time deposits of the private sector. Such a development was for the most part associated with the removal of rupee deposits from the system to clear commercial arrears of the private sector. As for savings deposits, the end-2007 balance was

26 Financial Survey R92 million above the previous year s amount corresponding to an annual percentage increase of 9.6 per cent compared to 12 per cent in The upward revision in interest rate from 2.50 to 3.50 per cent effective December 2007 was under the prevailing economic conditions modest in quantum but very significant as a signalling event to the private and business fraternity. As such, such a move was not expected to contribute to an immediate and major slowdown in aggregate demand, nor lend much support to the current account. However, it demonstrated the Central Bank s resolve to resort to more active use of interest rate policy as a demand management instrument within the constraints posed by a small imperfect financial market and the vulnerability of government finances to interest rate increases. Moreover, with the emergence of inflationary tendencies, strong downward pressure is being exerted on monetary balances as economic agents attempt to maintain volume consumption levels unchanged. Such a trend is unlikely to be arrested in the short-term by the recent interest rate increase until savings are drawn down to precautionary levels and adjustment in consumption pattern becomes obligatory within a given budget constraint. Of the various money components, foreign currency deposits registered the most significant movement. Compared to R318 million in 2006, the balance more than doubled at the end of This was partly on account of the weakening of the domestic currency between the two periods which translated into a higher rupee balance for the same unit of foreign currency. Nonetheless, in euro terms the currency in which the majority of inflows to the country are denominated foreign currency deposits of residents in domestic banks was higher than in the previous year. The increase was from 42 million to 55 million which was also consistent with the increase in tourism earnings (and record visitor arrival level) recorded during the year. As regards to pipeline deposits, this expectedly fell from R384 million in 2006 to R92 million in The reduction reflected both withdrawals and payments were the latter corresponded to legitimate requests for goods and services which have entered the country which were being cleared by the Central Bank as part of the foreign exchange liberalisation process launched in October The target is to systematically finance out all commercial arrears in

27 Financial Survey Chart 2.2: Money Supply ( ) R million 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Years Demand deposits Time deposits Savings deposits Pipeline deposits Foreign Currency Deposits % Change in M2(p) Percentage Source: Central Bank of Seychelles 2.4 Domestic Credit Central Bank and Commercial Bank Credit The drop of 4.0 per cent in aggregate domestic credit observed at the end of 2006 was reversed at the end of 2007 when a growth of 4.6 per cent was recorded, bringing the stock to R5,549 million. Such a movement was due to an increase in total credit extended by both the Central Bank and commercial banks, with the latter leading the expansion. During the year, the commercial banks recorded an increase of R218 million (5.2 per cent) in their exposure on the economy reflecting the net effect of a growth in claims on the private and parastatal sectors and a contraction in the amount extended to the government. Chart 2.3: Total Domestic Credit ( ) R million 6,000 5,000 4,000 3,000 2,000 1, Years Commercial Banks Central Bank % Change in Total Domestic Credit Source: Central Bank of Seychelles Percentage

28 Financial Survey Table 2.2 Credit 1/ (R million) Total Credit Commercial banks Claims on private sector Claims on parastatals Claims on government Of which: Dev. Fund Stocks (140.0) (147.1) (147.1) (147.1) (147.1) Treasury bonds (1167.4) (1079.4) (1095.0) (1342.4) (1055.1) Treasury bills (1003.9) (1511.6) (1302.2) (1132.8) (1092.6) Central Bank Claims on government Of which: Advances (811.0) (1316.6) (0.0) (0.0) (86.4) Treasury bonds (200.0) (84.0) (1340.8) (1111.1) (1052.6) Treasury bills (0.7) (0.0) (0.0) (0.0) (0.0) Figures do not necessarily add up due to rounding. 1 End-of period data. 2 All figures for stocks, bonds and bills are at cost value. Source: Central Bank of Seychelles The increase in claims on private sector was of R432 million (33 per cent) whereas the growth in claims on the parastatal sector amounted to R101 million (42 per cent). At the end of 2007, the share of aggregate credit extended by commercial banks to the private sector was 40 per cent whilst parastatals accounted for 7.7 per cent of the loans portfolio. In 2006, the ratio was 31 per cent and 5.7 per cent, respectively. Both sectors thus increased their respective share of banking resources in line with the retrenchment of central government. Claims on the government by the commercial banks declined by R315 million (12 per cent) whereas an increase of R28 million (2.5 percent) was recorded by the Central Bank. Such a development does not reflect a strong fiscal outcome but more a restructuring in the composition of public debt with the decline in domestic debt being partly offset by a growth in foreign indebtedness. At the end of the year, the government still accounted for the lion s share of banking sector aggregate credit. However, this ratio has been on a gradual declining trend from 80 per cent in 2003 to 71 per cent in 2006 and fell further to 62 per cent at the close of

29 Financial Survey Sectoral Allocation of Credit to Private Sector and Parastatals A number of factors appeared to have influenced the sectoral distribution of credit during Foremost of all, the improved economic environment stemming from the success of government policies to facilitate business activity particularly in tourism and fisheries had translated into a growth in credit demand from the productive sector. Secondly, the combined impact of higher prices and a weaker currency had increased the economy s rupee requirement for both investment and working capital. In the case of certain companies, including some key parastatals, added recourse to bank credit was required to cover some serious cash shortfalls resulting from operational losses. Thirdly, a restructuring in the composition of public debt intricately linked with certain important foreign exchange liberalisation initiative led to a drop in domestic financing needs but an increase in external indebtedness. Chart 2.4: Commercial Banks Credit ( ) R million 4,000 3,500 3,000 2,500 2,000 1,500 1, Years Claims on private sector Claims on government Claims on parastal sector Source: Central Bank of Seychelles Consequently, whilst the government remained the main borrower in the economy, its share of total credit declined whilst an increase in credit allocation to the private and parastatals sectors was reported. In growth terms, the increase in credit by the private and parastatals sectors was by a significant 33 per cent and 42 per cent, respectively. This credit expansion was experienced across all economic sectors. The dominant sector was tourist facilities which accounted for 35 per cent of commercial banks total lending to non-government sectors. A total of R315 million was borrowed, representing a growth of 74 per cent compared to the previous year. Such a development was consistent with the observed growth of the sector in terms of infrastructural development and tourism arrivals

30 Financial Survey Table 2.3 Commercial Banks Loans and Advances To Non-Government Sector by Economic Sectors (R million) (per cent) Total Advances Of which: Foreign Currency Loan Agriculture & fishing Of which: Refinance scheme Manufacturing Construction Transportation Tourist facilities Wholesale & Retail trade Other businesses Private households & Non-profit organisations Of which Mortgage loans Figures do not necessarily add up due to rounding. 1 End-of-period data. Source: Central Bank of Seychelles A notable growth was observed in the amount lent out to the transportation sector which grew from R9.1 million in 2006 to R54.7 million in 2007, translating in an increase in its share of total credit to the non-government sector from 0.6 per cent to 2.5 per cent. This unprecedented increase can be linked with the record number of vehicles imported in the country during the year by car hire businesses as well as private households. The smallest increase in credit was of R2.3 million in respect of credit allocated to the manufacturing sector which continued to be affected by shortages of key imported inputs arising from the stringency in the foreign exchange situation. It is interesting, albeit worrisome, to note that an increasing share of total credit was in foreign currency, amounting to 31 per cent versus only 6.7 percent in Partly such an outcome is explained by a weakened domestic currency. Compared with 2006, foreign-denominated advances increased from R338 million in 2006 to R652 million in In US dollar terms, the increase was still considerable, from US$58 million to US$82 million. The borrowers of such resources are foreign exchange earners, particularly businesses in the tourism sector. At the close of 2007, tourists facilities accounted for 35 per cent of total non-government credit as against 27 per cent in The next dominant sector was other businesses with a share of 21 per

31 Financial Survey cent despite showing a drop compared to 28 per cent in Other sectors which observed a reduction in their share allocation were manufacturing, construction, wholesale and retail trade and non-profit organisation. The sectors which accounted for the smallest proportion of credit to the non-government sectors were agriculture and fisheries and manufacturing, both of which represented only 0.7 per cent of the total credit extended to the private and parastatal sectors. Chart 2.5: Commercial Banks Loans and Advances to the Non-Government Sector as Percentage of Total ( ) 2,500 2,000 R million 1,500 1, Years Agriculture and Fisheries Manufacturing Construction Transportation Tourists Facilities Wholesale & Retail trade Other businesss Private households & Non profit organisaiton Source: Central Bank of Seychelles Development Bank s Credit 3 The Development Bank of Seychelles (DBS) is the microfinance institution in the financial system, providing advances across economic sectors. In 2005 and 2006, DBS s loan portfolio has been increasing at a decreasing pace. For the year 2007, the stock of outstanding loans at DBS stood at R294 million, showing a contraction of R37 million (11 per cent) compared to the previous year. Prior to 2007, the most recent contraction in DBS loan portfolio was registered in Development Bank of Seychelles(DBS) was established in 1977 under Decree No. 21 as a development financing institution with a specific mandate to assist in the economic development of Seychelles. DBS finances new modernization and expansion projects in the fields of agriculture, fishery, industry, service and tourism as well as construction of commercial and residential complex. To qualify, the applicant must be a Seychellois citizen or a company incorporated in Seychelles with at least 51 per cent Seychellois ownership. Currently, DBS charges 9.5 per cent per annum on all loans and requires applicants to make a minimum personal contribution of 25 per cent of the total project cost. The Development Bank of Seychelles does not provide credit for working capital by itself

32 Financial Survey In 2007, the decline in total advances reflected developments in lending to all sectors. This reflected an increase in competitiveness of the loans disbursed by commercial banks, with the added advantage of the client being able to borrow in hard currencies. The contraction ranged between R1.8 million ( Industry ) and R21 million (Tourism). The drop in credit extended under other services, which accounted for the bulk of DBS advances, was R8.0 million (4.4 per cent). The agricultural sector continued to represent the smallest proportion of DBS s loan portfolio and at R8.3 million showed a decrease of R4.1 million. Table 2.4 Loans by Development Bank by Economic Sectors (R million) (per cent) Total Advances Agriculture Fishing Industry Tourism Other services Figures do not necessarily add up due to rounding. 1 End-of-period data. Source: Development Bank of Seychelles Chart 2.6: Loans By Development Bank by Economic Sectors ( ) R million Years Agriculture Fishing Industry Tourism Other services Source: Central Bank of Seychelles

33 Financial Survey 2.5 Liquidity of Commercial Banks Based on the credit/deposit ratio which showed a small increase from to 102.8, the consolidated liquidity situation of commercial banks appeared unchanged at the end of 2007 compared to Compared with preceding years, banks are currently operating within a tighter liquidity envelope. Notwithstanding this, banks participated actively in the Treasury bill auctions during the year and at the end of 2007, they continued as a group to hold excess consolidated balances over the prevailing prescriptions on statutory cash reserves requirement and local assets ratio. Table 2.5 CBS Advances to Commercial Banks (R million) Advances Repayments Stock of credit End-of-period data. Nonetheless, unlike in earlier years, at least two banks faced liquidity difficulties late in the year following the withdrawal of deposits linked with the discharge of some large commercial arrears in the banking sector. This is reflected in an increased tendency by these banks to resort to temporary borrowings from the Central Bank. In its role as lender of last resort, the Central Bank increased its volume of advances to the banks from R34 million in 2006 to R157 million in However, similar to the previous year, the whole sum was repaid by the end of the year. Chart 2.7: Central Bank Advances to Commercial Banks ( ) 1,200 1, R million Years Advances Repayments Source: Central Bank of Seychelles

34 Financial Survey Table 2.6 Liquidity Indicators of Commercial Banks (R million) Credit Deposits (per cent) Credit-deposit ratio Figures do not necessarily add up due to rounding. 1 End-of-period data. 2 Excludes pipeline deposits Source: Central Bank of Seychelles Chart 2.8: Credit and Deposits at Commercial Banks ( ) R million 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Years Credit Deposits Source: Central Bank of Seychelles 2.6 Interest rates The prescription of a minimum deposit rate of 2.50 per cent except on current accounts in October 2006 was a landmark policy development. Prior to this, banks applied such a rate only on savings deposit, a situation tantamount to the adoption of a de facto passive approach to interest rate policy. The announcement of an increase in the minimum deposit rate from 2.50 per cent to 3.50 per cent in October 2007 to take effect the following December further confirmed that the Central Bank was now adopting a stronger and active stance in the determination of interest rates

35 Financial Survey The shift in monetary policy resulted, as anticipated, in a general upward movement in the structure of domestic interest rates. On the deposit side, the most significant increase was of 0.65 percentage points in respect of deposits of above 7 days to 3 months. An upward movement was also registered in the yield on deposits with a maturity of above 3 months to 6 months and above 6 months to 12 months and this was of 0.17 percentage points and 0.25 percentage points respectively. Likewise, the average Treasury bill rate increased from 3.96 per cent in 2006 to 4.44 per cent in The average weighted interest rate on time deposits with a maturity of up to 7 days and above twelve months showed a contraction compared to the previous year. The decline was of 0.75 percentage point and 0.79 percentage points respectively. These aberrations from the norm can be deemed to be temporary in duration being associated with some exceptional events as explained earlier. Volume-weighted average deposit rates: Table 2.7 Interest Rates (per cent) Savings rate Time deposits 7 days > 7 days < 3 months > 3 months < 6 months > 6 months < 12 months > 12 months Volume-weighted Average lending rate day treasury bill rate (tap) day treasury bill rate (tender) day treasury bill rate (tender) Average of monthly data, compiled on an end-of-period basis. As regards to the lending rate, the average movement was from 10.5 per cent to percent which followed the trend in other rates. Most small loans appeared to have incurred an increase in rates whilst larger loans seemed to have enjoyed a drop in rates as competition in the banking intensified following the decline in government domestic financing requirement

36 Financial Survey Chart 2.9: Interest Rates ( ) Percentage Years Minimum Deposit rate Time deposits rate: <= 7days Time Deposit Rate: > 6 months < =12 months Average lending rate 91-day treasury bill rate Source: Central Bank of Seychelles

37 SECTION THREE Government Finance 3. Summary As has been the case since 2003, the philosophy underlying the government budget strategy is a firm and prudent fiscal stance, one that emphasises expenditure control and debt sustainability whilst at the same time targeting a retrenchment in government intervention in the economy. This belief was reinforced by the launch in March 2007 of Strategy 2017, which clearly redefines the role of government to that of facilitator with an eye on raising efficiency, improving governance and promoting responsiveness in service delivery. Many discussions, involving expert exchanges, were undertaken during the year with the objective of helping government design and implement policies that would allow for better management flexibility in responding to shocks and in promoting faster macroeconomic convergence. For 2007, the fiscal outcome showed an overall surplus of R65 million which amounted to 1.1 per cent of the estimated GDP 4. When compared to the original budget target of R327 million, this outturn was somewhat disappointing. However, this occurred against the backdrop of some adverse unanticipated events that happened throughout the year originating from both domestic and external sources. Specifically, these related to the increases in the price of fuel and other commodities from the international markets as well as the realignment of the domestic currency, events which had negative impact both on spending levels and on revenue streams. The above two factors affected key expenditure heads throughout the year, not least government subsidies to PUC/SMB which became unavoidable as these parastatals saw themselves faced with rising operating/procurement costs whilst having to function against the constraint of unchanged tariff and price structures. For the full year, expenditure overruns were of the order of R389 million or 19 per cent in respect of both spending on current expenses and capital outlays. In contrast, a better performance on revenue collection was recorded, amounting to some 5.2 percent above expectations. This was consistent with the general rise in economic activity corresponding to a real GDP growth of 4 GDP data series have been revised upwards. This forms part of an exercise to enhance the national accounts which had been called for. The new series is seen to be more realistic of the level of income generation compared to the old series

38 Government Finance 7.3 per cent for the year, arising from higher tourism, construction, telecommunications and financial services activities. Chart 3.1: Government Finance Outcome ( ) R million Years Total Receipts Total Outlays Overall Balance Source: Ministry of Finance 3.1 Outcome for 2007 The achievement of debt sustainability through budgetary consolidation is one of the key elements of the government reform agenda and underpins the whole spectrum of the internal/external economic convergence roadmap. However, in the prevailing context, adjustment efforts are severely constrained by the high level of official (domestic and external) indebtedness, more specifically by its sensitiveness to both interest rate and exchange rate movements. Moreover, whilst government may pursue a conservative fiscal policy, the budgetary performance of a small island economy like Seychelles will continue to be vulnerable to adverse exogenous developments as experienced in Hence, in addition to changes in domestic monetary/exchange rate policies, external shocks such as the rise in international energy and commodity prices can have a great bearing on fiscal performance of the country. The fiscal outcome for 2007 portrayed all the opportunities and downside risks that the country can conceivably face from a budgetary management standpoint. The budget posted a surplus of R65 million compared to R174 million in This outcome reflected another year of peak revenue, especially achieved under current receipts which was above the previous year s level by R129 million or 5.4 per cent. This reflected the increased economic growth, especially arising from the tourism sector through higher Goods and Services tax collections as well as income/business tax and trades tax

39 Government Finance Table 3.1 Government Budget Summary Budget Actual 1 Budget Actual 1 Budget Actual 1 Budget R million Total Receipts Current receipts Of which: Trades tax [306] [281] [199] [225] [260] [265] [360] Transfers from Social Security [125] [325] [125] [125] [125] [125] [135] Business/income tax [317] [277] [304] [297] [316] [360] [359] Other indirect taxes [628] [684] [673] [723] [883] [884] [1023] Grants Total Outlays Current outlays Appropriation items Of which: Ministries/departments [794] [809] [836] [952] [933] [1008] [973] Social Security contributions [143] [143] [143] [147] [170] [136] [139] Current outlays to parastatals [30] [48] [62] [124] [121] [239] [68] Charges [424] [377] [433] [456] Of which: Interest payments [301] [243] [179] [406] [360] [417] [435] Contingency Fund Capital outlays Net lending Of which: Parastatals [0] [-35] [0] [-3] [0] [-55] [0] Primary Balance Overall Balance Financing (net) Foreign loans (net) Domestic loans (net) Cash movements Memorandum Items: Amortisation of loans Of which: Foreign loans Domestic loans Figures do not necessarily add up due to rounding. 1 These series are subject to audit and might be revised accordingly. 2 The primary balance is obtained by excluding interest payments from the overall balance. Source: Ministry of Finance

40 Government Finance In terms of total expenditure, R2,484 million was spent, representing an increase in spending over 2006 by R182 million or 7.9 per cent. The higher expenditure reflected to a large extent the impact of external shocks and changes in domestic policies in the manner described above. These two elements were very much at play in 2007 more so than in Excess expenditure was incurred in terms of ministries/departments, current outlays on parastatals and interest payments. However, on an encouraging note, there was a decline in the expenditure allocation for capital expenditure which fell by R30 million or 7.4 per cent relative to the previous year. 3.2 Revenue Resulting from the momentum in economic growth stemming from trade liberalisation, a realigned currency and an improved business climate, was a major expansion in the country s tax base. In consequence, revenue collection hit at an all-time high in 2007, an outcome led by taxation receipts and dividends/interests. Total revenue collection for the year amounted to R2,549 million, representing an increase of R127 million or 5.2 per cent relative to forecast. Current receipts accounted for 99 per cent of the total with the remaining balance being flows from grants. Current revenue was above budget estimates by 6.7 per cent with all revenue streams performing better than anticipated with the exception of administrative fees and fines and rents and royalties which fell short by R14 million and R124 million respectively. For the latter, the reduced income is explained by lower revenue from the rent of land and buildings which came in at 50 per cent lower than forecast. As mentioned above, revenue collection from taxes was the most influential revenue flows in 2007 as has been the case in the recent past. For 2007, the four main tax heads, namely, trades tax, income/business tax, other indirect tax and transfers from Social Security Fund (SSF) accounted as a group for 65 per cent of current revenue. The increased revenue respective to budget estimates for the four named revenue heads was of the magnitude of R5.2 million, R44 million and R466,000 whilst the flow for SSF was on target. An in depth analysis of those taxable revenue flows showed that for trades tax, higher income was gained through increased collections from the importation of vehicles and food products. Nevertheless, trades tax revenue could have been higher, especially from oil products due to both volume and price effects. However, under the fixed price system that existed up to August, petroleum revenue at the pumps was essentially the difference between the international fuel price and a fixed price regime, implying that as the fuel import price rises, the tax element falls. With the change in the

41 Government Finance pricing policy in September, which involved major price increases - and allowed for changes in fuel prices on a quarterly basis - government was able to recover some tax revenue in the latter part of the year. Nonetheless, it was not enough to outweigh the losses of the previous eight months. The most significant increase in tax receipts has been in terms of income/business tax, which was in excess of forecast by 14 per cent and by coincidence accounted for the same percentage share in current revenue. This noteworthy achievement clearly vindicated the proposition that strong growth in the economy prevailed in 2007, as in The growth impulses emanated from the tourism, construction, telecommunication and financial sectors with the former two sectors being strongly influenced by FDI flows. Table 3.2 Government Budget Revenue Budget Actual 1 Budget Actual 1 Budget Actual 1 Budget (R million) Total Receipts Current receipts Transfers from social security fund Trades tax Income/business tax Other indirect taxes Of which GST on: Locally manufactured goods Services Imported goods Fees and fines Administration fees and Charges Rent and royalties Income public service Dividends and interest Reimbursements Miscellaneous Grants Figures do not necessarily add up due to rounding. 1 These series are subject to audit and might be revised accordingly. Source: Ministry of Finance

42 Government Finance Chart 3.2: Major Revenue Flows in Current Receipts ( ) R million Years Transfers from SSF Trades Tax Income / business tax Other Indirect Taxes Fees and Fines Rents and Royalties Source: Ministry of Finance As regards other indirect tax, a slight increase of only 0.1 per cent was recorded relative to expectations. Nevertheless, it must be noted that its share in current revenue rose from 30 per cent in 2006 to reach 35 per cent in the current year. This increase in share clearly demonstrates the importance of this tax, especially the Goods and Services Tax (GST) component introduced in 2003, which has allowed for the domestic tax base to be considerably widened. For the non-taxable revenue, the most prominent flows came from the category head of dividends/interests. This was primarily in relation to higher than anticipated receipts from Nouvobanq, the public sector commercial bank amounting to R61 million compared to the original forecast of R15 million and on statutory transfers from the Central Bank which stood at R175 million compared to the expected R40 million. For the rest, there were increases in fees and fines (16 per cent); income from public services (10 per cent); reimbursements (13 per cent) and miscellaneous income (180 per cent) compared to their respective budget forecasts. 3.3 Expenditure Government was very focussed since the beginning of the year in making sure that spending remained within the approved limits. Expenditure control was being tightly co-ordinated by the Ministry of Finance such that maximum fiscal discipline could be achieved. Much progress was attained in the first half of the year but moving in the second half, there were increasing pressures on the government accounts for additional resources. These stemmed from the external and policy shocks alluded to

43 Government Finance earlier, namely higher prices of fuel and commodities as well as the exchange rate movement of the domestic currency. The international increases in the price of oil and food commodities increased the expenditure on parastatals in the form of large subsidies to compensate for losses arising out of a policy regime of fixed prices, primarily in respect of PUC (utility prices) and the SMB (commodity prices). The magnitude of subsidies extended to the parastatals proved unsustainable, forcing government to resort to a pricing policy for energy products that reflects international price developments. Whilst this change of policy allowed for an improvement on the revenue from trades tax on fuel, it translated into higher expenditure in terms of the procurement of this commodity which had not been anticipated at the time the budget was formulated in late Furthermore, the government was greatly affected by the movement in the exchange rate, especially in the final quarter of the year. The change in the exchange rate in October affected the spending requirements in respect of external commitments associated with education, health and debt servicing payments. In addition to the external price shocks and the exchange rate movement, the budget performance was also undermined by firmer domestic interest rates which continued from the previous year in view of the tightening of monetary policy. Overall, total outlays amounted to R2,485 million which represented an excess over budget estimates of R389 million or 19 per cent for the year. The overrun was in reference to current and capital spending which were above their budget limits by 17 per cent and 57 per cent respectively. Net lending for its part reported a net repayment compared to a budgeted nil balance. Chart 3.3: Government Expenditure by Main Heading ( ) Rmillion Years Current outlays Capital outlays Net Lending Source: Ministry of Finance

44 Government Finance Table 3.3 Government Budget Expenditure Budget Actual 1 Budget Actual 1 Budget Actual 1 Budget R million Total Budget Outlays Total Current Outlays Appropriation items Ministries/departments Tourism & Transport Education & Youth Health Defence Internal Affairs Pension & Gratuities Subventions Regulatory bodies Parastatals Other bodies Social Security Contributions Pension Fund Contributions Other appropriations Charges Public debt interest Other charges Capital Outlays Development grants to parastatals Land acquisitions Capital projects Net Lending BTL advances parastatals 0 (35) (55) 0 BTL advances others (7) 0 Capital subscriptions Equity participation Figures do not necessarily add up due to rounding. 1 These series are subject to audit and might be revised accordingly. Source: Ministry of Finance Current Outlays Current expenditure amounted to R2,172 million which was above its budget limit by R316 million or 17 per cent. This excess spending was observed in almost all the categories of expenditure in the two broad heads of appropriation items and charges. A detailed analysis of these broad categories of spending showed that the most prominent expenditure overrun in the appropriation items category was in current outlays on parastatals and centralised

45 Government Finance payments, which were above their respective budget estimates by R118 million and R68 million. The higher expenditure in relation to current outlays to parastatals, was mainly in terms of subsidies granted to PUC and SMB. The increasing prices of oil and other commodities on the international market coupled with the exchange rate effect in October, placed heavy cost pressure on the said companies, thus forcing them into loss positions which had to be covered through government subsidies. The revision in pricing policy of domestic fuel at the pump in September signalled government s preparedness to review its national position on the sensitive issue of prices in order to arrest the deterioration in the fiscal position. Accordingly, after September, the government was reportedly reassessing the pricing policies of PUC and SMB to eliminate their need for budgetary support. In terms of the extra spending on centralised payments, this represented mostly resources needed to accommodate the extra expenditure on overseas training which rose on account of the exchange rate movement during the year. In addition, given the government s endeavour to pursue its reform agenda during the year, additional costs were incurred to contract in overseas expertise in the many instances where no local counterpart skills could be sourced. In the case of the rest of the expenditure heads in the appropriation items category, there were instances of excess spending, but in all cases the margin of overruns were below single digit in percentage terms. With regards to charges the second main sub-category of current outlays, these recorded a total expenditure of R433 million which was above its budget target by R56 million. Such significant variance reflected to a large extent excess spending in terms of public debt interest which was above budget by R62 million. This development clearly mirrored the changes in domestic interest rates during the year, especially on the government debt instruments (Treasury bonds) and the exchange rate effect on external debt interest payments. As part of the government s strategy to enhance savings, two new bonds were placed on the market with relatively higher interest rates compared to the previous year. Towards the end of the year, a tightening in monetary conditions started to affect short-term interest rates notably the 91-day treasury bill. This movement though not affecting the budget in 2007 will translate into higher interest costs for government moving forward. This clearly demonstrates the extent of the interest rate risk on government finances that can arise as the authorities continue to implement its reform agenda. Such a risk needs to be understood and minimised so that the budget strategy is not derailed, especially in the initial phase of the macroeconomic adjustment program

46 Government Finance Capital Outlays Capital expenditure for the year amounted to R374 million compared to a budget limit of R239 million. The bulk of the capital expenses represented capital projects in the amount of R343 million. In addition to spending on services and infrastructure development, the capital outlays were mostly in regard to housing development which absorbed R156 million in the year. Most of the housing development costs was incurred in respect of the Ile Perseverance housing project (Further details of the government capital project expenditure is discussed below). For the rest of capital outlays, there was a slight overrun of R705,000 on land acquisition. On the other hand, expenditure towards development grants to parastatals was well restrained and below budget by R8.2 million. Chart 3.4 Government Capital Expenditure ( ) R million Years Percentage Capital outlays % Change Source: Ministry of Finance 3.4 Public Sector Capital Project Expenditure Capital projects expenditure of the order of R343 million represented a decline of R27 million or 7.7 per cent relative to the previous year. This resulted from less spending on infrastructure and utilities projects and services which fell by R21 million and R7.7 million respectively. As for the economic sectors, there was a slight increase of R0.3 million in expenditure Economic Sectors Spending on government sponsored economic projects was more or less stable compared to the previous year. At R4.4 million, it represented a growth of only R328,000, mainly targeting the

47 Government Finance agriculture and fisheries sectors. Within the sector, spending on agriculture mostly covered the implementation of projects to eradicate the melon fruit fly as well as the upgrading of the poultry parent stock and the importation of new pig bloodlines. With regards to fisheries, this was expenditure incurred towards the construction of the Bel-Ombre fishing port which started in the previous year. Table 3.4 Public Sector Capital Expenditure (R thousand) Total 114, , , ,499 Economic Sectors 5,450 1,869 4,054 4,382 Agriculture 3, ,449 2,882 Fisheries ,593 1,500 Tourism 1, Outer island development Craft & home industries Trade & commerce Infrastructure and Utilities 26,121 20,411 43,445 22,185 Transport 13,860 8,711 33,515 16,422 Water supply & sanitation 275 4, Communications 122 1, Land Reclamation 6, Land Bank 4,984 6,093 9,523 5,439 Services 82, , , ,932 Education 17,424 22,824 1,662 1,518 Health 2,245 5,418 17,728 13,043 Housing 4,088 79, , ,484 Social development 12,921 31,842 99,273 34,624 Culture 1,613 1,607 3,777 3,524 Sports 3,765 7,812 2,996 11,388 Information & media ,623 17,866 Internal affairs 4,998 1, ,666 Public sector management 25,790 43,947 36,774 68,808 Environment 9,668 5,739 10,388 7,010 Source: Ministry of Finance Infrastructure and Utilities Compared to 2006 when there was a substantial increase in this category of project financing, an important scale down in expenditure was seen in the year under review, amounting to a decline of 49 per cent to close at R22 million. This was mainly on account of transport and land bank projects which fell by R17 million and R4.1 million, respectively. For the other two heads of expenditure, minimal expenditure was recorded

48 Government Finance Services Services continued to be the key sector where there has been important financing on capital projects. Of the R343 million of total expenditure for capital projects, the share of the services stood at 92 per cent. However, the amount allocated has declined compared to the previous year, corresponding to a fall of R7.7 million or 2.4 per cent. Whilst there was an overall decline in this category of expenditure, an analysis of the details shows that the most prominent spending was towards the sub-categories of housing and public sector management ; these increased by R39 million and R32 million respectively relative to the previous year. For housing, the expenditure reflected disbursements on on-going projects, especially the Ile Perseverance which accounted for R63 million of total housing outlays. As regards public sector management, this represented major renovation works on some of the government offices. Other increases were registered in favour of projects under the heads sports and internal affairs. For all the other categories, namely education, health, social development, culture, information and media and environment, there were reductions in the total spent relative to the previous year. Collectively the reductions amounted to R90 million. 3.5 Net Lending The policy of net lending is to achieve a nil balance by the end of each year. The outcome for 2007 was strongly encouraging in that the government was able to record a net repayment on such advances. These net payments came principally from parastatals in the amount of R55 million. Under the head others, which represents mainly general purpose loans to public servants, a net repayment of R8.0 million was registered. 4. Financing As has been the case in the rest years, the budget surplus in 2007, amounting to R65 million, was used to reduce domestic debt. In 2007 however, the net reduction in domestic debt was R328 million, an amount that exceeded the budgeted figure of R300 million as well as standing R263 million above the overall fiscal outcome. This repayment was made possible through a net draw down of R725 million in new external loans, thus leaving R462 million to be reflected in a rise in cash balances

49 Government Finance Following the above, the government has made significant progress in reducing the domestic debt stock as well as restructuring it from short term to longer term instruments. At the end of 2007, the total domestic debt outstanding amounted to R4.3 billion, representing a fall of R259 million or 5.7 per cent relative to It is important to note that this year s decline represents the five consecutive years of reduction and since 2005, the decline has ranged between R259 million to R325 million. Chart 3.5: Stock of Domestic Debt R million Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Months Source: Ministry of Finance

50 SECTION FOUR The External Sector 4. Overview Based on provisional Balance of Payments (BOP) statistics, a review of Seychelles external sector performance for the year 2007 showed a generally positive result. This is in consideration that the overall balance ended with a surplus for the second consecutive year despite an observed decline in the magnitude from R583 million (US$106 million) in 2006 to R190 million (US$28 million). On the financing side, the 2007 s overall BOP surplus represented a decline in reserves at the Central Bank but also a marked reduction in external arrears. The contraction in foreign exchange reserves was from R653 million (US$113 million) in 2006 to R323 million (US$40 million) end December Much of the pressure on official reserves can be attributed to the need to fund payments in areas such as education and health, whilst at the same time covering certain debt obligations. Although banking sector statistics showed an increase in foreign exchange inflows, this gain was far outweighed by the increased payment demand linked in a significant way with the underlying rise in aggregate demand and external factors such as the increase in oil prices to record level as well as the rise in prices of other commodities such as food items on the world market. The remarkable reduction in the country s stock of commercial arrears posted in 2007 was for the most part achieved through additional external borrowings and drawdown on reserves rather than from current banking inflows. Whilst this thus came at the cost of increased external indebtedness, such a development significantly corrected the liquidity overhang in the monetary sector whilst strengthening investor confidence in the country. With the monetary sector converging closer to equilibrium, the scope and effectiveness of monetary policy tools correspondingly improved, thus strengthening the credibility of the macroeconomic reform program and enhancing its prospects for early and successful closure. A detailed look at the main accounts showed a worsened current account position but a further strengthening of the financial account. This is consistent with the observed trends in real sector

51 The External Sector activity, in particular the strong recovery in aggregate demand induced by the unprecedented rise in FDI inflows. Moreover, given the country s heavy dependency on foreign goods, for consumption, investment, production, as well as in tourism and re-export activities, a deficit position under the current account is a virtual inevitability. In 2007, the shortfall stood at R1,820 million or equivalent to 30 per cent of GDP. This was a significant widening in net imports compared to R738 million (14 per cent of GDP) in Such a development was associated with a worsened trade balance and an increase in the deficit under the income account, which in combination totally exceeded the growth in the positive net contribution under the services account. The provisional trade deficit increased from R2,458 million in 2006 to R3,792 million in This 56 per cent rise was attributable to a significant 41 per cent growth in merchandise imports compared to an expansion of 11 per cent in exports. Of note is that the increase in exports denominated in rupees was due to the policy-induced weakening in the external value of the domestic currency. In US dollar terms, the total (f.o.b.) value of merchandise sold abroad fell to US$201 million in 2007 against US$220 million in The decline was mainly due to a drop in exports of canned tuna as well as other fish products. In 2007, an overall contraction in fisheries activity was experienced on account of adverse weather conditions. Nonetheless, the country s main export commodity continued to be canned tuna which represented around 91 per cent of total export earnings. Chart 4.1: The overall balance, current account and capital & financial account of the BOP from ,500 2,000 1,500 1, R million ,000-1,500-2,000-2, Years Current Account Capital & Financial Accounts Overall Balance Sources: Central Bank of Seychelles, National Statistics Bureau

52 The External Sector As for merchandise imports (f.o.b.), these are estimated at R5,139 million compared to R3,644 million in Whilst such increase was partly on account of domestic movement in exchange rate, important contributing factors were the strong demand for FDI-related goods required in the construction phase of projects, the high demand for consumption goods by both private households and the tourism industry and the increase in fuel imports, mainly attributed to the global rise in prices. Additionally, around R461 million (or 40 million) of imports represented the acquisition of a fourth oil tanker (MT Seychelles Prelude) by Seychelles Petroleum Company (SEPEC). With regards to the services account, this maintained its positive net contribution to the current account. The surplus amounted to R1,165 million, showing an increase of 35 per cent compared to year The main contributing factor was the foreign exchange earnings from tourism which posted growth of a significant 52 per cent and represented 59 per cent of services credit. The peak in tourism earnings was one of the positive achievements of the sector in a year when visitor arrivals reached a new record of 161,273 visitors, 15 per cent above 2006 level. The deficit under the income account which was R241 million in 2006 increased to a remarkable R471 million. Such a development was mainly due to the movement under investment income, primarily associated with an increase in interest payment in 2007 compared to The bulk of these were payable by the government and parastatal sectors and included the amount due and paid on the US$200 sovereign bond issue raised on the international capital market in September For its part, the transfers account ended the year in usual but larger surplus. At R343 million, the estimated net inward transfers from the rest of the world grew by R101 million compared to last year. Of important significance was the increase under the non-official sector, the bulk of which represented settlement of imports, a trend which gained prominence since the start of the trade liberalisation process in mid As for the capital and financial accounts, these achieved a surplus for the third consecutive year. The balance increased from R1,312 million in 2006 to R1,999 million in 2007, largely on account of the increase in foreign direct investment inflows from R804 million (US$146 million) to R1,663 million (US$248 million). The bulk of these flows were tied to the financing of the construction of new tourism establishments and resorts. Based on the current level of commitments, FDI projects which include the participation of internationally known names such as Four Seasons, Shangri-La, Emirates and Qatar, are expected to remain strong through at least the next five years

53 The External Sector An important financial account development recorded in 2007 was the surplus reported under portfolio investment. This amounted to R208 million and was primarily associated with the issue on the capital market by the government of a US$30 million bond in August. The bond has the same price and maturity structure as the US$200 bond raised in On the exchange rate front, the domestic currency remained pegged to the Seychelles Trade and Tourism Weighted Basket (STTWB) with the euro, UK pound and US dollar, being the three currencies that are featured in the STTWB. In October, the Central Bank announced a revision in its exchange rate policy with the adoption of a nominal target of R8.0 to the US dollar with the competitiveness of the main exporting sectors of tourism and fisheries in mind. In the government s 10-year development plan, Seychelles Strategy 2017, tourism and fisheries, together with financial services, are indentified as the key sectors which will drive economic growth. In 2007, the average value of the domestic currency relative to the US dollar was as against in On an end of period basis, the movement was from to , with the latter rate reflecting the re-alignment implemented in October in Given the country s heavy dependency on imports, the revision in the external value of the domestic currency translated into higher domestic prices, a development which was particularly apparent towards the end of the year. Although not exclusively due to exchange rate movement, the consumer price index (CPI) showed an average price movement of 5.3 per cent in 2007 against negative 0.4 per cent in At retail banking level, the foreign exchange situation remained tight in As such, many importrelated activities which heavily depend on the availability of hard currencies continued to resort to sources other than the domestic banks to meet their import requirements. The value of imports indicated by customs data thus remained larger than the actual payments made by commercial banks in As the effects of the exchange rate correction filter through the economy, this discrepancy is expected to progressively reduce. However, an eradication of parallel market financing of imports will only occur when supply and demand fundamentals converge to the point that hard currency becomes available on demand at banks. In the present context, non-essential imports are being predominantly funded through leakages from the tourism sector as well as inward private remittances to the overseas accounts of residents or directly to overseas suppliers

54 The External Sector Table 4.1 Seychelles Balance of Payments Provisional (R million) CURRENT ACCOUNT Goods, Credits (of which) Merchandise exports (f.o.b) Debits (of which) Merchandise imports (f.o.b) Services Credits (of which) Tourism Earnings Debits Income Compensation of employees Credit Debit Investment income Credits Debits Current transfers General government Credits Fishing license fees Other grants Debits Other sectors Credits Debits CAPITAL AND FINANCIAL ACCOUNT CAPITAL ACCOUNT FINANCIAL ACCOUNT Direct investment Abroad In Seychelles (of which) Sale of Assets (Privatised enterprises) Equity capital Re-invested earnings Portfolio investment Assets Liabilities Other investment Assets Liabilities Net errors and omissions OVERALL BALANCE Financing of overall balance Reserve assets Arrears Memorandum items: Current account (percentage of GDP) Trade Balance (f.o.b).(merchandise exports less imports) Stock of Reserves (Gross)(R million) Stock of Reserves (Gross) (Weeks of cif imports) Exchange Rate (Rupee/US$; period average) Data series differ from previous publications due to revisions. 2 (-) sign indicates increase in reserves. Sources: Central Bank of Seychelles, National Statistics Bureau

55 The External Sector The country s external accounts in 2007 were further hit by the oil price shocks. Due to strong demand from emerging economies and supply concerns in important markets, as well as a depreciation of the US dollar, oil prices hovered at record highs during the year. Seychelles had to allocate more foreign currencies to meet its domestic consumption needs, of which a large portion goes towards the generation of electricity. The importance of this commodity implies that a further increase in energy cost could upset the ongoing macroeconomic reform program since higher oil import payments would not only displace other important requirements such as food imports, but leave less resources available for the settlement of external debt commitments. In 2007, the importation of mineral fuel for domestic consumption amounted to about US$60 million. Given a general growth in demand and a further increase in oil prices, the projected requirement for 2008 is US$84 million. At such a level, the country s adjustment programme in its current form is effectively derailed and will need to be significantly revised and re-sequenced. Under the constraint of the prevailing exchange rate regime, additional tightening in fiscal and monetary policies would thus be necessary to further restrain aggregate demand such that macroeconomic convergence is achieved within the set timeframe whilst minimising adverse impact on economic growth. During 2007, the country s foreign exchange earning capacity increased further. This was not limited to the expansion in the tourism sector but also in international oil bunkering and tanker operations. In December 2007, the size of SEPEC s tanker fleet was increased to four with a fifth one expected to be delivered in the first quarter of Although revenue generated from this activity will only become fully apparent once the company has cleared its loans on the vessels, international oil business has already become a growing pillar of the Seychelles economy. 4.1 Current account From a national accounts perspective, a current account deficit depicts the fact that national expenditure (or absorption) exceeds output. The widening in the current account deficit in 2007 implies that the economy had increased its dependency on foreign savings (or resources) to finance an excess of imports. From R738 million (14 per cent of GDP) in 2006, the deficit rose to R1,820 million (30 per cent of GDP) in Trade in goods Following the government s adoption of a more liberalised trade regime in mid-2004 which saw a downward revision in the rate of applicable tax on imports, some policy-induced boost was given to the goods account, more specifically on the debit side. Such a development continued to influence import demand, and thus external transactions in goods during 2007, although some other factors were also at play

56 The External Sector As to be expected, the 2007 balance under the goods account showed a deficit. At R2,857 million, this was a significant increase of 78 per cent compared to 2006 and was primarily driven by a widened trade deficit (the balance under general merchandise) and to a lesser extent the net outflow under repairs on goods. As regards to the former, a strong growth in imports relating to the demand across all sectors of the economy associated with the pick up in activity contributed the most to the outcome. In addition to the higher demand, the price increases in imported items such as food and fuel on the international markets raised the value of the country s import bill. Chart 4.2: Trade in Goods ( ) 6,000 5,000 4,000 3,000 2,000 R million 1, ,000-2,000-3,000-4,000-5, Years Merchandise Exports Merchandise Imports Merchandise, net Sources: Central Bank of Seychelles, National Statistics Bureau The balance under repairs on goods remained in deficit but from R43 million in 2006, this expanded to R93 million in 2007 due to an increase on the debit side corresponding to repairs on residents aircraft and ships. In value terms, this continued to significantly exceed the value of repair works (mainly small maintenance) undertaken by residents on non-residents aircrafts and ships. As regards to goods procured in ports, this continued to be the only component of the goods account which registered a surplus. From R869 million in 2006, such a net contribution increased to R1,028 million, showing a growth of 18 per cent. The bulk of transactions under this head represent re-export of petroleum products to foreign ships and aircraft. Such activity includes tankers operations, the contribution of which has grown subsequent to the increase in the fleet size to four, and will eventually reach five by the first quarter of

57 The External Sector Merchandise exports In recent years, exports from Seychelles have originated mainly from the fisheries sector. This followed a marked contraction in export of agricultural products which traditionally were an important source of foreign earnings. In 2007, the range of commodities exported from Seychelles remained limited in scope. The total value of exports (f.o.b.) stood at R1,347 million, representing a growth of 11 per cent compared to the previous year. Consistent with the current trend, the main commodity exported was canned tuna which at R1,231 million recorded a growth of 19.4 per cent and accounted for around 91 per cent of total export earnings. As such, the Indian Ocean Tuna (IOT) cannery remains Seychelles largest single tuna manufacturing and exporting entity. However, the fisheries industry in general experienced some set back in This was related to adverse weather conditions (El Niño) which resulted in a marked reduction in industrial catch level. Compared to the previous year, a decline was also recorded in the value of exports of fresh and frozen fish, from R14 million to R13 million and frozen prawns from R22 million to R13 million. The latter was due to undesirable weather conditions and disruptions caused by replacement of capital equipment resulting in a drop in production activity. However, exports of other processed fish, which dropped to a low of R3.1 million in 2006, picked up to reach R6.5 million. Table 4.2 Domestic Exports (R million) Total Copra Cinnamon bark Frozen and fresh fish Canned tuna Other processed fish Crustaceans of which: Frozen prawns Other exports Source: National Statistics Bureau With regards to export earnings from the traditional agricultural product, namely cinnamon bark, these fell from R0.8 million to R0.5 million, showing a reduction in the contribution of the agricultural sector to the country s export earnings

58 The External Sector In foreign exchange terms, with the exception of other processed fish, the value of exports was at a lower level in 2007 compared to In aggregate, the decline was from US$220 million to US$201 million. Chart 4.3: Exports 2007 Other Processed fish 0.48% Other exports 5.97% Cinnamon bark 0.04% Frozen and fresh fish 0.96% Crustaceans 1.15% Canned tuna 91.41% Sources: Central Bank of Seychelles, National Statistics Bureau Merchandise imports The provisional trade statistics showed that for the year 2007, the total value (f.o.b.) of merchandise imported in Seychelles was R5,139 million. This was a significant 41 per cent above the 2006 level, and is explained by a combination of factors. Whilst exchange rate movements domestically played a part, a growth in demand underlined by an expansion in economic activity and increases in international prices for some commodities, especially fuel and several food products also contributed to the increased import amount. A detailed look at the main imported commodities showed that the growth in imports was broadbased. The most significant increase was recorded under machinery and transport equipment ; this was of the order of 85 per cent which raised the share of this class to 26 per cent of total imports. In addition to construction and capital goods, the increase in imports was also associated with the purchase of a fourth oil tanker (MT Seychelles Prelude) at an estimated cost of R461 million. Excluding the oil tanker, the increase in import value under this category is estimated at 29 per cent (to R891 million), with the bulk representing FDI-related imports and new vehicles into the country

59 The External Sector The second most significant import category was mineral fuel with a share of 25 per cent of the aggregate amount. At R1,223 million, such import was 29 per cent above its 2006 level. Although SEPEC reported growth in domestic consumption, the bulk of this increase was associated with higher international prices. In 2007, as a result of strong demand from emerging markets, such as China and India, amidst supply concerns in the main markets and the marked depreciation of the US dollar, oil prices (especially in US dollar terms) reached record levels. As a petroleum importing country, Seychelles saw itself badly affected by this development, and was forced to resort to emergency borrowings to secure supplies and avoid disruptive load (power) shedding in the country. Table 4.3 Imports (c.i.f) by HS 1 Sections (R million) Description Total imports Food and live animals Beverages & tobacco Mineral fuels Chemicals Manufactured goods & Misc. manufactured articles Machinery & transport equipment* Other commodities Harmonised System * Include the value of two oil tankers in 2005 and one in Source: National Statistics Bureau, Central Bank of Seychelles. Imports under food, live animals & vegetable oils, which represented the third main category of the total import value, increased by 22 per cent to reach R1,043 million. Such a development was partly influenced by the more liberalised trade regime as well as the increase in demand in the tourism sector. Of relatively similar nature to the preceding category, imports under beverages and tobacco, rose from R51 million to R65 million, representing growth of 27 per cent. However, its contribution to total imports was only 1.3 per cent

60 The External Sector Chart 4.4: Imports (f.o.b.) 2007 Other commodities 1.62% Machinery and transport equipment 26.18% Food, live animals & vegetable oils 21.29% Beverages and tobacco 1.33% Manufactured goods & misc. manufactured articles 20.23% Chemicals 4.39% Mineral fuels 24.96% Sources: Central Bank of Seychelles, National Statistics Bureau Import under the category manufactured goods and miscellaneous manufactured articles, the bulk of which represented demand in the construction industry associated with the implementation of FDI and housing projects, accounted for 20 per cent of aggregate imports. Such imports rose by 23 per cent to a peak of R991 million. The value of items classified under chemicals which entered the country in 2007 is estimated at R215 million, showing a growth of 32 per cent compared to the previous year. As for the importation of items grouped under other commodities and other unrecorded shipment (shuttle trade), the increase was of 22 per cent and 101 per cent respectively. In total, these items represented only 4.0 per cent of the aggregate value of merchandise imports for the year Goods procured in ports by carriers In 2007, the account goods procured imports by carriers maintained its traditional surplus. At R1,028 million, this was a significant increase of R159 million compared to the previous year. The rise portrayed a growth in inflows which was much stronger than the increase registered on the payment side. The gross increase in credit was of R196 million (18 per cent) of which around 98 per cent represented earnings from re-exports of petroleum products, including those associated with the operations of

61 The External Sector SEPEC s oil tankers. The remaining portion was attributable to the sales of goods and beverages to foreign ships and aircraft. On the debit side, the bulk of the transactions were mainly payments in respect of the purchase of petroleum products by the national carrier (Air Seychelles) and the fuel bought by the oil tankers which were subsequently re-exported. In addition, around 5.1 per cent represented the purchase of food and beverages in overseas ports and airports. In aggregate, the year-on-year increase on the debit side was of 16 per cent. Table 4.4 Goods procured in Ports (R million) Goods procured in ports, net Credits Petrol Food and beverages Others Debits Petrol Food and beverages Source: National Statistics Bureau, Central Bank of Seychelles Repairs on goods The balance under repairs on goods remained in deficit. The net payment rose from R43 million in 2006 to R93 million in Such a development reflected a higher value of repairs on residents ships and aircraft compared to earnings to the country in respect of repairs carried out on foreign goods by residents. This reflects the limited ability of the country to offer such services. 4.2 Services The importance of the services sector in the Seychelles economy is best illustrated by its vital contribution to GDP. The main service industry is tourism which constitutes the primary source of foreign exchange and private sector employment in the country. In the external sector, transactions in the services account are directly linked to the performance of the tourism sector, in particularly the foreign exchange inflows that are generated by the sector and its associated activities. Given the status of the country as a net exporter of services, the sub-account s contribution to the current account is thus always positive

62 The External Sector In 2007, the surplus stood at R1,165 million, showing growth of R303 million (35 per cent). Such a development was attributed to a gross increase in credit of R840 million compared to an expansion of R537 million in services payments. On the credit side, the main contributor was tourism earnings which accounted for 59 per cent of services inflow. In a year during which visitor arrivals peaked 161,273, some 15 per cent above 2006 level, foreign exchange inflows from tourism and related activities similarly reached a new record estimated at R1,901 million 5. This was a significant 52 per cent higher than in 2006 and was the main factor which explained the expansion of the surplus under the travel account the principal component of the service account from R1,059 million in 2006 to R1,638 million in The increase in gross credit under the travel account was of R650 million (52 per cent) against a growth of R72 million (36 per cent) in payments. On the debit side, the lion s share represented payments of travel allowance to residents. The latter rose from R110 million in 2006 to R150 million in 2007, mostly associated with exchange rate movements domestically rather than to the increase of 2.6 per cent in the number of residents who travelled abroad during the year. For the year 2007, the balance under transportation which showed a surplus of R182 million in 2006, registered net inflows of only R4.7 million. Such a development reflected the performance under all three of the account s main subcategories, namely passenger, freight and other transportation services. The balance under passenger which nets out the value of ticket sales to non-residents who travelled on the national carrier against payments to foreign airlines in respect of residents amounted to R388 million, showing a reduction of 5.9 per cent compared to the previous year. This outcome therefore indicates a decline in the net export of passenger services in 2007 compared to the previous year. As regards to freight, this remained in deficit despite a growth of 13 per cent in gross earnings under this head. The increase on the debit side was of R137 million (26 per cent) associated with the marked increase in imports. 5 This refers to foreign exchange earnings from the tourism sector through the banking system, and an imputed amount not recorded by banks. The estimate shows that 24 per cent of tourism earnings in 2007 were not captured by the banking sectors

63 The External Sector The third sub-account of transportation which records transactions classified as other transportation services showed a surplus of R90 million against one of R128 million posted in This followed an increase of R17 million (8.7 per cent) in credit against an expansion of R55 million (83 per cent) on the debit side. With the exception of airport (ground) handling fees which were R7.3 million less than in 2006, all the remaining credit items showed an increase in In percentage terms, the most significant increase was posted under agency service income which grew by just above 20 per cent. On the debit side, the increase represented development under most items with a maximum increase of around R42 million, on account of payments of ground handling fees internationally. Net payment of insurance services in respect of residents to non-resident firms, which rose to R135 million in 2006, enlarged by a further R18 million (14 per cent) in The resulted shortfall stood at R153 million. Much of this increase represented insurance payments in respect of goods entering the country and was thus associated with a growth in import payments. The balance under financial and business services showed that on a net basis, the country remains highly dependent on the services of non-resident labour. As such, the account showed a deficit and at R197 million, this was a slight contraction of R14 million (7.6 per cent) compared to the previous year. Of note is that financial services, together with tourism and fisheries, are identified in the government s 10 year policy document, Seychelles Strategy 2017, as the main sectors which will drive growth in country s GDP. However, despite a further expansion of the domestic financial sector, the balance under financial and business services is likely to remain in deficit given that the limited pool of indigenous labour will continue to imply further dependence on expatriates. As regards to the remaining sub-accounts under services, namely royalty, construction and government services, the latter was the only account which showed a surplus. This was of R153 million, representing an increase of R82 million (114 per cent) compared to the previous year. Gross inflows in respect of government services amounted to R177 million with the bulk attributed to licences and other related fees. As for payments in respect of services rendered to the government by non-residents, these fell from R49 million to R24 million. Transactions under construction services which once again depict the country s dependency from abroad are directly linked to FDI projects. Hence, given the growth in FDI inflows, the commensurate rise in the net import of construction services was from R130 million in 2006 to R277 million in As regards to royalty payments, these stood at R3.6 million, showing a slight increase compared to R3.0 million in the previous year Income The income account remained in deficit in At R471 million, this was R230 million higher compared to the previous year being associated with developments under both of the account s main components, namely compensation of employees and income account

64 The External Sector Table 4.5 Services Provisional (R million) SERVICES, NET Transportation Passenger Credits Ticket sales to non-residents by Air Seychelles Others Debits (tickets to foreign airlines by residents) Freight Credits Debits Other transportation services Credits (of which) Marine and port charges Income from stevedoring Agency service income Ground handling fees Aircraft landing fees Others Debits Travel Credits (of which) Tourism earnings Others Debits Foreign travel expenditure Training of residents abroad Health services Insurance, net Royalty debits Financial and Business Services Credits (of which) Telecommunications Debits Construction service Government services Credits Foreign embassies in Seychelles Licences and other fees Debits Expenses by Seychelles embassies Tourism promotion Government others Tourism earnings include tourism income as per banks records and an estimate of earnings not captured by the banking system. Source: Central Bank of Seychelles

65 The External Sector The shortfall under compensation of employees stood at R60 million, following a growth of R19 million. This was due to an expansion on the debit side, associated with the increase in the number of foreign labour in the economy, more specifically in the tourism and construction sectors. Given the anticipated expansion of the tourism sector, such a trend is expected to persist in the coming years. As regards to the deficit under investment income, this grew from R200 million in 2006 to R411 million in On the credit side, a growth of R6.5 million (12 per cent) was recorded. This compared to a significant increase of R218 million in debits. The bulk represented interests payable and which in 2007 included the payments in respect of the government of Seychelles international bond, payable semi-annually Transfers As it is traditionally the case, the transfers account showed a surplus which depicts the fact that the country is a net recipient of current transfers from the rest of the world. For the year 2007, the surplus amounted to R343 million, representing an increase of R101 million (42 per cent) compared to the previous year. The outcome was on account of R106 million reported under general government and R237 million under other sector. Net official inward transfers showed a decline of an estimated R21 million compared to the previous year and represented a reduction in the gross inflows from both fishing license fees and overseas grants. As mentioned earlier, the fisheries sector in general observed a reduction in activity during 2007 compared to 2006 due to adverse weather conditions. The net contribution under other sectors is estimated at R237 million. This was a remarkable increase against R116 million for the year 2006, the balance of which exceeded the net inflows under general government relative to the previous years. Such an outturn followed a strong growth in receipts against a lower expansion in outward transfers. The debit entries primarily represented workers remittances which grew by R16 million (29 per cent), consistent with the increase in the number of expatriate employees, especially in the tourism and construction sectors. As regards to inward transfers under other sectors, the growth was of R137 million (81 per cent). The majority of this entry represented an estimate of the fund transfers to individuals and businesses towards the financing of imports. From an accounting/analytical perspective, it largely explains the discrepancy between foreign exchange allocation towards imports reported by domestic banks and the value of imports derived from customs data

66 The External Sector 4.3. Capital and financial account The balance under the capital and financial accounts (combined) which gives an indication of capital movements between the compiling economy and the rest of the world, as well as providing key insights in cross border financial and investment flows showed a surplus for the third consecutive year. Therefore, despite a reduction in capital donations in 2007 compared to 2006, a further strengthening of the financial account associated with large net foreign direct investment inflows produced an expansion of the surplus under the combined capital and financial accounts Capital account For the year 2007, capital donations to the country from bilateral and multilateral donors were estimated at R29 million. These represent a further contraction of R44 million in donations, from a peak of R164 million reached in 2005 in the aftermath of the December 2004 tsunami Financial account The provisional BOP statistics showed a third consecutive annual financial account surplus, which grew from R1,239 million in 2006 to R1,903 million in Such a development was primarily attributed to a strong increase in net foreign direct investment in Seychelles. The balance under direct investment amounted to R1,606 million, showing a significant growth of R759 million (111 per cent) compared to the previous year. At R57 million, the increase in investment outflows was of R13 million (29 per cent). As regards to inward investments, these rose from R804 million (US$146 million) to R1,663 million (US$248 million). The estimated outcome under portfolio investment is a surplus of R208 million, which showed a notable decline of R898 million (81 per cent) relative to the previous year. In 2006, the balance under portfolio investment amounted to a remarkable R1,105 million surplus as against a small stable surplus in earlier years. This followed a marked increase in liabilities associated with the US$200 million government of Seychelles bond issued on the international capital market in September For the year 2007, a tap on the existing Euro bond issue of US$30 million explained the bulk of the R208 million in new liabilities reported under portfolio investment. As regards to the balance under other investment, this moved from a deficit of R626 million in 2006 to a surplus of R157 million in The change in the balance reflected a net repayment of external loans in 2006 which primarily reflected repayment of public debt using the rupee proceeds of the US$200 million bond whilst during 2007 the country increased its external liabilities with the rest of the world

67 The External Sector 4.4 External reserves After increasing to a peak of R654 million (US$113 million) at the end of 2006, a contraction in Seychelles reserves position was observed at the end of 2007, finishing the year at R323 million (US$40 million). The extent of the decline between the two periods therefore amounted to R324 million. In terms of import cover, the gross official reserves were equivalent to 3.0 weeks of 2007 c.i.f. imports value. This compared to 8.1 weeks in As in 2006, the Central Bank ended the year with no external liabilities. Table 4.6 External Reserves (R million) Gross official reserves Central Bank Government Central Bank s short-term Borrowings Net official reserves End-of period data. Source: Central Bank of Seychelles 4.5. Exchange rates On October 5, 2007, about one year after the Central Bank rationalised the composition of the Seychelles Trade and Tourism Weighed Basket (STTWB) from six to the three most dominant export currencies, a further revision of the exchange rate policy was implemented. The revision was such that the external value of the rupee is managed around a target of R8.0 per US dollar. This amounted to an increase in the competitiveness of the Seychelles economy and was constituted to support of the main export sectors of tourism and fisheries. In the government s 10-year policy document, Seychelles Strategy 2017, these have been designated as the main sectors, together with financial services, to support the planned GDP growth. With the implementation of the new policy, the Seychelles rupee weakened against all of the currencies published by the Central Bank. From a selection of the country s six most traded currencies (Euro, Pound Sterling, US dollar, Singapore dollar, South African Rand and Japanese Yen), the movement in the CBS par rate showed that the loss in value or increase in competitiveness of the rupee varied between 16 per cent and 33 per cent during This reflected the average movement

68 The External Sector of the Seychelles rupee against the South African Rand and the Euro respectively. While to a large extent the Rupee/Euro movement was influenced by the new domestic exchange rate policy indexed on the US dollar, part of the Rupee/Euro movement was influenced by international currency developments. In 2007, the US dollar traded at its weakest levels relative to most currencies, especially the Euro and Pound Sterling. Chart 4.5: Exchange rate movements of the three main currencies in the STTWB ( ) Seychelles Rupees per currency unit Years UK Sterling US Dollar Euro Source: Central Bank of Seychelles The average value of the Rupee per unit of US dollar moved from in 2006 to in 2007, representing a 22 per cent weakening of the domestic currency. As for the average loss in strength of the rupee against the Pound Sterling, this was from to (32 per cent). The average movement of the domestic currency relative to the Japanese Yen and Singapore dollar was from to and from to , respectively. During 2007, hard currencies continued to be actively traded outside the banking system and at a premium above the official rate in view of the continued foreign exchange shortage experienced in the official sector. Based on information available to the Central, the currencies most traded on the parallel market were euro, US dollar and Pound Sterling. Encouragingly, these traded at a significantly lower premium compared with the previous year

69 The External Sector Table 4.7 Exchange Rates (Seychelles Rupees per currency unit) Euro US dollar Pound sterling Japanese yen South African rand Singapore dollar Period averages. Source: Central Bank of Seychelles 4.6 Offshore developments In 2007, the offshore sector remained an important pillar of the Seychelles economy. Around 10,472 new international business companies were registered in This brought the total number of registered international business companies (IBC) to nearly 43,634. In the international trade zone, the total number of registered licensed companies amounted to 57 at the end of the year. The total number of companies incorporated under the Companies (Special Licenses) Act, 2003, amounted to 113 by the close of In terms of earnings generated from the provision of services by the offshore sector, these were estimated at between US$20 million and US$25 million, excluding income from the international trade zones (ITZ)

70 SECTION FIVE The Real Sector: Production, Labour and Prices 5. Overview Domestic Income and Production The year 2007 recorded a further upswing in the level of real economic activity in the country. At R5,730 million, the provisional estimates for GDP 6 showed a 7.3 per cent growth compared to the preceding year s outcome. It must be noted that during the year, the country s national accounts underwent a substantive update as regards to its methodology and compilation approach. This was initiated by a need to bring the existing set of compilation methods in line with international standards, namely the UN System of National Accounts (SNA93). With the launch of Strategy 2017 early in 2007, which incorporates explicit economic growth targets over the plan period, the need for higher quality national accounts data gave added significance to this exercise. Compared with the previous statistical series, this new set of GDP data features more extensive coverage of economic units and adopts techniques to better capture activity in the key tourism sector. On the average, the new GDP data series now stand at about 25 per cent above the previous estimates, an adjustment that brings national income statistics closer in line with corresponding monetary and external data and the observed tempo of economic activity in recent years. Growth impulses were fundamentally headed by a continued boom in investment activity and another strong performance by the tourism sector during the year under review. The associated surge in aggregate demand coupled with rising energy and commodity prices gave rise to a growth in the value of merchandise imports. In 2007, these reached a new record level of US$760 million compared to 6 GDP data series have been revised upwards. This forms part of an exercise to enhance the national accounts which had been called for. The new series is seen to be more realistic of the level of income generation compared to the old series. Statistical Bulletin February 2008 issued by NSB Seychelles National Accounts Estimates

71 The Real Sector: Production, Labour and Prices US$666 million in Consistent with past trends, the deficit that structurally characterises the country s trade balance deteriorated even further to US$559 million. Investment activity, currently a key growth fundamental, reached a new peak and would have been higher still were it not for capacity bottlenecks in the domestic supply of basic building materials such as aggregates and crusher dust. Maximising valued added from the investment surge remained a major challenge during the year as the relative share of local to imported inputs, or retained value added, reportedly declined yet again. For most new projects, there has been a tendency to increase the contingent of expatriates in the workforce as the indigenous labour market tightened to frictional level, thus losing an economic opportunity to generate significant value addition to national income. Further with most local Class 1 contractors fully engaged in ongoing project commitments, future capacity building in tourism will need to be carried out by foreign contractors, implying higher external leakages in terms of mobilisation costs and transfer of profits. Notwithstanding such positive investor confidence, the economy faced major external and fiscal challenges in 2007, linked in a large measure, to the persistent high energy and commodity prices on the international market. Given the demand inelasticity of such basic goods, the country s import bill consequently deteriorated, the extent of the deterioration being such as to totally erode the record performance on the tourism earnings side. Further whilst the policy shift to adopt and maintain a more competitive exchange rate has consolidated the recovery in the external sector and improved the viability of the tourism and peripheral sectors, this has had the negative collateral impact of destabilising government finances and domestic prices. The consequence of this mixture of economic events, instigated largely by external factors, was to cost Seychelles a drop in country s outlook rating by the rating agency, Standard and Poor s. Whilst the country maintained a solid B rating, the outlook slipped from stable to negative, which also reflected in some ways, a very cautious position by Standard & Poor s in the wake of the controversy surrounding the role of rating agencies in the collapse of the sub-prime mortgage market in the USA. In value terms, it is estimated that the flows of FDI increased from US$146 million in 2006 to a new peak of US$248 million in This total captures the impact of ongoing tourism investments such as the Eden Island Project, the Four Seasons Petite Anse Development, the Shangri-La Long Island Project and the new Ephelia Resort Development at Port Launay. With the commencement of the proposed Emirates Resort at Cap Ternay, the Raffles (Kingdom Hotel) Development on Praslin, the Ile Aurore Integrated Residential/Resort/Golf Development and the Qatari Diar Resort Development at Anse La Mouche, FDI flows are expected to reach a new record in

72 The Real Sector: Production, Labour and Prices Mindful that the above investment roadmap can be significantly derailed by domestic supply constraints, government has dedicated much energies in search of solutions, particularly in the critical area of additional quarrying capacity. At the policy level, a revision in the Tourism Investment Act (TIA) set for implementation in 2008 expects to introduce some incentives that could impart solutions to the prevailing investment bottlenecks whilst enhancing local value added. These would include incentives to spur the involvement of local sub-contractors, overcome the labour constraint as well as extend concessions to peripheral activities such as guest houses, car hires, charter boat operators and taxis. Table 5.1 Gross Domestic Product Production Account by Industry 1 At constant market prices (R million) Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply, sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communication Financial and insurance activities Real estate activities Professional, scientific and technical activities Administrative and support service activities Public administration and defence; compulsory social security Education Human health and social work activities Arts, entertainment and recreation Other service activities Taxes not allocated above Less subsidies Allocation of FISIM to nominal sector GDP at 2006 constant market prices % Change n.a 7.5% 8.3% 7.3% 1 Indicative Estimates Source: National Statistics Bureau

73 The Real Sector: Production, Labour and Prices The year 2007 has clearly vindicated the view that the Seychelles now enjoys high visibility internationally, a development which can be attributed to the more extensive and focussed marketing networks of the various new airline and resort stakeholders in the industry. This visibility, coupled with the new generation of world class resorts and better air access, has made the country a highly desirable long-haul destination, which has clearly underpinned the strong revival of the industry. In the year under review, some 161, 273 arrivals were recorded, a significant growth of 15 per cent over the preceding year, which was a record year in its own respect. Supported by a more competitive exchange rate, tourism related earnings grew by a disproportionate 52 per cent year on year to a total of R1.9 billion. To sustain the momentum in the industry, the Seychelles Tourism Board (STB) adopted a new branding strategy in 2007, one featuring modern advertising tools and that better exploits the destination s unique selling propositions (USPs). Accordingly, a fresh brand concept and logo The Seychelles islands Another World was launched internationally and in an effort to maximise exposure, the STB pledged to give the country greater online visibility via enhanced involvement in e- marketing initiatives. By way of ascertaining quality standards, the tourism board also provided technical assistance through its Seychelles Secrets program which encouraged small hotels to engage in upgrading and renovation of some below standards tourism establishments. Looking towards 2008, a grading system for all accommodation and hotel establishments is set for implementation on STB s agenda. To ensure a smooth adoption of such a complex initiative, the cooperation and support of the trade will need to be solicited. For its part, the local carrier, Air Seychelles, extended its support to the tourism industry by announcing increased frequency and new flights to existing and new destinations. In the fisheries sector, mixed outcomes were observed. While increases in artisanal catch and the semi-industrial sector were achieved, industrial tuna fishing activity slackened due to the cyclical El Nino weather phenomenon. On the policy and development front, the fisheries sector benefitted from a number of initiatives during the year. These ranged from prospecting for new fisheries resources (deep water shrimp fishery and bait fish import substitutable resources) and greater cooperation with L institut Francais pour L exploitation de la Mer (Ifremer) for assistance in marine sciences and technology

74 The Real Sector: Production, Labour and Prices Table 5.2 Gross Domestic Product Production Account by Industry 1 At current market prices (R million) Agriculture, forestry and fishing Mining and quarrying Manufacturing Electricity, gas, steam and air conditioning supply Water supply, sewerage, waste management and remediation activities Construction Wholesale and retail trade; repair of motor vehicles and motorcycles Transportation and storage Accommodation and food service activities Information and communication Financial and insurance activities Real estate activities Professional, scientific and technical activities Administrative and support service activities Public administration and defence; compulsory social security Education Human health and social work activities Arts, entertainment and recreation Other service activities Taxes, not allocated above Less subsidies Allocation of FISIM to nominal sector GDP at current market value % Change n.a 5.2% 9.9% 14.4% 1 Provisional for years , indicative Estimates Source: National Statistics Bureau Notwithstanding the reduced catch of tuna during the year, the value of canned tuna exports was relatively unaffected as the impact of output losses were offset by a draw down on inventories and favourable exchange movements. The susceptibility of the industrial fishery to the vagaries of weather patterns and concerns on stock sustainability dominated policy discussions in In consideration of its importance, the management of the country s fisheries was given high prominence in the design of the Strategy 2017 framework presented during the year. In other sectors of the economy, the general consensus is that a more challenging business environment prevailed than in the previous year. This arose against the backdrop of some price

75 The Real Sector: Production, Labour and Prices shocks arising from higher energy and commodity prices and the depreciation of the domestic currency. The inevitable consequence was higher costs of production of local goods and services which subsequently fed into retail prices. The persistent shortage of foreign exchange in the banking sector added to the production difficulties, resulting into sporadic supply interruptions and sub-optimal output results. 5.1 Primary Sector An overview of production in the primary sector shows an overall improvement in performance compared to the previous year. This applied both to the agricultural and fisheries activity although production was somewhat affected by unfavourable weather conditions in the latter months of Despite the depreciation of the currency, no significant output gains are anticipated in either farm output or fish catch as both sectors face certain supply bottlenecks. Thus even with increased demand, limited scope presently exists in the economy for exploiting the competitiveness advantage of the exchange rate correction in shifting consumption from imports to local substitutes. In order to address this structural constraint, the authorities have actively sought engagement with local as well as international partners to undertake new initiatives and co-operative ventures for primary sector development Fisheries Mixed results were observed in the fisheries sector during the year 2007 relative to the preceding year. This was reflected in both production indicators and revenue flows. Table 5.3 Estimates of Fish Landed (Metric tonnes) Artisanal method 3,852 4,374 4,583 4,050 4,211 Semi - industrial (long line) Industrial method - Caught 378, , , , ,464 - Transhipped 359, , , , ,000 Source: Seychelles Fishing Authority In the artisanal domain, the level of catch increased by 4.0 per cent to reach 4,211 MT in Nonetheless, this remained below the 4,583 MT landed in As such, the price of fish during the year remained at a high level, with the fish component of the CPI showing a year on year rise of 16 per cent. The improved catch levels permitted an increase in the production of certain fish products. In

76 The Real Sector: Production, Labour and Prices particular smoked fish production reached a record level of 29,413 kgs representing a 17 per cent growth compared to As regards to industrial tuna fishing activity, this experienced a lower performance in 2007 due to warm seawater conditions, often forcing the tuna biomass to cooler depths beyond the operational threshold of the fishing nets. Notwithstanding the considerable decrease in tuna catches, the Indian Ocean Tuna (IOT) canning factory did not report much of a decline in exports revenue in foreign exchange terms. At US$184 million, exports were a mere 1.9 per cent lower than in 2006, an outcome associated with positive currency developments as well as value-additions from improved by-product management mainly in the production of fish meal. While the volume of fresh and frozen fish (excluding canned tuna), including dried sea-cucumber and shark fins declined, by some 13 per cent to 370 MT, an increase of approximately 12 per cent in value was recorded, taking total revenue to R18 million. The authorities, through agencies such as the Seychelles Fishing Authority (SFA), initiated discussions and engaged in various forums to discuss the sustainable use of the country s fisheries resources in light of scientific evidence of possible overexploitation of certain marine species. This was set against a backdrop of increasing global awareness of the danger of exploitation of fisheries resources beyond sustainable levels. Of particular interest to Seychelles is the restoration and management of certain depleted stocks, notably groupers such as snappers and other reef fishes. The same year saw the implementation of National Plans of Actions (NPOA) covering shark fisheries and illegal, unregulated and unreported (IUU) fishing in the country s Exclusive Economic Zone (EEZ). As part of Strategy 2017, the fisheries sector is to further implement an operational management plan for each of the country s major fisheries. First steps will be taken in 2008 with a demersal line fishing action plan as well as a Sea Cucumber Management Plan. Also provided for in the Strategy 2017 framework is the improvement and diversification of port services to provide better infrastructural and logistical support to both artisanal and industrial fisheries. These include designating Zone 14 on the East Coast as a modern fishing port and providing supporting infrastructure in Zone 6, with construction on the two zones set for commencement in the subsequent year Aquaculture Prawn farming, which is the main aquaculture activity undertaken in the country saw a marked decrease in production during the year compared to This was from 699 tonnes to 368 tonnes or 47 per cent. Consequently an R8.9 million fall in export revenue was observed. In foreign exchange terms, income fell from US$2.3 million to US$1.9 million. The drop in production was attributed to

77 The Real Sector: Production, Labour and Prices disruptions in the production process due to the replacement of capital equipment in addition to unfavourable weather conditions Agriculture In 2007, the agricultural sector showed a higher performance compared to the preceding year. This is based on generally positive movements in the production indicators of the various subsectors. Notwithstanding the improvement in output, the level of agricultural and livestock food remained well below the requirement of national food security. In the livestock subsector, poultry and pork remained the two main livestock production areas in Pig slaughters showed a reversal of last year s drop by increasing 3.3 per cent to 9,306 units. Chicken slaughters also went up by 1.9 per cent to 833,320 units. While higher cattle consumption was indicated by a 27 per cent increase in slaughters to 75 units, cattle remained at a relatively low level of production. This was reportedly due to land availability and the low profitability of running such a business. As a result, following poultry, pig was the second most imported category of meat in the country. Table 5.4 Production and Import of Crops and Livestock products (tonnes) Local Production Crops 4,253 3,032 2,608 5,568 10,000 Livestock product 2,047 2,170 2,228 2,241 2,135 Imports Crops 6,901 4,032 5,721 5,674 7,824 Livestock products 1,596 1,175 1,208 2,152 2,412 Source: Ministry of Environment and Natural Resources 2007 saw major developments in the livestock sector. Inclusive were the kick-off of the poultry parent stock project construction phase and the introduction of new blood lines in pig production. In addition, the agricultural domain as a whole benefitted from several other important technical activities, with special focus on the human resources development of that sector. These ranged from further staff training through the Food and Agricultural Organisation (FAO) and follow ups on the use of the Geographical Information System (GIS) software established in On the downside, agricultural stakeholders have in general felt administratively disadvantaged against other socio-economic sectors (tourism, housing, education etc) with respect to land and foreign

78 The Real Sector: Production, Labour and Prices exchange allocation. Supporting such a contention, was the fact that a number of agriculturally designated areas, including the cattle farm and pig genetic centre at Grand-Anse Mahe were taken over for the purpose of other developments in On the foreign exchange front, shortages have led to inadequate and inconsistent supplies of essential agricultural inputs (fertilisers, pesticides, seeds, etc ) during the course of the year. This coupled with budget cuts has also made the acquisition of new vehicles difficult such that the frequency of on-site extension services to farmers have had to be reduced for the lack of transportation means. 5.2 Industries Industrial growth in 2007 was driven fundamentally by the demand-pull of the tourism boom and the high level of FDI activity in the economy. However, growth possibilities were effectively hampered by capacity constraint issues in terms of raw materials and labour. In addition, the availability of foreign exchange has been an ongoing impeding factor, causing in several instances sporadic supply of certain domestically produced commodities on the market. This has been especially the case for nonforeign exchange generating industries, which have acutely felt the impact of domestic as well as external developments on their imports and operational commitments Construction A high level of construction activity was observed during the year under review corroborated by major FDI and housing projects. In consequence, the capacity constraint experienced in the preceding year became even more evident in Even as the production of construction materials increased, notably blocks (7.9 per cent to 4,701,112) and aggregates (8.7 per cent to 128,014 tonnes), available supply failed to fully satisfy the prevailing demand. Based on approved projects, Strategy 2017 sees the tourism industry requiring an increased supply of construction material over the period , with a peak occurring in By then the estimated number of blocks required is expected to be five times over 2007 capacity while for aggregates, a fourfold increase is forecasted. At that pace of development major tourism and housing projects could be held back or postponed if the supply constraint remains unsolved. The year 2007 thus saw the government actively soliciting private sector investment into a third quarry which would considerably but not totally improve the situation. As such, the existing quarry operators were encouraged to invest into additional ways of enhancing their production capacity. In 2007, the authorities supported the view that local sub-contractors were not taking full advantage of business opportunities at hand with the upswing of tourism projects underway on the islands. This

79 The Real Sector: Production, Labour and Prices applied largely to local electrical contractors, plumbers, blasters, air conditioning and refrigeration experts which are usually sub-contracted in by the larger contractors. To address such a concern, some new initiatives will be introduced in 2008 within the framework of a revision in the Tourism Investment Act (TIA). These would look towards assisting the small contractors in filling up the available jobs which could otherwise be taken up by foreigners. Moreover concessions on materials as well as on Gainful Employment Permits are on the agenda. At the same time, a serious shortage of Class 1 contractors have impeded on the speed and implementation of some major projects. A last resort option to this capacity issue may eventually be the contracting in of regional building companies in spite of the value-reducing implications attached to such a policy. For yet another year, the highest number of expatriate workers was recorded in the construction sector. At 4,083, this represented 52 per cent of the total expatriates employment, much of the additional ones being associated with the ongoing FDI projects. The increased dependency of the sector on foreign workforce has emerged as a consequence of the economy operating at its natural full employment level Manufacturing An overall decrease in manufacturing activity was observed during the year This was substantiated by a 4.3 per cent decline in manufacturing industry s contribution to GDP and some losses in production indicators. Overall output declines were observed in beverage production with the exception of beer, stout and spirits. These were largely associated with a shortage of foreign exchange required to import the raw materials and capital equipment. As a result, erratic supply of these beverages, specifically soft drinks characterised the year 2007, impacting adversely on trade and consumption. Critical components breakdown on the Seychelles Breweries Limited (SBL) factory lines also contributed to the prolonged periods of shortages. Despite elevated prices in 2007 in response to rising production costs, beer and stout consumption proved inelastic with higher production of 11 per cent to 7,506 KLtrs. Between 2006 and 2007, the Indian Ocean Tuna (IOT) Company experienced a more pronounced contraction in the production of canned tuna. Compared to a reduction of 384 tonnes in the previous year, 2007 saw a decrease of 8,653 tonnes to a production level of 31,569 tonnes. This was mainly due to persisting adverse weather conditions which were not conducive to tuna harvesting during the year. In response to this concern, the conservation and management of the country s tuna resources took policy priority in 2007 with the convening of a series of scientific meetings organized by the Seychelles Fishing Authority (SFA) and the Indian Ocean Tuna Commission (IOTC) on the subject

80 The Real Sector: Production, Labour and Prices On IOT s side enhanced diversification efforts into fish meal products contributed to a 27 per cent increase in the production of other processed tuna. On a welcome note, the future viability of the country s tuna exports was secured by an interim agreement negotiated upon the year-end expiry of the EC-EPA agreement. This ensures that Seychelles exports continue to benefit from zero duty as of the year However, local manufacturers are in the future likely to face more foreign competition, since the agreement also requires the signatory state to gradually open up its markets to EU products. 5.3 Services Seychelles continues to be a net exporter of services illustrated by a positive services accounts balance of R167.8 million on the balance of payments, an increase of R13 million over the preceding year. Primarily led by the tourism sector, the tertiary sector has also been the main impetus behind economic growth. Of growing significance is the telecommunications industry, which in recent years has become increasingly important in view of its contribution to value-added and the support it provides to the tourism and the business community Tourism For the second consecutive year, the tourism industry posted an unprecedented growth in visitor arrivals. At 161,273, the total number of visitors for 2007 represented a 15 per cent annual increase compared to 9.3 per cent recorded in the preceding year. Consistent with the higher arrivals and a depreciated rupee, tourism earnings rose to R1.9 billion in 2007, a 52 per cent growth relative to the earnings in The ripple effects of a surging tourism industry were strongly felt in other peripheral and downstream sectors of the economy as well as in national employment. In 2007, employment in the industry increased by 8.6 per cent and remained in a major way, short-staffed with numerous vacancies unfilled. Tourism related activities, which represent some 21 per cent of GDP, have thus contributed greatly to the increase in economic activity during the year under review. For yet another year, European visitors stayed atop of the market, making up 79 per cent of total arrivals growing by 12 per cent over Whilst most encouraging a stronger outcome would have prevailed had the necessary seat capacity over Europe been available during the high seasons. The need to plan for a major expansion of airline capacity in 2008 and beyond has become most urgent with the planned growth in the tourism bed base over the years

81 The Real Sector: Production, Labour and Prices Table 5.5 Tourism Visitors arrivals 122, , , , ,273 Average length of stay ( nights) Tourism Foreign Exchange Earnings -R million ,051 1,251 1,901 Average expenditure per diem - Rupees ,155.8 Memorandum Hotel bed occupancy rate (%) Hotel bed occupancy rate for 2007 is CBS estimate Sources: National Statistics Bureau (expect tourism foreign exchange earnings which are from Central Bank data) On the promotional side, efforts to consolidate the country s position in the traditionally mature market continued in earnest in These ranged from the concerted use of tour operators and the media as well as more active and extensive representation in major international tourism fairs. Consequently, with the exception of Germany, the leading markets registered high growth rates during the year 2007; France with 17 per cent growth and Italy showing an upswing of 10 per cent. With respect to Germany, the main source for the 0.8 per cent arrivals drop has been linked with a lack of airline capacity between the country and Seychelles. Besides the primary markets, due heed has been paid to the increasing importance of the emerging markets to the tourism trade in the country. Impressive growth was recorded in Japan (30 per cent), South Africa (29 per cent), Reunion (33 per cent), Other CIS countries (37 per cent) and Israel (1,046 per cent). The spectacular growth in Israeli visitor arrivals, from only 202 in the preceding year to 2,315 in 2007, represented the product of a series of charter flights from Israel, organized by a local travel agent during the year. Much promise also lies in the Asia-Pacific region, identified as the fastest growing tourism region in the world, both as a generator and receiver of tourism. Overall, growth factors include economic growth, higher disposable income and an increase in the leisure time in the region. Middle-Eastern carriers, Qatar Airways and Emirates have also facilitated air links between Middle East/Asia and Seychelles making the continent an even more important prospect for the tourism industry in Seychelles. Notwithstanding the developments in the sub-markets, Middle-Eastern arrivals were constrained by room availability during the year. Given the market s relative newness, they have been somewhat disadvantaged by a tendency to accord priority, perhaps by way of loyalty, to the more traditional European visitors. With this in perspective, STB has the intention to further develop this

82 The Real Sector: Production, Labour and Prices market and eventually ease the booking difficulties for the Middle-Eastern tour operators in the year However, until the new generation of beds are commissioned and additional flights introduced, tourism growth will continue to be affected by capacity limitations. Chart 5.1: Visitor Arrivals ( ) Number of visitors 180, , , , ,000 80,000 60,000 40,000 20, Visitors Years Arrivals % Change Percentage Source: National Statistics Bureau Consistent with the airline s corporate strategy of consolidating existing markets and targeting emerging markets, Air Seychelles acquired a refitted Boeing in December As such, new services included Bangkok and Milan flights, as well as additional frequencies to Paris and Mauritius were inaugurated. In spite of quite high flight frequency by Middle Eastern carriers, the local airline, Air Seychelles, still carries some 80 per cent of total visitor arrivals into the country. This is, in the main, on account of clients preference for direct access over the inconvenience associated with stop-over flights. While Air Seychelles monopoly status in that respect places it an advantageous situation, it also highlights the vulnerabilities of the destination on the financial health of the airline. Above all, recent experience has demonstrated the extent of disruptions that can be caused to the industry in the event of mechanical breakdowns or damage to aircraft. Towards the end of the year, one of Air Seychelles three Boeing B767 aircraft sustained damage that required lengthy repairs. This meant that maximum use of the two other Boeings B767 had to be made, and temporary recourse to a replacement aircraft had to be sought to minimise service disruptions. Furthermore, the long-haul tourism industry today faces a new challenge in the form of criticism by international organisations for its effects on global climate change. This is being taken seriously by STB. In its defence, Seychelles will need to communicate in a strong and vociferous manner its enviable track record on environment protection. The STB will further encourage hotels to reduce their carbon footprints in an effort to lessen Seychelles contribution to worldwide carbon emissions

83 The Real Sector: Production, Labour and Prices and gain an early marketing edge over competitor countries before carbon standards are officially adopted internationally. During the year under review, the overall increase in visitors into the country for business purposes and combining business with a holiday showed an increase of 20 per cent above the 2006 level. Foreign Direct Investments which are mainly related to developments in the tourism sector picked up momentum during the year This was such that the inflows, according to the projects submitted to Seychelles Investment Bureau, grew by around 66 per cent to an estimated value of US$242 million. These included a diversified set of high-end world-class projects such as the Four Seasons Hotel and Resort, Shangri-La Resort and the Ephelia Resort. In 2007, the country received elevated online exposure and visibility following STB s engagement in a major e-marketing campaign with the well-known travel website, Expedia. To supplement that, an e- brochure application, which allows custom-made brochures to be produced by browsers, was added to the official destination website during the year under review. In furtherance of the country s visibility has been the publicity created by upcoming FDI projects as well as the international airlines. Despite the inception of the world-class tourist institutions, some ageing hotels have posed certain challenges to marketing initiatives, somewhat dimming the value-for-money perception of the destination. This issue has been taken on board and certain hotels have been encouraged to upgrade or renovate under STB s Secret Seychelles program, initiated in 2006, so as to raise standards. Negative reports which emerged from 61 out of 469 inspections carried out by STB on hotels in 2007, have spurred the organisation to introduce the so-called National Harmonised Standards which is to start in The program would include, in essence, minimum requirements for all categories of accommodation and a grading system for all hotels in the country. However if growth in the tourism sector stays on the upside as anticipated, the issue of capacity constraint may become more pressing, especially as in 2008 many properties are being renovated and projects underway will only reach finalisation in the medium to long term. In connection with this, around 489 rooms may be unavailable as a result of the expected close downs for renovations of some tourism establishments whereas an estimated 493 new rooms are in line to be commissioned, most of which will be late in the year. The provisions of Strategy 2017 recognise capacity building as essential to cater for the anticipated rise in tourism arrivals in the islands. National bed capacity, which stood at 5,300 in 2007, is expected to increase by around 9,000 by This would address, to an extent accommodation enhancement issues in the medium term, but in light of a targeted 360,000 arrivals in 2017, a further increase in the number of beds may be required. Also pertinent to tourism growth are the availability

84 The Real Sector: Production, Labour and Prices of construction materials for the new hotels, quantity and quality of staff, airline seat requirements and domestic land and sea transport capacity. On a note with regard to staff quality, an important step taken during the year was the handing over of the Seychelles Hospitality and Tourism College (SHTTC) by the Ministry of Education to STB. Seychelles Tourism Academy (STA), as it is now called, is a revamped effort being run jointly with the tourism industry which provides trained personnel to the academy to lecture students. The academy is looking at partnership with other overseas hotel schools such that better programs of study can be implemented. At the end of 2007, the tourism sector remained in an upbeat mood as it looks forward to the next year. Notwithstanding the capacity concerns, it is expected that 170,000 visitors will be achieved in 2008, representing a growth rate of 5.4 per cent in arrivals over Telecommunications The year 2007 saw further growth and development of the country s telecommunications industry. With mobile phone upgrade to 2.5G and third generation (3G) evolution, the industry has responded to public demand for improved service quality and enhanced network capacity. In addition to basic usage, widespread traffic of additional services such as Internet browsing, video conferencing, Multimedia messaging (MMS), has been reported with the upgrade in network technology. With the entry of an additional telecom services provider during the year 2006, consumers have benefitted from increased competition through enhanced service delivery as well as reduced rates. Fixed telephone users gained from several pricing schemes during the year which included the reintroduction of a fixed-line pre-paid calling card. The more competitive mobile sector, through various promotional packages, saw in several instances reductions of as much as 50 per cent in the cost of calls. Consequently there was an increase in both international and local calls traffic by 17 per cent and 2.5 per cent respectively. Despite a reduction in prices and the fiscal burden of amortising new investments, the overall revenue for the telecommunications sector has been on the upside for Labour Market As a result of higher economic activity, labour market conditions experienced further tightening during the year With fourfold demand for labour over the unemployed, competition for required skills that match vacancies became even more apparent during the year. In 2007, against a 4.2 per cent growth in the labour force to 48,802 employees, actual employment rose by 6.0 per cent compared to 2006, thus pushing the economy closer to a state of full-employment

85 The Real Sector: Production, Labour and Prices Employment During the year 2007, an increase in employment from 39,560 in 2006 to 41,948 in the formal sector 7 was observed. This was generally across the board, with more evident growth in the health and social workforce, other community, social and personal services, construction and tourism sectors. As regards to Public Administration, in which the bulk of the population is employed, there was a 9.2 per cent fall to 6,094 employees during the year under review. This is indicative of a restructuring exercise undertaken by the government during the year, aimed at a leaner and more efficient public administration. Table 5.6 Employment and Unemployment Rate (end - of - year) Total Employment 33,111 32,780 34,542 39,560 41,948 Private Sector 17,408 16,944 18,595 20,778 22,358 Parastatals 5,459 5,545 5,931 6,010 6,136 Government 10,244 10,293 10,015 12,773 13,455 Unemployment Rate (%) Provisional estimate. Sources: Employment Division - Ministry of Employment and Human Resources Development and the National Statistics Bureau As is to be expected, employment in hotels and restaurants increased by 9.4 per cent to 5,222 in In a fast-growing tourism industry, however, the employment growth rate has not satisfied the demand that prevailed for workers in that industry. As at the end of the year, hotels and restaurants represented the greatest portion of published vacancies, accounting for 54 per cent of the total (3,705). That said, total expatriates employed in hotels and restaurants amounted to 1,485, ranking second only to the number of foreigners employed in the construction sector which was 4,082. The total level of expatriate employment in the country rose from 4,157 in 2006 to 7,879 in This represented 19 per cent of the total formal employment compared to 11 per cent in the preceding year. The challenge hence is to train a qualified pool of local labour that could take upon at least some of these expatriates-filled positions, and thus reduce pressure on the country s foreign exchange resources. Nevertheless at present, employment statistics show a certain capacity constraint in the labour market, making the large foreign workforce essential if not a default solution. Given the large 7 As from the year 2003 a new International Standard Classification of Economic Activities has been used by the NSB

86 The Real Sector: Production, Labour and Prices number of investment projects in the pipeline, the tightness in the labour market is set to significantly worsen. With respect to employment by sector, this remained in line with last year s proportions. The private sector continued to be the largest employee with 53 per cent of the total registered workers. The public sector and parastatal organisations employed 32 per cent and 15 per cent of the total formal employment respectively Unemployment The unemployment rate continued on its downward trend of the past two years, decreasing from an average of 3.4 per cent in 2006 to 2.7 per cent in At the end of the year, the number of people unemployed was 909 relative to 1,175 in the preceding year representing a year end rate of 1.9 per cent compared to 2.6 per cent in December Statistical trend does not pin-point gender to be a determinant characteristic of unemployment in the country. As such no significant disparity between the number of unemployed males (466) and females (443) in 2007 or preceding years can be made out. However, a relationship between skills and unemployment over the years can certainly be identified. Of the total registered jobseekers for the year, 708 fell under the unskilled classification. The majority was under the age of 29 and 71 per cent had experienced up to secondary level of education. These jobseekers therefore are equipped with little marketable skills making it difficult for them to be absorbed into employment. Most of them have been registered in the services and production occupational groups, in particular manufacturing, construction and hospitality, where there is higher availability of employment opportunities Earnings Given tighter labour market conditions, average monthly earnings for 2007 amounted to R3,871 showing an increase of 1.4 per cent over A 2.5 per cent growth in earnings of the private sector against a 3.5 per cent contraction in that of the public sector resulted in a narrowing of the gap separating the earnings of the two sectors. Thus the competitive edge that the public sector holds on the private sector thinned somewhat during the year in review. Nevertheless parastatal organisations still reaped the highest average earnings of R4,920 as well as the greatest year on year income growth of 29 per cent. In tandem with the previous year, employees in the education industry within the private sector showed the highest average earnings of R6,221. This highlights the increasing appeal for private school education which requires the services of qualified and experienced teachers. On the other extreme, lowest earnings were to Other Community, Social and Personal Services industry which

87 The Real Sector: Production, Labour and Prices received an average of R2,310 per month. This category includes for example home carers, who are being paid by the Social Security Fund as well as the earnings of those absorbed in the URS program. Table 5.7 Average Monthly Earnings (Rupee - current prices) All Sectors 3,603 3,708 3,750 3,817 3,871 Private Sector 3,297 3,441 3,469 3,566 3,654 Parastatals 3,984 4,038 4,072 4,528 4,920 Government 3,918 3,971 4,081 3,891 3,753 Source: National Statistics Bureau A higher level of average monthly earnings is expected in 2008 as wages are adjusted upwards to compensate for the rise in prices. The Budget 2008 made provision for the introduction of a minimum wage in the economy amounting to R14.5 per hour for a full time worker and R18.0 per hour for a casual labour. In addition, a general wage revision for the public sector was announced. The award was deliberately skewed in favour of employees in the lower salary brackets in the interest of social equity. The Seychelles Chamber of Commerce and Industry (SCCI) expressed concerns that the salary increase could counter any benefits that could be obtained from the current economic adjustments, particularly the realignment of the Seychelles rupee. In SCCI s view, this could adversely affect business profitability and cash flow and thus be detrimental to the competitiveness of investments. Nevertheless in consideration of increasing competitiveness in the labour market between the three broad sectors, namely the private, parastatal and government, in an environment of increased demand for labour, an upward movement in employee remuneration was clearly inevitable in Prices During the year 2007, the National Statistics Bureau undertook a methodological change in the computation of the rate of inflation in the economy. This was as per a revised basket incorporating weights of goods and services derived from the Household Budget Survey of May 2006-July Under the new statistical framework, an attempt has been made to capture the recent shifts in household s expenditure pattern

88 The Real Sector: Production, Labour and Prices Chart 5.2: Price Movements ( ) Percent Years Average Inflation Rate End of Year Inflation Source: National Statistics Bureau Current statistics show an increase in inflationary pressure during the year under review. The annual average rate of increase in prices stood at 5.3 per cent. Compared to December 2006, a year on year increase of 17 per cent in overall prices was observed. The real impact of increase in prices, notably food prices, occurred during the last quarter of 2007, coinciding with the realignment of the exchange rate and the upward revision in fuel tariffs. In the absence of further policy and/or external shocks, the price effects of the underlying economic trends are expected to peak in the latter half of 2008 before stabilising in early Table 5.8 Annual Average Inflation Rates Weights (percentage change) All Items Fish Other Food Items Non-Food Items Source: National Statistics Bureau

89 SECTION SIX Operations and Administration of the Central Bank 8 6. Overview 2007 was a very successful year for the Central Bank in the sense that the institution was an active participant in the economic decision making process as well as being upfront as a policy agent both in the implementation of key policy measures and in guiding expectation formation in a changing economic environment. At the very beginning of the year, the Bank reviewed its performance in the previous year as well as putting into context its role as a policy-maker. Following the assessment, a proposal was put to the Board for a re-organisation of the institution s internal structures to enhance its capacity and efficiency. In that restructuring, a new Strategy and Policy Unit was created and the Bank Supervision Division was renamed as Financial Services Supervision Division. For the latter, the change of name was seen to be more reflective of the range of financial institutions that fall under the responsibility of the Division. There was also an increased emphasis on the pursuit of developing the financial and offshore services sector. This objective was in line with the economic vision of Strategy As a first step, the Bank reviewed the current regulatory and supervisory framework of the industry, especially focussing on the agencies involved in the industry and the future human resources requirement. At the time of the review, there were three institutions that oversaw the financial and offshore sector, namely the Central Bank, the Seychelles International Business Authority and the Non-Bank Financial Services Authority (NBFSA). After a critical assessment and also extensive consultations between the Central Bank, the government and local and international institutions, it was recommended that a new Division be created in the Bank to oversee the non-bank services. The new division will function under the title Securities and Financial Markets Division. The creation of the new division was essentially an exercise in streamlining and consolidation in order to eliminate overlapping of responsibilities, reduce costs and 8 All the data presented in this section is actual

90 Operations and Administration of the Central Bank hence promote greater efficiency in service delivery. Given the size of the country s labour force and skills shortage, it was argued that the Bank was best placed to discharge this function given its expertise in terms of regulation and supervision of financial services through the Financial Services Supervision Division. The new Division should also provide for better synergies to be gained within the Bank in the supervision and regulation of bank and non-bank financial services. The core responsibilities of the new division are to oversee the stock market, mutual and hedge funds as well as the insurance services. A critical element for the successful development of the financial and offshore services sector is to ensure the availability of a pool of essential technical skills. Mindful of this, the Central Bank initiated the launch of an initiative to set up a Banking Institute. This would be the platform for training staff of the financial community, with particular emphasis in its initial stage in providing training in customer care, leadership skills and performance management. Some courses were conducted in the second half of the year within the framework of a pilot scheme. The plan is to have a full-fledge Banking School by the end of Apart from the above training initiative, the Bank intensified its own development program designed to provide the staff with avenues for professional advancement and opportunities to keep abreast with central banking issues internationally. In this way, the Bank is able to strengthen capacity whilst encouraging initiative and creating the drive for forward thinking. On the policy front, the Bank was very active during the year. It closely monitored the impact and outcomes of the monetary/exchange rate policies and foreign exchange liberalisation that were initiated in the second half of Through regular meetings of the Board of Directors, which is the body that approves the policies, continuous assessment of the progress in the economic stabilisation programme was carried out and timely decisions taken whenever economic developments called for new policy actions or corrective responses. Based on these regular reviews, the Board agreed to the recommendation to take immediate steps to enhance the competitiveness of the domestic currency in order to consolidate gains in the monetary sector and the real economy and thus hasten macroeconomic convergence. In its September meeting, the decision was thus taken to adopt a new exchange rate regime which explicitly targets the exchange rate of the domestic currency to the US dollar at R8. The new regime became effective as of October 5. In addition, in its last meeting for the year, the Board decided that its policy review meetings should be conducted on a quarterly basis and that any decisions taken be then conveyed in a more transparent manner to the public so as to build confidence and eliminate negative bias in the formation of economic expectations

91 Operations and Administration of the Central Bank At the national level, the Central Bank participated in policy debates, often co-opting the assistance of external partners in areas where the institution lacked the expertise in order to provide fresh insight and assist in policy formulation. Acting under the auspices of the National Economic Planning Council (NEPC), the Bank played a pivotal role in the drafting of the Seychelles Strategy 2017, a document which outlines the government s development strategy for the next ten years. From an operational perspective, many developments emerged in 2007 in all the divisions and the highlights of these are outlined below. 6.1 Administration and Human Resources Division The Administration and Human Resources Division continues to provide administrative support to all the divisions on a variety of issues related to human resources management and development. Through the various recruitment and outreach efforts, the Bank seeks to recruit dynamic and motivated personnel. A total of fifteen new staff has joined the Bank during the year. As part on its ongoing efforts for development of human resources to achieve highest standards, a number of staff had the opportunity to attend training programmes organised both locally as well as internationally. From the second half of 2007, the Bank started renovation works on its building and work is expected to be completed by July Banking Services Division The core business of the Banking Services Division is being the banker to the government, the banking community and other specialized agencies. During the year, this function was discharged with utmost efficiency through a computerised platform which allows for greater operational effectiveness. The latter has seen the successfully completion of the infrastructure upgrade and migration of the SWIFT system in November 2007 and the implementation of a simple computerized cheque printing facility. The Division also looked at other upgrades of the accounting system with the help of the Department of Information Technology and Communication (DITC) and the Information Technology (IT) Unit of the Bank. These upgrades would include new functionalities, including a voucher printing system and an electronic clearing house module Currency Issues There was a further increase in currency in circulation in 2007, representing a rise of R33 million or 8.0 per cent relative to This rise was nevertheless at a slower pace than in previous years and the share of notes and coins remained stable compared to the previous year. Whilst transactions in the Seychelles economy are still through the medium of cash, the increase during 2007 reflected the higher economic growth which warranted a rise in the amount of cash needed to support transactions

92 Operations and Administration of the Central Bank Furthermore, the inflation tendencies which had emerged in the second half of the year called for a higher holding of cash by economic agents. Chart 6.1 Notes and coins in circulation ( ) R million Years Notes Coins % Change in Total Currency in Circulation Percentage Source: Central Bank of Seychelles Table 6.1 Circulation of Notes and Coins (R million) Total Notes Coins (per cent) Share Notes Coins End-of-period data Source: Central Bank of Seychelles In relation to other currency matters, namely the sale of numismatic coins, an amount worth R97,281 was registered, representing a decline of 20 per cent relative to the previous year. These coins are

93 Operations and Administration of the Central Bank excluded from currency in circulation since it is unlikely that such coins will be presented at any time for redemption. In addition to numismatic coins, a total of 730 Seychelles Currency Coin Packs, worth R36,500 was also sold Annual balances For 2007, the Central Bank recorded a net operating profit of R142 million, an increase of R79 million or 127 per cent relative to the previous year and also represented the highest profit in any given year. This important growth was underlined by the rise in income most notably the non-interest component, which rose by R88 million or 454 per cent and a slight improvement of R1.0 million in net interest income. The surge in non-interest income was to a large extent directly related to the movement in the exchange rate. With the rupee trading at a much weaker value that in 2006, this influenced the foreign exchange transactions that were conducted by the Bank as well as on the revaluation of external assets. The gains of exchange were thus a prime component of non-interest income External Reserves At the end of the year 2007, the gross external reserves amounted to R323 million which represented a decline of R331 million or 51 per cent relative to The movement in the external assets was namely linked to the foreign exchange liberalisation process which started in October 2006 as well as the discharge of some external commitments. As part of the foreign exchange liberalisation process, some proceeds from the sovereign bond issue raised in September 2006 were deployed to clear part of the outstanding balances on the pipeline scheme. In terms of the external commitments, these related more specifically to debt repayments and payments towards health, education and energy imports in view of the unanticipated increase in the price of this commodity on the international market Accounts of commercial banks Movements in commercial banks deposits with the Central Bank has since 2006 been influenced by major policy impulses compared to past years. On an end-of-period basis, there was a decline of R66 million or 9.9 per cent of such deposits relative to the previous year. Whilst the banks as a group had been keeping reserves in excess of the required level of 5.0 per cent, in the second half of the year, the banks were faced with a major challenge to entertain a significant withdrawal of funds by the private sector associated with the clearance of external arrears in the financial system. In the face of this, the banks had to draw down on reserves at the Central Bank to effect such payments to their clients. By the end of the year, banks had not recovered the level of cash that they had in the first half of the year which was around 23 per cent of total deposits. However, they continued to fully comply with the statutory requirement even to the extent of having some significant excess balances. As a group, the banks were holding on average 15 per cent cash reserves at the end of the year

94 Operations and Administration of the Central Bank The Clearing House remained active during the year. There was a further increase in the number of items cleared and in value which rose by 5.5 per cent and 1.8 per cent respectively. Whilst the movement shows that there is evidence of increasing growth in the economy, the acceptance of cheque as a means of payment remained limited in scope. Table 6.2 Bankers Clearing House Activities (Total) Number of items cleared 598, , , , ,724 Amount (R 000) 2,007,938 2,386,481 2,192,623 2,339,69 2,382,069 (Daily average) Number of items cleared 2,405 2,326 2,341 2,416 2,519 Amount (R 000) 8,064 9,470 8,736 9,472 9,528 Source: Central Bank of Seychelles 6.3 Financial Intelligence Unit The Financial Intelligence Unit (FIU) was established on June 1, 2006 as an independent unit within the Central Bank. The FIU started with a complement staff of three, one of whom is the Director. By the end of 2007, the Unit employed two more staff members making a total of five. One of the core functions of the FIU is to receive, analyse and disseminate reports of transactions or attempted transactions relating to the offence of money laundering or the financing of terrorism to the appropriate law enforcement or supervising agencies. During 2007, the Unit received several Suspicious Transaction Reports from reporting entities which after analysis, were disseminated to the appropriate law enforcement and supervisory agencies. Another important function is the exchange of information with foreign FIUs in accordance with the requirements of the Egmont Group. During 2007, such practice was undertaken by exchanging information with three foreign counterparts and requesting information from one. The FIU is also authorised to conduct examinations of Reporting Entities so as to ensure compliance with the provisions of the Anti-Money Laundering Act 2006 and the Prevention of Terrorism Act During the year, it completed the examination of four banks, one Bureau de Change and eight Corporate Service Providers

95 Operations and Administration of the Central Bank Other functions include producing and issuing guidelines on Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) to the Reporting Entities. The Guidance Notes on AML for financial institutions prepared by CBS in 1998 were amended during 2007 to incorporate the requirements of the AML Act of 2006 and have since been distributed to Reporting Entities. The provision of training on AML/CFT to the Reporting Entities is also another function. In March 2007, the Central Bank in collaboration with the US Department of Treasury s Office Office for Technical Assistance (OTA), organised a workshop on Investigative Techniques for Law Enforcement Officers at the ICCS in which the FIU Director made a presentation. Officers from various local Law Enforcement agencies participated in the workshop. The OTA has an agreement with the Central Bank of Seychelles to provide technical assistance to its FIU. During 2007, an expert from the OTA visited the country on three occasions to provide on-going training to the staff of the Unit. In February, the Deputy Governor accompanied by the FIU Director visited the Mauritius FIU on a familiarization visit during which talks on technical assistance, mutual co-operation and assistance in helping the Seychelles FIU gain admittance to the Egmont Group were discussed. Following this visit, two members of staff went on a one-week attachment to the Mauritius FIU. Other members of staff also proceeded overseas on training covering AML/CFT. 6.4 Financial Services Supervision Division The division assists the Central Bank in promoting a sound financial structure through its rigorous licencing process as well as ongoing on-site and off-site examinations of supervised institutions. To this end, its portfolio in 2007 remained unchanged with six banks conducting domestic banking business, one offshore bank, two bureau de change and a microfinance institution. The noteworthy event that occurred in the early part of the year was the revision in the division s name as well as the post title of the officers who work within the division. The former changed from bank supervision to financial services supervision in an attempt to give a more comprehensive indication of the division s area of expertise. Similarly, it is perceived that analyst rather than officer better reflect the type of work that each such staff undertakes. As planned, the year saw the completion of four full scope onsite examinations. These related to Saymore, Mauritius Commercial Bank (Seychelles), Seychelles Savings Bank and Travel Change (Seychelles). In line with the division s goal of striving for excellence, the examination teams improved on past examination reports in all aspects. On this line, the manner that commercial banks

96 Operations and Administration of the Central Bank manage their information and communication technology was evaluated by an expert in the field of information technology, who also formed part of the onsite team. As regards offsite surveillance, this was performed on a continuous basis although a more thorough analysis was prepared to coincide with each of the supervised institutions deadline for the payment of their annual fees. When these two are combined, it can be concluded that all the supervised institutions are indeed financially safe and sound. With regard to legal issues, the division also had the opportunity to comment on the proposed Seychelles Credit Union bill that was put forward by the institution itself. By and large, this was done in line with the Model Law for Credit Unions which has been developed and recommended by the World Council of Credit Unions. To this end, although there are issues that the various stakeholders are yet to reach an agreement on, the exercise is now in its final stages. During the last quarter of the year, a paper was prepared by the division for the Board s comment on the manner that international repute and good standing ought to be interpreted for the purpose of granting offshore banking licence. Consequently, it was agreed that this meant that the applicants should essentially be able to show a good track record of growth and profitability. Concerning licensing, the application form, as well as accompanying notes, were brought up to date. Essentially, this exercise culminated in the production of one single application form in place of three, catering for both banking (domestic and offshore) as well as bureau de change businesses. Concerning capacity building, in addition to on the job training, the division continued to subscribe to the FSI Connect, which is an on-line learning tool developed by the Financial Stability Institute for banking supervisors around the world. Moreover, staff from the division had the opportunity to attend specialized training overseas in relation to central banking, Basel II implementation, the revised core banking principles for effective supervision and integrating on-site and off-site banking supervision. In relation to reinforcing banking supervision, a technical assistance team from the IMF reviewed the division s current practices in this area in an attempt to assist it further in maintaining financial sector stability. Further assistance will be provided by the Fund over an 18 month time frame, which will end in June Minimum required capital and investment of capital funds The minimum required capital is applicable to all financial institutions whilst that relating to the investment of capital funds is specific to banks. These requirements remained unchanged in 2007 and were adhered to by all the relevant institutions

97 Operations and Administration of the Central Bank Minimum reserve requirement and local asset ratio There were no changes to these two key monetary policy instruments during the year but nevertheless, the Bank monitored the outcomes very closely as they are key in the modulation of liquidity growth in the short-term. All banks were able to comply with the requirements, with the exception of one bank which was unable to recover on the local asset ratio after it encountered a major squeeze on both its asset and deposit liabilities. Chart 6.2: Minimum Reserve Requirements ( ) Percentage Years Outcome Statutory limit Source: Central Bank of Seychelles Chart 6.3: Minimum Local Asset Ratio ( ) Percentage Years Outcome Statutory limit Source: Central Bank of Seychelles

98 Operations and Administration of the Central Bank Table 6.3 Minimum Reserves and Local Assets Ratio (per cent) Minimum reserve requirement Statutory limit Outcome Minimum local assets Statutory limit Outcome Yearly averages of weekly data. Note: An increase in the local asset ratio from 50 per cent to 65 per cent and the minimum reserve requirement from 2.5 per cent to 5.0 per cent effective August 01, Source: Central Bank of Seychelles 6.5 Foreign Earnings Regulation Division As previously announced by the Minister for Finance, the process for removing foreign exchange controls began in the latter part of Allocation of foreign exchange continued to be on a discretionary basis by the banks, with the surrender requirement being maintained at 15 per cent. A total of R37.57 million was paid from the frozen pipeline, representing requests where goods and services had previously entered the country. Moreover, in an attempt to create a climate of confidence both at a national and international level in the economy, banks were encouraged to open and operate foreign exchange accounts for individuals, subject to the normal customer due diligence process. On a somewhat related issue, the Minister for Finance announced in the 2008 Budget presented in December 2007, that the Exchange Control Act would be amended to decriminalize the possession of foreign exchange. The relevant amendments were subsequently repealed on January 7, Public Debt Division The Division continued to function as government s agent for domestic debt management as well as registrar for government securities. It also acts as advisor to the Ministry of Finance on the restructuring of its domestic debt portfolio. At the operational level, the secondary market window for treasury bills was again not very active during the year given the restricted dynamics that characterise this market. Other government instruments on offer were treasury bonds where two new securities were put on tap mostly targeting the household sector in a bid to promote a savings culture amongst the population. The other

99 Operations and Administration of the Central Bank instrument that was issued was a government stock, which was issued purely from a regulatory standpoint for the financial institutions Treasury Bills The treasury bill market remained practically the same in 2007 compared to the previous year in terms of the cycle of auctions with eight tenders for the 91-day maturity and one for 365-day. As has been the case in the past, commercial banks continued to be the main participants in the primary auctions. This is the case as they participate in this market in order to obtain sufficient government instruments so as to satisfy the requirement of the local asset ratio. The use of the secondary market was limited given the number of subscribers in the market. The only time where there were transactions in the secondary market was in the second half of the year at the time of a significant withdrawal of deposits in the banking sector for the clearance of commercial arrears by the private sector. In terms of the observed yield during the auctions, there was a generally downward trend on the 91- day maturity, the instrument which serves as the market reference rate. Nevertheless, towards the end of the year as a response to a tighter liquidity position in the banking system as well as a reaction to the increase in the minimum deposit rate stipulated by the Central Bank, there was an increase in the yield of the instrument. Given the policy of the Bank to maintain a liquidity squeeze in the banking sector, the expectations are that a further rise in the interest rate on this government instrument is expected. Chart 6.4: Average tender rate of 91-day bill rate (2007) Percentage Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Months Source: Central Bank of Seychelles

100 Operations and Administration of the Central Bank Given that the average yield has been relatively stable compared to the previous year, the cost to government on this instrument also remained steady at R44 million. With the restructuring of public debt, involving a transitory increase in external borrowings, the government was able to reduce the limit of issue for the auction in the second half of the year. This has resulted in a decline in the amount outstanding at the end of the year to stand at R1,131 million at cost value, a reduction of R55 million. The largest share of this amount represented the 91-day maturity. Table 6.4 Treasury Bills 1/2/ (R million) Stock outstanding 1/ day bills (tap issue) day bills (tender issue) day bills (tap issue) day bills (tap issue) day bills (tender issue) Stock outstanding 2/ day bills (tap issue) day bills (tender issue) day bills (tap issue) day bills (tap issue) day bills (tender issue) Central Bank Commercial banks Other financial institutions Others Non-residents At cost value. 2 At face value. 3 End-of-period data. Source: Central Bank of Seychelles

101 Operations and Administration of the Central Bank Chart 6.5: Total Stock of Outstanding T-Bills ( ) R million Years Total T-Bills % Change in Total Stock of Outstanding T-Bills Percentage Source: Central Bank of Seychelles Treasury bonds During the year, the government continued with the ongoing policy within its debt management framework to progressively lengthen the maturity profile of its domestic debt instruments in support of monetary stability as well as providing the platform to encourage private savings. To this effect, two new bonds were put on offer. There were the 6.0 per cent 3-year which targeted the corporate sector which was issued in November; and a 10 per cent, 5-year bonds issued earlier in May, purely for individuals. The latter bond which was for a limit of R100 million was fully subscribed whilst in the case of the former only R23 million had been sold out of a limit of R250 million. At the same time, there was the continuation of the redemption of the 4.0 per cent, 3-year bond that was issued in With maturities completely outweighing sales, the total stock of bonds declined by R252 million or 12 per cent to reach R1,826 million at the end of the year. Given the level of redemption and new instruments in the bond portfolio, there was an increase the payment of interest by R16 million

102 Operations and Administration of the Central Bank Table 6.5 Treasury Bonds (R million) Stock outstanding %, 1-yr %, 3-yr %, 5-yr %, 7-yr %, 10-yr %, Esmeralda II %, 3-yr %, 3-yr %, 5-yr %, 3-yr %, 3-yr %, 5-yr Central Bank Commercial banks Other financial institutions Others End-of-period data. Source: Central Bank of Seychelles Chart 6.7: Total Stock of Outstanding Treasury Bonds; R million Percentage Years Total Stock Outstanding % Change Total Stock Outstanding Source: Central Bank of Seychelles

103 Operations and Administration of the Central Bank Government Stocks At the beginning of the year, the 8.5 per cent stock came due and this instrument was replaced by a similar one yielding an interest of 8.0 per cent. This roll-over was of the same amount of R30 million which was mainly subscribed by commercial banks in view of a regulatory requirement. With these developments, there was no major change in the profile of this government security with the amount due to subscribers standing at R150 million, whilst government effected interest payments of R12 million. Table 6.6 Government Stocks; (R million) Stock outstanding %, %, 2005/ %, %, %, Central Bank Commercial banks Other financial institutions Others End of period data. Source: Central Bank of Seychelles 6.7 Research and Information Management Division Apart from the work that has to be conducted for the publication of the Quarterly Reviews and Annual Report, the Division started with a program of education, whereby economic articles were prepared and published in the national newspaper the Seychelles Nation. This program has been initiated to provide a platform of awareness of economic issues, especially now that the economy is going through a transition phase. Economic knowledge is very important at a time of transition as it helps to mould and guide expectations of economic agents. In support of the above and to provide more information for the policy reviews, especially now that the latter will be conducted on a quarterly basis, the Division reinforced its data management capacity. This was done by increasing the scope of data coverage and in some instances working more closely with the National Statistics Bureau (NSB). The Division was very instrumental in the work that was being undertaken by the NSB on the new national accounts data which are due for release in the first

104 Operations and Administration of the Central Bank quarter of The Division also prepared and co-ordinated the preparation of documents for policy reviews. To further enhance its capacity, especially in monetary operations and research, which will underpin future policy decisions of the Bank, a technical mission of the IMF was conducted in the last quarter of the year. This mission assessed the current status and provided an Action Plan for a period of 18 months, starting February Strategy and Policy Unit As part of the restructuring of the Central Bank which was approved at the beginning of the year, the Strategy and Policy Unit was created. The rationale behind the setting up of this Unit was to have a channel through which the Bank would participate more fully at the national level in policy debates, especially now that the economic landscape is undergoing significant transformation. The Unit has as its mandate the responsibility for the evaluation and advisory role to the Governor and the Board of Directors on key economic issues. It also participates in forums and meetings both nationally and internationally as well as studying and preparing strategic papers for consideration of the Central Bank Board and the government. 6.9 Board of Directors The Board of Directors met on 12 occasions during the year Appreciation The Board and Management of the Central Bank wish to record their appreciation to all staff members of the Central Bank for their valuable contributions to the operations of the institution in Despite serious economic challenges, the staff have continued to discharge their responsibilities in a professional, ethical and exemplary manner as befitting a central monetary institution. Above all, they have done so with loyalty, sincerity and quiet efficiency. On this note, the Board and Management look forward to another successful year ahead

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