CENTRAL BANK OF SEYCHELLES

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2 CENTRAL BANK OF SEYCHELLES ANNUAL REPORT 2010

3 CONTENTS Page Letter of Transmittal Board of Directors List of Charts and Tables Section One Overview 1 Section Two Developments under Macroeconomic Reform Programme 5 Section Three The Real Sector: Production, Labour and Prices 10 Section Four Monetary and Financial Sector 21 Section Five Government Finance 36 Section Six The External Sector 48 Section Seven Central Bank Operations 67 Annex I Annual Accounts and Auditor s Report 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 2010) Pierre Laporte - Governor and Chairman Caroline Abel - Deputy Governor Member Errol Dias - Director Wilfred Jackson - Director Ronny Govinden - Director Steve Fanny - Director Secretary to the Board Juliana Ah Thew-Rose

6 List of Charts and Tables Chart No. Title Page The Real Sector: Production, Labour and Prices 3.1 Visitor Arrivals ( ) Price Movements ( ) 19 Monetary and Financial Sector 4.1 Net Foreign Assets and Domestic Assets ( ) Money Supply ( ) Reserve Money (2010) Notes and coins in circulation ( ) Total Domestic Credit ( ) Commercial Banks Loans and Advances to Non-Government Sectors ( ) Loans by Development Bank by Economic Sectors ( ) Central Bank Advances to Commercial Banks ( ) Interest Rates ( ) 33 Government Finance 5.1 Government Finance Outcome ( ) Major Revenue Flows in Current Receipts ( ) Government Capital Expenditure ( ) Stock of Domestic Debt (Jan-Dec 2010) 44 The External Sector 6.1 The overall balance, current account and capital and financial Account of the BOP ( ) Trade in Goods ( ) Imports (f.o.b.) Exchange rate movements of the three main currencies ( ) 58

7 Table No. Title Page Developments under Macroeconomic Reform Programme 2.1 Quantitative Performance Criteria 7 The Real Sector: Production, Labour and Prices 3.1 Gross Domestic Product by Kind of Economic Activity ( ) (at constant market prices) Gross Domestic Product by Kind of Economic Activity ( ) (at current market prices) Tourism Indicators Employment and Unemployment Rate ( ) Inflation Rates ( ) 20 Monetary and Financial Sector 4.1 Monetary Survey ( ) Reserve Money (Q to Q4-2010) Notes and coins in circulation ( ) 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 ( ) Interest Rates ( ) Weighted Average Deposit Auction Arrangement Rates (2010) 34 Government Finance 5.1 Government Budget; 2010 Summary Public Sector Capital Expenditure ( ) Treasury Bills ( ) Treasury Bonds ( ) Government Stocks ( ) 47 The External Sector 6.1(a) Seychelles Balance of Payments (R million) ( ) (b) Seychelles Balance of Payments (US$ million) ( ) Imports (c.i.f.)-by HS Sections ( ) External Reserves ( ) 57

8 6.4 Exchange Rates ( ) 58 Table No. Title Page Central Bank Operations 7.1 Banks licence fees Bankers Clearing House Activities ( ) 79 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 SSF STB - Central Bank of Seychelles - Development Bank of Seychelles - International Business Company - Indian Ocean Tuna Limited - International Trade Zone - Seychelles Petroleum Company - Seychelles Fishing Authority - Social Security Fund - Seychelles Tourism Board

9 SECTION ONE Overview 1.0 External Developments Signs of a global economic recovery were generally apparent in 2010, and most analysts are of the view that the world economy recovered from the recent global crisis. This was despite strong concerns over the possible downside risk which therefore implied a fragile recovery. Preliminary estimates by the International Monetary Fund (IMF) are that world output expanded by 4.8 per cent in Notably, the intensity of activities in developed economies was not as strong as that in emerging and developing countries. This underlines a gradually growing tendency of investments being directed towards emerging markets, where, amidst greater country-wide risks, the potential downside risks of the global financial crisis were seen as being relatively lower. The world economic recovery is set to continue in According to latest IMF statistics, global output is forecasted to grow by 4.5 per cent. However, inflationary pressures emanating from rising commodity prices, namely food and oil, are viewed as the main factors that may constrain growth. Moreover, growing instability in North Africa and the Middle-East are also expected to have negative bearings on the world economy, especially on oil production. 1.1 Domestic Economic Developments Domestic activity was buoyant during 2010 even though Seychelles remains heavily dependent on the international environment. Estimates by the Seychelles authorities and the IMF indicate that activity picked up strongly with real GDP growth estimated at 6.2 per cent compared to 0.7 per cent in 2009 whilst figures released by the Employment Department show that the unemployment rate fell from 2.4 per cent to 2.3 per cent 1. The main drivers of growth during 2010 were construction, related largely to foreign direct investment projects, and tourism-related activities, which recorded a record growth in The telecommunication sectors as well as domestic manufacturing also recorded positive growth. Notwithstanding this positive performance, risks that events across the globe could have the potential to derail domestic performance remained. Already in the latter part of 2010, signs that rising commodity 1 It should be noted that a survey carried out by the National Statistics Bureau (NBS) in August gives a different unemployment rate. The agencies are in the process of reconciling this data

10 prices, including oil, could begin to translate into higher domestic prices, though by the year end inflation remained firmly under control. Tourism remained the most important sector of the economy in terms of its direct foreign exchange earnings, employment, as well as GDP contribution. The year 2010 was the best on record in terms of visitor arrivals with a total of 174,529 tourists, which was an increase of 11 per cent compared to 2009 numbers. In line with the higher arrival figures, there was a growth in tourism earnings to US$231 million in comparison with US$209 million in the previous year. This positive outcome followed a change in the marketing strategy by the Seychelles Tourism Board (STB), which have both private and government representation. A new marketing slogan Affordable Seychelles was adopted and this contributed importantly in boosting arrival numbers. With this strategy, STB aims to change the image of the country from being a high-end expensive destination to one that is financially attractive to a wider range of tourists. This also entails targeting other markets such as South Africa, China and the Middle East. Evident in 2010 was the higher level of confidence in the Seychelles economy compared to the previous year. This return of confidence was a key element in boosting economic activity across all key sectors of the economy, particularly the private sector. Consequently, foreign direct investment (FDI) inflows rose to US$323 million in This includes a combination of hotel projects and a major real estate component that was at the peak of its construction phase during the year. The implementation of these projects boosted growth in construction and related activities. In line with the sharp growth in FDI, and given the country s high dependency on imports, this translated into a worsening of the current account deficit from 34 per cent of GDP in 2009 to around 50 per cent in However, the deficit is expected to contract in the coming year once these major projects are completed. From a different stand point, FDI-related foreign exchange inflows as well as tourism earnings have helped to provide for the financing required to sustain the growth in imports. This has also directly supported the stability of the domestic currency. Throughout the year, the Seychelles rupee remained stable against the main traded currencies. After some early periods of overshooting in the first quarter of 2009 following the change from a fixed to a floating regime, further stability of the domestic currency was observed in Compared to 2009, the rupee appreciated by 11 per cent against the US dollar and pound Sterling and by 14 per cent relative to the euro

11 The accumulation of external reserves, a key element of the reform programme, continued during On a gross basis, official reserves held by the Central Bank stood at US$238 million at end-2010, equivalent to 2.3 months of import cover. This compared to US$169 million and 1.6 months of imports end As for the net international reserves, the target of US$168 million at the end of the year was largely exceeded, attaining US$207 million. The increase in reserves was realised through a combination of factors including Central Bank purchases from the banking system, and disbursements by the International Monetary Fund, World Bank, African Development Bank (AfDB), European Union as well as other bilateral partners, in support of the reform programme. The fiscal sector also over-performed in The programme target was a primary surplus of 7.0 per cent of GDP. However, owing to buoyancy in revenue collection in the form of business tax, trades tax and GST, a primary surplus of 8.9 per cent of GDP was realised for the year. This allowed the government to continue to repay part of its domestic debt, in line with its overall debt reduction strategy. On the external front, important progress was made during the year in negotiations between the Seychelles government and its external creditors. In February, there was the successful completion of the commercial debt exchange offer to restructure the bulk of the country s external commercial debt with a face value of US$320 million, inclusive of US$230 million Eurobond and two commercial bank loans. The debt exchange was supported by a US$10 million unprecedented guarantee from the AfDB. In July, the Paris Club cancelled the second tranche equivalent to 22.5 per cent of debts owed to its members as part of an historic agreement reached in April 2009 which gave an overall cancellation of 45 per cent. The reduction in domestic debt occurred through a net maturity of treasury instruments during the year. To the extent that this liquidity was not directed to other sectors, commercial banks were highly liquid and held reserves above the minimum required amount. This excess liquidity was the main cause of the reduction in interest rate, especially on the short-term spectrum of the maturity profile of instruments. On 91-days, 182- days and 365-days treasury bills, the yield fell to 0.48 per cent, 1.23 per cent and 2.38 per cent at the end of 2010 compared to last year s 4.29 per cent, 5.50 per cent and 6.40 per cent, respectively. Consistently, the same trend was observed in the effective interest rates on banks deposits. The average on fixed-term rupee deposits fell from 5.64 per cent to 3.01 per cent. As for the savings rate, the decline was from 1.85 per cent to 1.58 per cent. With regards to the lending rate, the fall was less pronounced. From per cent in 2009, it decreased to per cent in In view of relatively low domestic inflation and low world interest rates, the lending rate in Seychelles can be considered to be on the high side, and a deterrent to credit growth. A recent study by the Central Bank of Seychelles showed several indicators that point to a lack of competition between commercial banks

12 Notwithstanding the relative high cost of borrowing, there was a growth in credit to the economy by commercial banks during At the end of the year, total claims on the private sector, the majority of which were local currency loans, increased by 22 per cent and represented loans disbursed to sectors such as tourism, trade, manufacturing, mortgages as well as to private households. The monetary survey shows an increase in the broadest measure of money supply, M3, by 14 per cent relative to the previous year. This represents growth under all of the main monetary aggregates. As for the change in assets, both the domestic and foreign assets increased compared to On a percentage basis, the expansion in foreign assets was more prominent and this was on account of a growth in the position of the Central Bank. Despite the liquidity overhang and increased level of activity, these were not filtered through to pressures on domestic prices. Throughout the year, the rate of inflation remained close to zero which to a large extent was due to the stability of the domestic currency and increased competition in the economy given the liberalised economic environment. However, going forward, the Central Bank remains vigilant of increases in inflation in view of rising international commodity prices including the price of oil. To ensure that its price stability objective is not compromised, the Bank stands ready to tighten monetary policy and contain inflation should the need arise

13 SECTION TWO Developments under Macroeconomic Reform Programme 2.0 Programme Implementation since 2008 Seychelles embarked on an ambitious macroeconomic reform programme in November 2008 to primarily address serious balance of payments and external debt difficulties, amidst the impending financial crisis. Previous attempts at redressing the economy through home-grown reform programmes faced significant challenges and were inadequate as the measures were largely piecemeal and selective. With the global slowdown and sharp increases in food and fuel prices in 2008, the authorities requested the assistance of the IMF. Following intensive consultations, the Seychelles authorities launched the reforms with the removal of exchange restrictions and floating of the Seychelles rupee, which were programme prior actions, in November In December 2008, the IMF Board approved a two-year Stand-By Arrangement (SBA) during which the country agreed to implement a series of far-reaching adjustments in its monetary, fiscal, exchange rate and structural policies. Whilst in the past monetary policy always accommodated the fiscal stance, the reform programme focuses on strict fiscal discipline and the need to ensure proper liquidity management in the banking system. The complexity of Seychelles economic problems also required a complete overhaul of the exchange rate regime. The liberalisation of the foreign exchange market was accompanied by the elimination of all administrative controls and restrictions on foreign exchange transactions. The main objectives of the SBA were to promote macroeconomic stability and sustainable growth by: (i) Introducing a floating exchange rate regime and achieving full convertibility of the rupee; (ii) Placing public debt on a sustainable path through the implementation of a comprehensive debt restructuring strategy and tightening of the fiscal and monetary policy; and (iii) Reducing the role of the state in economic activities, whilst creating an environment that is conducive for private investment. The programme was front-loaded, meaning that most of the adjustments had to be made at the beginning and closely monitored throughout the duration of the exercise. During its quarterly reviews, the IMF - 5 -

14 consistently confirmed the country s progress in all areas. By the end of the first year of the SBA, Seychelles had already achieved macro-economic stability, with the exchange rate stable, inflation firmly under control, fiscal surpluses and foreign exchange reserve build-up exceeding programme targets, and the external debt restructuration very advanced, the Seychelles authorities and the IMF came to a mutual agreement to cancel the SBA and move to a longer-term arrangement which would focus more on structural issues. Hence, on December 18, 2009 the IMF Board approved Seychelles request to move on to an Extended Fund Facility (EFF). The successful transformation under the SBA laid the groundwork for the second generation of reforms that would be implemented under the EFF. This medium-term framework will guide the necessary policies to secure macroeconomic stability and improve the country s economic performance. The aim is to strengthen public financial management, institutionalise higher governance standards, downsize the public sector, reform the taxation system, bolster the financial system and improve the business environment. This would consolidate the efforts to create a market-driven economy and also address long-standing structural imbalances. 2.1 Macroeconomic Reforms during 2010 During 2010, emphasis was placed on the introduction of various laws and regulations, and also guidelines and procedures to strengthen the existing legal and operational framework where public finance is concerned, whilst creating an environment that would encourage private sector investment. For instance, significant structural benchmarks were attained during the year in the taxation area as well as in terms of public financial management and expenditure reforms. The tax reform focused on three main areas: (i) The introduction of a revised Business Tax Act as of January 1, 2010, which broadened the tax base and provided for a step-wise reduction in rates to encourage competitiveness and achieve harmonisation across sectors. The maximum business tax rate was reduced from 40 per cent to 33 per cent. (ii) Replacing the existing social security contributions with the Income Tax on Monetary and Non- Monetary Benefits effective July 1, The new law expanded the income tax base to resident expatriate workers and eliminated all sectoral concessions

15 (iii) Introducing a Value Added Tax (VAT) from January 1, Work on the necessary legislation, which aims to modernise the tax system and remove distortions has already started. The VAT will replace the current multiple-rate Goods and Services Tax (GST). As regards the strengthening of public financial management and expenditure, positive steps were made in that direction. New procedures and protocols for budget submissions were introduced in order to ensure better budget preparation. The budget document presented to the National Assembly gave a more comprehensive analysis of the fiscal position and macroeconomic context than in previous years. In line with good governance practices, the Ministry of Finance has also started to publish government finance statistics on their website. To achieve the objectives of the programme, several quantitative and structural targets were agreed between the IMF and the Seychelles authorities. Table 2.1 shows the quantitative performance criteria since the start of the programme and performance during 2010 (actual versus target). Table 2.1: Quantitative Performance Criteria Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Reserve Money 1 SCR million Target Actual Net International Reserves 2 USD million Target Actual Primary Fiscal Balance 3 SCR million Target Actual The stated target is a ceiling. 2. The stated target is a floor. 3. The stated target is a cumulative floor

16 2.2 Reforms undertaken by the Central Bank of Seychelles (CBS) The significant transformation at the Central Bank and in the financial system as a whole through the policies that the Bank implemented continued during the year. With the support of technical assistance from the IMF in the areas of monetary operations, foreign exchange market, bank supervision, payment system, financial reporting, internal audit and risk management, the Bank has established structures that will assist in the delivery of its new mandate in the liberalised economic environment. These technical capacity building measures have been supported by a strong internal human resources training programme approved by the Board of the Bank. During the year, the Central Bank ensured that its range of monetary and exchange rate instruments remain consistent with current market conditions. A new instrument was also added to the existing monetary policy framework, namely the foreign exchange swap. The instrument which is to be used as a liquidity management tool was approved by the Board in August. It offers more flexibility to achieve liquidity management within the banking system, and will also help in the deepening of the domestic financial market. The enhancement of the supervisory framework remained one of the Bank s priorities. At the beginning of the year, there was a revision in the application processing fees as well as the annual fees such that these are more reflective of the cost of functions and procedures carried out. In November, the Financial Institutions (Capital Adequacy) Regulations to ensure that banks maintain adequate capital as a buffer against potential losses were introduced. In that same month, the Financial Institutions (Credit Classification and Provisioning) regulations to ensure that banks prudently classify loans and provision for potential losses were also gazetted. As part of the work done to develop appropriate safeguards to ensure financial sector stability, work has started which will allow the drafting of a crisis preparedness binder. From a more operational perspective, important steps were taken during the year in support of further developments of the domestic banking system. These included the establishment of a complete requirements and standards document for electronic funds transfers that replaced the manual settlement system and the adoption of a new cheque standard under the new clearing house rules. Such measures form part of the overall project to modernise the national payment system. To put in place the necessary infrastructures to improve the efficiency and reduce the risks when undertaking financial transactions, the necessary laws were introduced. In June, the National Assembly approved a bill to create a national clearing house and settlement system. This will enable the Central Bank to put in place the necessary infrastructure which will improve efficiency and reduce risks when - 8 -

17 undertaking financial transactions. The National Clearing and Settlement System Act provides for the regulation and supervision of clearance and settlement systems. Another important achievement was the implementation of a new Core banking system in December which will significantly improve banking services offered by the CBS to the government and commercial banks. The Core banking system provides the platform for: (i) future payment system integration such as the introduction of a local rupee switching system; (ii) the Electronic Clearing House; (iii) Electronic Funds Transfer; and (iv) and Real Time Gross Settlement (RTGS). Another important milestone is the development of a Business Continuity Management System. This is to ensure that the Bank continues its critical operations in case of a disaster or other unforeseen disruptions to its activities

18 SECTION THREE The Real Sector: Production, Labour and Prices 3.0 Overview Economic activity picked up pace in Provisional estimates show that Gross Domestic Product (GDP) grew by 6.2 per cent in real terms compared to only 0.7 per cent in the previous year. The main source of growth was the services sector, primarily driven by activities in the tourism, construction and telecommunication industries, as well as construction associated with large FDI projects. Further stabilisation of the economy during 2010 also contributed to a more favourable environment and improved investor confidence. The elevated confidence in the Seychelles economy is portrayed by increased economic activities by both businesses and private households. Evident was the higher level of total investments in the form of intention or actual spending compared to Foreign direct investment (FDI) is estimated to have increased from 34 per cent of GDP in 2009 to 35 per cent of GDP whilst the number of investments in commercial projects by residents also increased. The performance of the tourism sector was key to the acceleration in overall economic growth, especially given its significant contribution towards investments, employment creation, foreign exchange earnings as well as GDP. In 2010, a number of important policy changes were introduced aimed at improving the performance of the tourism industry. These include a restructuring of the Seychelles Tourism Board (STB) and the adoption of more aggressive marketing strategies targeted at not only the traditional markets, but to new emerging ones. The most notable result achieved in 2010 was an increase in visitors arrivals by a significant 11 per cent compared to the previous year to set a new record whilst the associated estimated growth in tourism earnings was by 14 per cent in euro terms. Despite the increased pace in economic activity, inflationary pressures remained contained and near zero throughout the year. To a significant extent, this was supported by marked stability in the external value of the domestic currency, coupled with strong foreign exchange inflows into the country. Away from tourism, the main challenge expressed by the private sector is stiff competition that domestic producers faced with import substitutes given that in a significant number of cases, imported goods were 2 Source: Seychelles Investment Bureau (SIB)

19 cheaper than locally produced commodities. Notable is that with the further liberalisation of the economy since late 2008, a marked increase in imports has been observed and this was especially significant during Table 3.1 Gross Domestic Product by kind of Economic Activity ( ) at constant market prices (1) 2008 (1) 2009 (2) 2010 (3) (R million) GDP at 2006 constant market prices 5, , , , ,478.4 Change 9.5% 9.6% -1.3% 0.7% 6.2% Agriculture Fishing Manufacture of food Manufacture of beverages and tobacco Manufacture of concrete, rock products, glass etc Manufacturing, other 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 Owner Occupied dwellings 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 Allocation of FISIM 3 to Nominal Sector Taxes less subsidies ,128.3 Notes: 1 Provisional Estimates 2 Indicative Estimates 3 Central Bank of Seychelles Estimates (i) (SIC) - Seychelles Industrial Classification and International Standard Industrial Classification (ISIC) Rev. 4 (ii) "Indicative" estimates are at an early stage of development and are expected to be substantially improved with further work. Source: National Bureau of Statistics and Central Bank of Seychelles 3 Financial Intermediation Services Indirectly Measured

20 Table 3.2 Gross Domestic Product by kind of Economic Activity ( ) at current market prices (1) 2008 (1) 2009 (2) 2010 (3) (R million) GDP at 2006 current market prices 5, , , , ,299.6 Change 9.7% 21.8% 27.6% 23.1% 5.4% Agriculture Fishing Manufacture of food Manufacture of beverages and tobacco Manufacture of concrete, rock products, glass etc Manufacturing, other 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 ,198.5 Accommodation and food service activities , , , ,100.9 Information and communication Financial and insurance activities Real estate activities Owner Occupied dwellings 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 Allocation of FISIM to Nominal Sector Taxes less subsidies , , ,276.3 Notes: 1 Provisional Estimates 2 Indicative Estimates 3 Central Bank of Seychelles Estimates (i) (SIC) - Seychelles Industrial Classification and International Standard Industrial Classification (ISIC) Rev. 4 (ii) "Indicative" estimates are at an early stage of development and are expected to be substantially improved with further work. Source: National Bureau of Statistics and Central Bank of Seychelles 3.1 Primary Sector In 2010, output from the primary sector, particularly agricultural produce, fell. Additionally, locally produced commodities faced major challenges, primarily in terms of competition with imported substitutes

21 Similarly, in the fisheries sector, the indication is that output contracted in 2010 and that the sector was also faced with some major challenges, notably piracy in and around the Seychelles waters Fisheries For the year 2010, the value-added contribution of the fisheries sector to national output fell to R33 million compared to R49 million in The main challenge has been the elevated operational cost given that fisheries activities are increasingly being concentrated further away from the coast. Furthermore, the year experienced an increased threat of piracy attacks due to more of such activities in the Indian Ocean. Notwithstanding these challenges, fisheries remain an important sector for the Seychelles economy. Hence, the recorded 15 per cent increase in financial resources directed to such activity by the Development Bank of Seychelles was a positive development. Additionally, with the objective of accelerating the development of the fisheries industry, the Seychelles Fishing Authority (SFA) in collaboration with the Japanese government embarked on several projects throughout the year. These include a new ice plant at Bel Ombre which opened in June. This new facility has helped cut down operational costs and time for fishermen. The year 2010 also saw the opening of two new fishing ports at Bel Ombre and Providence Zone 6 as part of the government s endeavour to further promote sustainable artisanal fisheries. The project also served to decentralise fisheries services so as to limit congestion in Port Victoria. Going forward, the SFA is set to venture into new projects, namely the mariculture 4 development which is being financed by a grant from the African Development Bank Agriculture The year 2010 was a very challenging period for the agricultural sector. This was the case primarily for the meat and eggs producers following the complete liberalisation of this activity. Whilst this measure has promoted efficiency and increased the choices available to consumers, it has on the other hand resulted in a reduction in the demand for such local produce and thus its production due to the more competitive prices of imported items. Given the relatively high cost of production, local farmers were unable to compete against imported substitutes that were generally more affordable for customers. The local production of broiler chicken, for example, dropped by 19 per cent compared to 2009, whereas imports of this commodity rose by 28 per cent over that same period. As for crop production, this plummeted by almost 83 per cent as 4 The cultivation of marine resources in the open seas

22 of the third quarter relative to the same period in the previous year. However, the decline had minimal impact on the overall outcome given its relatively small share of aggregate output. In addition to high costs of agricultural inputs and operational expenses, some other constraints faced by the agricultural sector included a lack of infrastructural developments. In efforts to address all these challenges, several strategic measures were considered by the Farmer s Cooperative. An important one was the setting up of the livestock trust fund as a financial support for farmers. In the near term, the Farmer s Cooperative plans to invest in infrastructural projects such as the relocation of the abattoir and cold storage facility at Providence. In support of the sector, the government reviewed a number of incentives given to farmers and egg producers. These included exemption from any business tax for farmers, reduction in the applicable trades tax on import by farmers to a flat rate of only 5.0 per cent, and the capping at R100 per month for water usage by farmers. 3.2 Industries A strong performance of construction activities supported by growth in foreign direct investment was an important factor contributing to the overall increase in industrial output in Manufacturing-related output was also higher than in Construction Construction activities picked up significantly in 2010, mainly driven by the implementation of foreign direct investment projects, including hotels, commercial and residential developments, as well as major government social projects such as the diagnostic centre at Victoria hospital. Construction activity is likely to decelerate in 2011 as the major projects are completed Manufacturing Production statistics for 2010 reveal an overall increase in output. Based on data as of the third quarter of 2010 published by the National Bureau of Statistics (NBS), there was a notable pick up in the production of beverages. Output of soft drinks went up by 27 per cent whilst that of beer and stout increased by 7.0 per cent, relative to the same period of Increases were also recorded in the volume of both electricity production and treated water consumption, rising by 7.0 per cent and 3.0 per cent correspondingly. However, a number of manufacturing companies have been constrained by increased costs of raw materials and utility bills as well as a significant increase in competition from import substitutes. Nonetheless, output

23 at the country s largest single manufacturing entity, namely the Indian Ocean Tuna (IOT), remained somewhat constant compared to last year despite the drop of 10 per cent in the total value of its exports compared to the previous year in US dollar terms. 3.3 Services The tertiary sector, particularly tourism is of key importance to the Seychelles economy in terms of its direct contribution and in support of activity in other sectors. An overall expansion in services output was observed in 2010 compared to the previous year which positively impacted on the recorded overall expansion of the economy Tourism Tourism remains one of the leading pillars of the Seychelles economy, contributing around 25 per cent of the annual gross domestic product. The year 2010 was a positive one for the industry. Tourist arrivals reached a record high of 174,529 which represented growth of 11 per cent compared to 2009, notwithstanding the economic uncertainties in the European region from where the majority of tourists to Seychelles originated. In line with recent trends, France remained the dominant market followed by Italy and Germany. There were also record number of visitors from smaller markets such as South Africa and China. The South African market has been growing steadily, reaching 10,425 visitors in 2010 compared to only 8,208 in Tourists from China amounted to 1,078 or 17 per cent more than in the previous year. Chart 3.1: Visitor Arrivals ( ) 200, Number of visitors 180, , , , ,000 80,000 60,000 40,000 20, Percentage Visitors Arrivals Years % Change Source: National Bureau of Statistics Whilst partly supported by amelioration in global economic conditions, the higher visitor arrivals were primarily attributed to a strong marketing campaign undertaken by key stakeholders in the industry, particularly the Seychelles Tourism Board (STB), private sector operators, and the government. In line with its commitment to reinforce its marketing strategies, STB underwent major restructuring in

24 Amongst the new initiatives pioneered were the appointments of Seychellois staffs at the head of all Seychelles tourist offices in UK, South Africa and France. Marketing efforts were also intensified in all other regions under the new slogan Affordable Seychelles, which promote Seychelles as an ideal destination for a wider range of visitors. Table 3.3 Tourism Indicators Visitors arrivals 140, , , , ,529 Average length of stay ( nights) Tourism Earnings (R million) 1,252 1,901 2,438 2,841 2,785 Average expenditure per diem - Rupees 906 1,156 1,511 1,768 1,350 Memorandum Hotel bed occupancy rate (%) Note: Hotel bed occupancy rate for 2010 is up to August Sources: National Bureau of Statistics (NBS) (except tourism earnings which are from the Central Bank of Seychelles) In terms of tourism earnings, despite the fact that the room rate of a number of tourism establishments remained discounted since 2009 in reaction to the global economic slowdown, an increase in earnings is estimated for Due to a combination of higher arrivals and increased capacity in the sector, tourism earnings are estimated to have increased to US$231 million in 2010 compared to US$ 209 million in However, given the relatively stronger domestic currency, in rupee terms, tourism earnings fell from R2,841 million to R2,785 million. As regards to tourism-related investments, a number of hotel projects either started their operations, initiated first phase of construction or were granted approval for implementation. Notable was the opening early during the year of the Constance Ephelia Resort at Port Launay, the largest hotel in Seychelles in terms of the total number of rooms. 5 Tourism earnings were derived through surveys of hotel establishments. Other sources of tourism earnings (e.g. Goods and Services Tax collection on tourism services) show different figures. The Central Bank, NBS and Ministry of Finance are in discussion with a view to reconcile these data sets

25 The tourism industry also remains one of the most important sources of employment. By the end of the third quarter of 2010, the industry employed a total of 9,223 staff or 21 per cent of the total labour force, of which 17 per cent were in the accommodation and food service departments. In order to improve staff quality, several operators intensified their efforts toward the training of staff. As an example, the Ste Anne Resort and Spa launched its first in-house management training programme for returning graduates who were interested in hotel management. Albeit the positive performance of 2010, the tourism sector continued to face major challenges, notably increasing competition, both in the airline industry and from other tourists destinations. In terms of the outlook for 2011, tourist arrival is expected to grow by 7.0 per cent as the industry continues to actively promote Seychelles outside its traditional markets and expands its stock of accommodation. Equally important is the upcoming Carnival de Victoria scheduled for March This huge event is expected to attract more visitors to the country and boost tourism earnings in March, which is normally a low season period Telecommunication The telecommunication industry registered a strong performance which as evidenced by an almost 37 per cent growth in the number of subscribers for mobile phone accounts by the third quarter of 2010 compared to the same period of the previous year. Competition within the telecommunications industry remained strong in Several new services were launched in the course of the year as the two main telecom companies strived to upgrade their services in response to higher demand and to achieve or maintain customer satisfaction. Another important initiative in the communications sector is the fibre optic submarine project 6, which will bring substantial economic benefits to the industry and the economy as a whole. The project is on course for completion by mid Labour market The privatisation of public enterprises and the recent downsizing programme in the public workforce has brought about many changes in the domestic labour market. The share of employment in the public sector has declined significantly since 2009 whilst most of these resources have been absorbed in the growing private sector. With regards to average earnings, an overall expansion was observed across all three sectors in 2010, namely government, parastatal and private. 6 A project to connect Seychelles with fibre optic cable and as such improve internet communications

26 3.4.1 Employment By the end of the third quarter of 2010, the average number of employees in Seychelles was approximately 44,365, representing an increase compared to the same period of the previous year. The largest share or 70 per cent were employed in the private sector. The public and parastatal sectors accounted for 19 per cent and 11 per cent of total employment, respectively. Notable was that the size of public sector employment observed a further contraction during 2010 in line with the government s policy to achieve a much more efficient and leaner public workforce. A substantial number of ex-government employees have been absorbed by the private sector as indicated by the 6.5 per cent increase in private sector employment during the year. Given the small size of the population and severe shortages of skilled labour in certain sectors, expatriate employment and expertise in some fields remains essential for the country s economic growth and development. At the end of the third quarter of 2010, expatriates accounted for 2.9 per cent of the public workforce, of which 106 were employed in the education field and 103 in the health and social work departments. The share of expatriate employment in the parastatal sector stood at 2.0 per cent, with the largest number being employed in the transportation and storage industries Unemployment Statistics received from the employment department, indicated that the unemployment rate finished the year 2010 at a lower level compared to Whilst the country continued to experience skills mismatch, this improvement in the labour market situation was evident in the growth in private sector activity experienced during the year. Table 3.4 Employment Statistics; (1) 2010 (end of year ) Total Employment 38,826 41,823 40,822 43,199 44,365 Private Sector 20,017 22,008 24,204 28,976 31,056 Parastatals 6,036 6,167 5,673 4,939 4,791 Government 12,773 13,648 10,945 9,284 8,518 (1) Figures for 2010 are up to September Source: National Bureau of Statistics

27 3.4.3 Earnings There was an increase in the average monthly earnings across all economic sectors in 2010 due to a number of factors. Firstly, the minimum wage was raised from R15.50 per hour to R16.50 whilst the public sector salaries were also increased by 4.3 per cent on average at the beginning of the year. Furthermore, there was an overall increase in gross salary in July which coincided with the introduction of the personal income tax. There were also salary revisions by the government in a number of schemes of service. For the year 2010, the average monthly earnings of parastatal workers was R8,483, while civil servants earned R6,590 and the average gross salaries of workers in the private sector was R6, Prices The rates of inflation were close to zero throughout the entire 2010, a development which has partly been attributed to the marked stability in the external value of the domestic currency and a high level of competition given the liberalised economic environment. The average annual inflation rate for the 12 months ending December 2010 stood at negative 2.4 per cent. Chart 3.2: Price Movements ( ) Percent Years Average Inflation Rate End of Year Inflation Source: National Bureau of Statistics Year-on-year inflation stood at 0.4 per cent at December In general, the most inflated item was vegetables, increasing by 13 per cent, followed by oils and fats which rose by just under 11 per cent. The price increase in respect of the latter was in part due to the rising global fuel price along with the price increase in sunflower oil. There were also increases by 9.1 per cent in the price of dairy products and fish

28 Table 3.5 Inflation Rates; Weights 2007 (percentage ) (Annual Average) All Items Fish Other Food Items Non-Food Items (Year-on-Year) All Items Fish Other Food Items Non-Food Items Sources: National Bureau of Statistics (NBS) Given the recent increases in international food and fuel prices the Central Bank expects an increase in inflationary pressures in 2011 compared to According to latest estimate, inflation could exceed 5.0 per cent (year-on-year) at the end of As a result, monetary policy is likely to be tightened during 2011 as the Central Bank will seek to contain inflation within a reasonable target

29 SECTION FOUR Monetary and Financial Sector 4.0 Monetary Policy Development Price stability is one of the primary objectives of the Central Bank. Under the monetary targeting framework adopted in late 2008, in which reserve money is the operational target, strong emphasis is placed on liquidity management. The Bank s monetary policy stance was loosened during the year through quarterly increases in the reserve money target. Consistently, measured on the basis of movements in broad money, an expansion in liquidity was observed in 2010 compared to 2009 but with no adverse effect on the price level given that inflation remained close to zero. As such, interest rates were positive in real terms despite observing a declining trend. The financial system remained highly liquid as net repayment of domestic public debt implied that less government securities were issued compared to the amount that matured. This was a major factor explaining the downward trend in interest rates in the securities market and on rupee deposits at commercial banks. However, given some rigidities in the market, and other factors like lack of competition among the banks and a general attitude of risk averseness by financial institutions, the decline in the lending rate was less pronounced. Nevertheless, preliminary indicators suggest that the demand for credit exceeded supply. Nonetheless, credit to the economy increased significantly compared to the previous year. The main beneficiaries of the additional credit were tourism, trade, manufacturing, real estate as well as private households. Credit to other critical sectors, like fisheries, however, remains insignificant, something that could be viewed as a concern. Against this backdrop, the Central Bank was fairly active in the market in order to ensure that its reserve money target was met. This was done largely through deposit auctions and reverse repurchase agreements (Repos). Going forward, the excessive liquidity overhang is likely to persist as government continues to repay domestic debt, and this will increase the risk of inflation. Toward the end of 2010, inflationary pressures appeared to be emerging as international prices of food and fuel began to be felt in the domestic economy. This could in turn put pressure on the current account with possible pressure on the exchange rate. To

30 ensure that its price stability objective is not compromised, the Central Bank will tighten monetary policy when appropriate. Table 4.1 Monetary Survey; 1, (R million) Net Foreign Assets Central Bank Commercial Banks Domestic Assets Claims on private sector Claims on public entities Claims on government (net) Money Supply, M Money Supply, M2(p) Money Supply, M Money Supply, M Currency with public Transferable deposits (of which public entities) Quasi Money Fixed Term deposits (of which public entities) Savings deposits Pipeline deposits Foreign Currency Deposits Other items, net Figures do not necessarily add up due to rounding off 1 End of period 2 Excludes government balances 3 Changes in 2009 figures are due to revisions Source: Central Bank of Seychelles 4.1 Net Foreign and Domestic Assets The expansion in liquidity and consequently broad money was the result of an increase in both the net foreign and domestic assets, with the former being the most significant (Chart 4.1)

31 Chart 4.1: Net Foreign Assets and Domestic Assets ( ) Rmillion 7,000 6,000 5,000 4,000 3,000 2,000 1, , Percentage Years Source: Central Bank of Seychelles Net Foreign Assets Domestic Assets % Change in Total Assets Net foreign assets grew from R2,919 million in 2009 to R3,675 million in 2010 (26 per cent) and this was largely driven by external reserve accumulation by the Central Bank. CBS net foreign assets increased from R1,997 million to R2,709 million, on account of a combination of purchases from commercial banks and receipt of funds from multilateral organisations such as the World Bank, AfDB and the IMF, as well as bilateral partners in support of the country s macroeconomic reform programme. Commercial banks NFA grew by 4.8 per cent or R44 million in rupee terms. However, it declined by 2.4 per cent in US dollar terms on account of the annual average appreciation of the domestic currency. Domestic assets grew by 17 per cent ending the year on R5,842 million. This was attributed to increases under two of its main components, namely by 22 per cent in claims on the private sector and 17 per cent in net claims on the government. By contrast, claims on public entities fell by 12 per cent mainly as a result of the impact of domestic debt restructuring. 4.2 Money Supply At the end of 2010, the broadest monetary aggregate, M3, rose by 14 per cent to stand at R7,275 million. This development was attributed to growth under all the main components of the money supply

32 Chart 4.2: Money Supply ( ) Rmillion 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, Years Transferable deposits Fixed Term deposits Savings deposits Pipeline deposits Foreign Currency Deposits Currency with public % Change in M Percentage Source: Central Bank of Seychelles The increase was more pronounced with regards to M1, the most liquid measure of broad money, which rose by 19 per cent compared to the previous year, standing at R2,570 million. This development was a result of an increase in both the stock of transferable deposits as well as currency with the public, a development that is consistent with the reduction in the opportunity cost of holding liquid assets. Quasi-money, the least liquid component of money supply, posted a 14 per cent increase, from R2,628 million to R2,997 million. This rise was a result of increases in both fixed term and savings deposits, in the order of 11 per cent and 18 per cent, to end the year at R1,681 million and R1,316 million, respectively. Given the very low yield on treasury instruments, term deposits are viewed by most investors as the next best available domestic investment avenue. 4.3 Reserve Money The reserve money component of the money supply 7 comprises of currency in circulation and other depository corporations deposits held by the Central Bank. Quarterly ceilings are fixed on reserve money and the Central Bank aims at achieving these targets through its interventions in the money and foreign exchange market (see below). Following the quarterly increases, the reserve money target was raised from R1,537 million in the first quarter to R1,753 million in the fourth quarter. The reserve money target is one of the key quantitative performance criteria under the IMF-supported economic programme. Given that it is a ceiling, the CBS should not exceed this target on test dates, which coincide with the end of each quarter. As shown in Table 4.2 and Chart 4.3, the CBS was successful in remaining below the target for each of the four quarters of Sometimes referred to as base or high-powered money

33 Table 4.2 Reserve Money 2009Q4 2010Q4 Q4 Q Q (R million) Q Q Reserve Money (Target) 1, , , , ,753.0 Reserve Money (Actual) 1, , , , ,746.2 Currency in Circulation Other Depository Corporations' reserves , ,092.3 Source: Central Bank of Seychelles Chart 4.3: Reserve Money (2010) R million 1, , , , , , , , , Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Central Bank of Seychelles Reserve Money Targets Currency in circulation finished the year at R654 million, an 18 per cent increase compared to R555 million in This development was consistent with other indicators of economic activity, including growth indicators. The increase reflected an acceleration in economic activity given that the majority of domestic transactions are settled in cash. In addition, the relatively low interest rate on deposits implies a minimal opportunity cost of holding assets in the form of cash, thus stimulating an increase in currency in circulation. Other depository corporations reserves increased by 47 per cent to R1,092.3 million in Q compared to the same period of the preceding year. This increase was largely a result of the repayment of public debt. Additionally, the loosening of monetary policy over the course of 2010 through an increase in the reserve money target implied a reduction in the amount of liquidity that the Central Bank is required to withdraw from commercial banks

34 Table 4.3 Circulation of Notes and Coins 1; Total Notes Coins % Change in Total Currency in Circulation Share (Percentage of Total) 'Notes 'Coins End of period data Source: Central Bank Of Seychelles Chart 4.4: Notes and coins in circulation ( ) Rmillion Percentage Years Notes Coins % Change in Total Currency in Circulation -5.0 Source: Central Bank of Seychelles 4.4 Domestic Credit Central Bank and Commercial Bank Annual credit growth attained 18 per cent in 2010, with the total stock of outstanding domestic credit standing at R6,548 million by the year end. This was attributed to growth in that of both the Central Bank and commercial banks. The expansion in Central Bank credit owed primarily to an increase in treasury bills holdings, which were acquired through a planned recapitalisation of the Bank. The CBS Act provides for a capitalisation level of the Central Bank of up to 10 per cent of its monetary liabilities. At end-2009, capitalisation represented 2.7 per cent of monetary liabilities and as agreed between the Ministry of Finance and CBS, a recapitalisation

35 through the issuance of securities was implemented during 2010 which, along with retained profits of R13 million for the year, brought the recapitalisation level to 9.2 per cent of monetary liabilities. The additional securities will provide the CBS with more instruments to be used in open market operations for its conduct of monetary policy. As for commercial banks credit, it increased by 18 per cent. The bulk of the increase was credit to the private sector, which posted a notable 22 per cent rise. Table 4.4 Credit; 1/2/ (R million) Total Credit Commercial banks Claims on private sector Claims on parastal sector Claims on government of which: Dev. fund stocks (147.1) (147.1) (147.1) (97.1) (97.1) Treasury bonds (1342.4) (1052.4) (841.0) (160.0) (143.0) Treasury bills (1149.7) (1079.5) (844.3) (1587.8) (1230.6) Central Bank Claims on government of which: Advances (0.0) (86.4) (140.6) - - Treasury bonds (1111.1) (1052.6) (747.1) - - Treasury bills (0.0) (0.0) (251.0) (998.1) (1185.1) Figures do not necessarily add up due to rounding off 1 End of period 2 All figures for stocks, bonds and bills are at cost value 3 Changes in 2009 figures are due to revisions Source: Central Bank of Seychelles

36 Chart 4.5: Total Domestic Credit ( ) R million 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, Years Claims on private sector Claims on government Claims on public sector Source: Central Bank of Seychelles Sectoral Allocation of Credit to Private Sector and Parastatals A breakdown of the overall credit portfolio of commercial banks shows that the share of most economic sectors remained largely unchanged. As per the established trend, tourism continued to account for the largest portion, representing 40 per cent. Agriculture and fisheries accounted for the smallest share of less than 1.0 per cent. The sectors which registered highest credit growth included mortgages and transportation, which grew by 62 per cent and 89 per cent, respectively. The increase under the transportation category reflected a combination of strong tourism growth which is highly correlated with demand for transportation, as well as the impact of a major real estate project that was being implemented during As in 2009, credit to wholesale & retail trade fell. The decline in 2010 was by R48 million or 17 per cent. This was despite a rise in non-fdi related imports and hence likely to have accounted for a shift in demand towards the Development Bank of Seychelles given the more favourable terms on the loans it offers

37 Table 4.5 Commercial Banks Loans and Advances To Non-Government Sector by Economic Sectors; 1/ (R million) (Percentage) Total Advances of which: Foreign Currency Loan Agriculture and horticulture Fisheries Manufacturing Real Estate Construction Transportation Tourism Facilities Wholesale & Retail trade Financial institutions Other businesses Private households & Non profit organisation Mortgage loans Figures do not necessarily add up due to rounding off 1 End of period 2 Changes in previous figures are due to revisions Source: Central Bank of Seychelles Chart 4.6: Commercial Banks Loans and Advances to Non-Government Sectors ( ) 3,000 2,500 R million 2,000 1,500 1, Years Agriculture and horticulture Fisheries Manufacturing Real Estate Construction Transportation Tourism Facilities Wholesale & Retail trade Financial Institution Other business Private households & Non profit organisation Source: Central Bank of Seychelles

38 4.4.3 Development Bank s Credit 8 The Development Bank of Seychelles (DBS), which provides credit to relatively smaller businesses and at comparatively more competitive rates than commercial banks, observed an increase by R80 million or 25 per cent in its total loan portfolio in This was across all economic sectors but driven primarily by a rise of R50 million or 28 per cent under other services and a R25 million or 30 per cent growth in allocation to the tourism sector. The growth in the demand for DBS loans came partly as a result of reductions in its lending rate at a faster pace than that of commercial banks. Table 4.6 Loans by Development Bank by Economic Sectors; (R million) (Percentage) Total Advances Agriculture Fishing Industry Tourism Other services Figures do not necessarily add up due to rounding off 1 End of period Source: Development Bank of Seychelles Chart 4.7: Loans by Development Bank by Economic Sectors ( ) R million Years Agriculture Fishing Industry Tourism Other services Source: Central Bank of Seychelles 8 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. Since September 1, 2010, DBS charges 8.5 per cent per annum on all loans and required applicants to make a minimum personal contribution of 10 per cent of the total project cost. The Development Bank of Seychelles does not provide credit for working capital by itself

39 4.5 Liquidity of the commercial banks Throughout 2010, commercial banks were overall highly liquid and did not require recourse to the Central Bank for funds. As in the previous year, the high liquidity position that prevailed reflected government s continued policy stance to reduce public debt, and keep Seychelles on the path toward fiscal sustainability. On the positive side, the increased liquidity at banks has provided more incentives for banks to lend. Table 4.7 CBS Advances to Commercial Banks; ( R million) Advances Repayments Stock of Credit End-of-period data Source: Central Bank of Seychelles Chart 4.8: Central Bank Advances to Commercial Banks ( ) 1,200 1, Rmillion Years Advances Repayments Source: Central Bank of Seychelles 4.6 Interest rates Given the overall excess liquidity in the banking system, interest rates continued to decline throughout From 5.64 per cent at the end of 2009, the average rate on fixed-term rupee deposits finished the year at 3.01 per cent. The fall occurred across all maturities with the most significant being a 3.50 percentage point decline posted under deposits in the maturity bracket above 6 months and up to 12 months. The smallest deviation in interest rates from last year s level was on deposits with a maturity of up to seven days where the decline was by only 0.64 percentage points. The average savings rate fell from 1.85 per cent to 1.58 per cent, representing a fall of 0.27 percentage points

40 In regards to government securities, the average rate on 91-day Treasury bills fell from 4.29 per cent at end- 2009, to 0.48 per cent a year later. Interest rates on the 182-day and 365-day bills followed the same pattern, falling from 5.50 per cent to 1.23 per cent and from 6.40 per cent to 2.38 per cent year-on-year, respectively. Table 4.8 Interest Rates 1/ (Percentage) Volume-weighted average deposits Savings Rate Fixed Term deposits rate <= 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 day treasury bill rate day treasury bill rate Average of monthly data, compiled on an end-of-period basis, whereas that of the 91-day bill rate is the average of monthly data, compiled on an end-of-period basis. 2 Changes in figures for 2009 are due to revisions Regarding lending rates, the decline was less significant, with the average rate falling to per cent at end-december 2010 compared to per cent at end This was partly influenced by a downward revision in the prime lending rate of two government-owned commercial banks in July. In consideration of the low level of inflation in Seychelles and interest rate level in comparable economies, the domestic lending rates remained relatively high. This partly reflects some rigidity in the market, mainly those with adverse effects on competition amongst the banks. Notwithstanding the above, at the end of the year under review, the spread between the saving and lending rates fell to 9.90 per cent compared to per cent end

41 Chart 4.9: Interest Rates ( ) Percentage Years Savings Deposit Rate Fixed-Term Deposit Rate (> 6 months < =12 months) Average lending rate 91-day treasury bill rate Source: Central Bank of Seychelles 4.7 Monetary Policy Instruments In August 2010, the CBS introduced a new monetary policy instrument, namely foreign exchange swap. This instrument will enhance the flexibility of the CBS and widens its range of instruments and improves the effectiveness of monetary policy 9. The swap was not used during the year, hence, repos and deposit auction arrangements remain the more common instruments of open market operations Minimum Reserve Requirement The Minimum Reserve Requirement (MRR) was maintained at 10 per cent of average deposit liabilities throughout Given the highly liquid environment, on average, commercial banks held reserves above the MRR requirement for most of the year. As regards to the remuneration on MRR, this was raised in February from 0.25 per cent to 1.75 per cent but revised downwards to 1.0 per cent in August and to 0.75 per cent in October Deposit Auction Arrangement The Deposit Auction Arrangement (DAA) was the main tool employed by the Central Bank in 2010 to absorb liquidity, with auctions conducted on a predominantly weekly basis. Given the reduced overall issuance of government securities, and despite the relatively low interest rates on these instruments, the participation of commercial banks was fairly high. At the end of 2010, the stock of outstanding DAA stood at R1,180 million compared to R851 million in December 2009, reflecting the increased level of excess liquidity in the system. As regards to the average interest rates on DAA, these declined across all maturities. 9 More information on the swap found in section

42 Table 4.9 Weighted Average Deposit Auction Arrangement Rates 1 (2010) (Percentage) Maturity Period Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 7 Days Days Days Days Notes: 1/ End-of-month data Source: Central Bank of Seychelles Credit Auction Arrangement The Credit Auction Arrangement (CAA) introduced in September 2009 was not employed by the Central Bank during 2010 given that the financial system was overall highly liquid Repurchase Operations Two other tools used in liquidity management are the reverse repurchase and repurchase agreements with government Treasury bills as underlying securities. There was an increase in the portfolio of government securities 10 held by the Central Bank in 2010, which resulted from the recapitalisation of the CBS by government, which was done in the form of treasury bills. This expanded portfolio increased the market intervention capacity of the Bank through the use of repurchase operations. Given the need for liquidity absorption, the CBS has thus far used only the reverse repurchase agreement. However, reverse repos were not used as frequently in 2010 as the previous year largely as a result of collateral constraints. As with DAA, the rate of interest on repos declined Standing Facilities Standing facilities are instruments that central banks put in place to assist banks and other depository institutions to adequately and efficiently manage their short-term liquidity on an overnight basis. These take the form of overnight deposit and lending arrangements. Where central banks do not use interest rates as the main instrument of monetary policy, the pricing of these facilities establishes the upper and lower limits of an interest rate corridor. 10 This was due to the re-capitalisation of the Central Bank to 10 per cent of its monetary liabilities by the end of

43 Standing Deposit Facility The standing deposit facility allows banks to place their end of day excess funds in an overnight deposit. The interest rate on such deposits is set by the Central Bank and is normally the floor of the interest rate corridor. This facility was first offered in February , however it was suspended shortly after because of excessive use by banks which was considered by the CBS to be counterproductive to the growth of credit to the economy. Use of this instrument is likely to be resumed over time, especially once the liquidity overhang is removed Standing Credit Facility The Standing Credit Facility (SCF) allows banks to borrow overnight from the Central Bank when funding is unavailable elsewhere and is one of the tools through which the Bank can carry out its lender of last resort function. Given the overall excess liquidity in the system, there were no requests for this facility during Emergency Lending Facility Alongside the standing facilities, the Central Bank offers emergency liquidity support through the Emergency Lending Facility (ELF). This collateralised facility 12 was not required by any commercial bank during Foreign Exchange Auction The foreign exchange auction (FEA) is yet another tool which central banks use for liquidity management purposes. Moreover, FEAs can also be used by central banks to affect the level of external reserves. A foreign exchange purchase (sale) will add (remove) domestic liquidity to (from) the system but it will lead to an increase (decrease) in official reserves. In 2010, the CBS predominantly purchased US Dollars with the main objective being to build international reserves. However, since foreign exchange purchases resulted in the injection of rupees in the system each purchase was sterilized i.e. the CBS had to follow the FEA with an intervention exercise to mop up the liquidity that had been injected Foreign Exchange Swaps The Central Bank expanded its portfolio of monetary instruments in August with the approval by its Board of foreign exchange (FX) swaps as a liquidity management tool. FX Swaps are intended for fine-tuning of liquidity in the system but may also be employed to manage external reserves. The Central Bank intends to make use of this instrument in the coming year. 11 Following Board approval in December The facility is offered for a duration of 30 days extendable to a maximum of 60 days

44 SECTION FIVE Government Finance 5.0 Overview Strict fiscal discipline continued to prevail during 2010, as the performance of the government budget once again surpassed expectations. This ensured that Seychelles remains firmly on the path toward fiscal and debt sustainability over the medium term. With the primary fiscal surplus exceeding the programme target (8.9 per cent of GDP against a programme target of 7.0 per cent of GDP), this allowed for a slight loosening in public expenditure in the latter part of the year. On the policy front, the government continued to implement its structural reforms by putting in place the necessary institutional frameworks and legislations to consolidate good governance and create an enabling environment for private sector development. The Ministry of Finance pursued the tax reform which started in 2009 with the amendment of the Business Tax Act. A new personal income tax law came into effect in July 2010, replacing the previous social security contributions system. Various amendments and new legislations were approved by the National Assembly to modernise the country s legal framework and eliminate bottlenecks that hinder investment. To better manage the country s financial commitments, the authorities continued the external debt rescheduling exercise. This allowed for a further reduction of the country s external debt to a more sustainable level, whilst at the same time paying down its domestic debt. The authorities also continued to press ahead with the challenging task of preparing the various pieces of legislations that would support the structural reforms. 5.1 Policy changes The amended Business Tax Act, 2009 took effect in January This new law broadened the tax base and provided for a gradual reduction in rates to promote competitiveness and achieve harmonisation across all sectors of the economy. The first phase saw a reduction in the maximum business tax rate from 40 per cent to 33 per cent for companies, government bodies or trustees with profits of over R1.0 million, and 25 per cent for profits below that threshold. Effective January 1, 2010 to December 31, 2010, the applicable tax rates for sole traders or individual persons were 0.0 per cent on the first R150,000 of taxable income; per cent between R150,001 and R1,000,000; and 33 per cent on profit above R1,000,000. However,

45 in January 2011, the rate applicable on taxable income between R150,001 and R1,000,000 is expected to fall to 15 per cent for the category that includes sole traders. In a bid to transform the Customs Division into a modern and efficient organisation, a customs reform strategy and implementation plan which will be followed in due course by a new Customs Management Act were approved. The aim is to institutionalise international best practice principles and improve the business climate. The tax reform included the introduction of the new personal income tax, the Income and Non-Monetary Benefit Tax which is based on a pay as you earn system, which became effective as of 1 st July Initially, the rate was set at per cent for all Seychellois workers, whilst expatriates paid 10 per cent. In October, the rate for Seychellois employees was lowered to 15 per cent. The rate is expected to be harmonised at 15 per cent for all categories of workers in January Aside from these major changes, other policy measures were implemented during the course of the year comprising the introduction of a new public sector wage-grid, new procedures for budget submissions by ministries and other budget-dependent agencies, and the publication of general government fiscal statistics. Further reforms will be undertaken during 2011 to complement what has been achieved so far. 5.2 External Debt The authorities continued the intensive debt rescheduling negotiations throughout the year. Other creditors, like Libya and Japan, agreed to grant Seychelles similar treatment to that of the Paris Club. Likewise, organisations such as the Kuwait Fund for Arab Economic Development and commercial banks with domestic representatives that had extended credit facilities also restructured their loans during Having met the criteria laid down by the Paris Club for external debt cancellation, the second tranche of the debt forgiveness (i.e per cent of the debt stock) took effect in July This helped to bring the country s external debt stock at end-december 2010 to US$455 million, equivalent to R5,528 million or 49 per cent of GDP. This was a significant improvement over December 2009 when the external debt stock stood at 93 per cent of GDP

46 Table 5.1 Government Budget; Summary Budget Actual 1 Budget Actual 1 Budget (R 000) Total revenue and grants 3,575,786 4,109,565 3,722,550 4,108,304 4,895,881 Total revenue 3,555,786 3,792,754 3,405,376 4,007,515 4,385,533 of which: Tax 3,145,329 3,319,181 3,066,912 3,533,448 3,868,784 Personal Income Tax , , ,461 Excise Tax , , ,570 Social Security Tax 352, , , ,887 - Pension fund contributions ,726 Trade Tax 575, , , , ,576 GST 1,442,000 1,347, ,139 1,047,429 1,215,644 Business tax 551, , , , ,008 Other Tax 225, , , , ,798 Nontax 410, , , , ,749 Fee and Charges 165, , , , ,272 Dividends Income 123, , , , ,086 Other Nontax 122, ,634 70,879 76, ,390 Grants 20, , , , ,348 Expenditure and net lending 4,160,296 3,441,682 3,626,533 3,814,932 4,631,601 Current expenditure 3,502,342 3,202,002 3,109,033 3,194,379 3,377,333 Primary Current Expenditure 2,279,851 2,287,571 2,431,033 2,482,013 3,039,823 Interest due 1,222, , , , ,510 Capital expenditure 357, , ,500 1,009,196 1,202,742 Net lending - (371,526) (330,000) (388,642) 1,526 Contingency 300,000 2, ,000-50,000 Primary balance, Accrual basis (GFS) Including grants 637,980 1,582, ,016 1,005, ,790 In percent of GDP 6.2% 15.3% 7.0% 8.9% 5.0% Excluding grants 617,980 1,265, , ,948 91,442 In percent of GDP 6.0% 12.3% 4.1% 8.0% 0.8% Overall balance, Accrual basis (GFS) (584,511) 667,884 96, , ,280 In percent of GDP -5.7% 6.5% 0.9% 2.6% 2.2% Change in Arrears (196,078) 20,943 (100,000) (4,305) - External Interest - 245,337-87,810 - Budget (196,078) (224,394) (100,000) (92,115) - Overall balance, cash basis (after grants) (780,589) 688,827 (3,984) 289, ,280 Financing 780,589 (688,827) 3,984 (289,067) (264,280) Foreign Financing (accrual basis, net) (820,154) (602,906) (246,354) (23,055) 54,571 Domestic Financing, net 1,275,239 (1,105,605) 98,037 (439,913) (464,876) Bank Financing 1,211,477 (650,750) - (177,448) (418,388) Non-Bank Financing 63,762 47,844 14,046 (262,464) (46,488) 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

47 5.3 Outcome for 2010 Fiscal revenue performed better than anticipated. The higher than forecasted revenue was mainly due to improved compliance measures taken by the Seychelles Revenue Commission and provided some fiscal space which allowed the government to address some urgent capital expenditure. Thus, despite the higher expenses, the primary balance remained well above target. Chart 5.1: Government Finance Outcome ( ) R million Years Total Receipts Total Outlays Overall Balance -800 Source: Ministry of Finance 5.4 Revenue Revenue remained buoyant throughout Provisional figures indicate that total revenue amounted to R4,008 million in terms of tax and non-tax receipts, exceeding the budget by approximately R602 million or 18 per cent. On the other hand, actual grants were less than forecasted, standing at R101 million compared to the expected R317 million. Given Seychelles outstanding performance in the first year of the reform programme in 2009, the need for budget support funds to help bridge fiscal gap or to make up for the loss of other forms of revenue was reduced. This is also further evidence that the reform measures undertaken by the country have been effective and have put Seychelles on a positive path toward sustainable economic development. The main source of government revenue were tax receipts which stood at R3,533 million, of which the Goods and Services Tax (GST), Business Tax, and Excise Tax were the biggest components, amounting to R1,047 million, R790 million and R580 million respectively. As planned, the rate of GST payable on tourism services was raised to 12 per cent in November, as part of the harmonisation of rates, in preparation for the introduction of the Value-Added Tax (VAT) planned for July As regards revenue from imports and business tax, this reflected the improved conditions and increased economic activities during the course of the year

48 Non-tax revenue amounted to R474 million, including dividends from parastatals which amounted to R206 million. Major contributors to government coffers were Nouvobanq, Indian Ocean Tuna, Seychelles Civil Aviation Authority and Seychelles International Business Authority which paid R76 million, R58 million, R35 million and R30 million in terms of dividends. Receipts from fees and charges stood at R191 million for the year. Chart 5.2: Major Revenue Flows in Current Receipts ( ) Years Transfers from SSF Trades Tax Income / Business Tax Other Tax Fees and Charges Source: Ministry of Finance R million 5.5 Expenditure The improved revenue collection system enabled the government to build up reasonable fiscal space which in turn allowed some extra expenditure on urgent capital investment, notably in the utilities sector and social sectors, such as health and education in the last quarter of Total expenditure inclusive of net lending amounted to R3,815 million, with the biggest share allocated to primary current expenditure Current Outlays Current expenditure stood at R3,194 million in 2010 and the largest component comprised of wages and salaries (R693 million) as well as goods and services purchased (R843 million). Other significant current outlays were in the form of transfers which amounted to approximately R935 million and went, for example, towards government s social programme and as grants to certain public sector organisations. New schemes of service were introduced in ministries and departments in line with the new public sector wage grid which took effect in early According to the fiscal report for the year under review, certain ministries exceeded their budgets by significant amounts. These were notably ministries of Education,

49 Employment and Human Resources, Health, as well as Home Affairs, Environment and Transport, which spent R21 million, R19 million and R10 million respectively in excess of their budget. The piracy problem that continued to affect Seychelles was one of the factors contributing to the higher-than-budgeted spending by the Department of Home Affairs Capital Outlays Following the launch of the economic reforms in 2008, the government postponed certain capital projects and reprioritised others. This allowed for a drastic reduction in its expenditure on capital projects and ensured that the fiscal targets were met. This trend was maintained for the most part of Towards the end of the year, given the very good performance on the revenue side, the government accelerated investment in urgent infrastructural projects, especially in utilities and social sectors like health and education. The actual capital outlays for 2010 stood at R1,009 million, surpassing the budgeted amount of R748 million by 35 per cent. Development grants amounted to R408 million. The main beneficiaries of these grants were the Public Utilities Corporation (R336 million), Seychelles Broadcasting Corporation (R32 million), Seychelles Land Transport Agency (R14 million), Seychelles Institute of Management (R13 million) and Seychelles Public Transport Corporation (R13 million). Chart 5.3: Government Capital Expenditure ( ) R million Percentage Years Capital outlays % Change -100 Source: Ministry of Finance

50 Capital Project Expenditure Spending on capital projects amounted to R573 million, which was below the budgeted figure of R591 million. Projects which were funded under grants totalled R50 million, whilst R76 million were funded through loans. The majority was financed through domestic borrowing and this amounted to R447 million. Table 5.2: Public Sector Capital Expenditure; (R thousand) Total 372, , , , ,657 Economic Sectors 4,054 4,382 3, ,758 21,806 Agriculture 1,449 2,882 1,240 2,491 2,813 Fisheries 2,593 1,500 2, ,267 18,994 Tourism Infrastructure and Utilities 43,420 22,185 12,870 30,595 21,812 Transport 33,581 16,422 8,005 10,330 19,581 Electricity, Water Supply & Sanitation Communications Land Bank 9,523 5,439 4,656 19,496 1,869 Services 324, , , , ,039 Education 1,662 1, ,653 56,266 Health 17,728 13,043 13,898 23,480 31,852 Housing 117, , ,039 66, ,528 Social Development 99,273 34,624 18,330 57,823 92,904 Culture 3,777 3,524 4,847 1,305 12,043 Youth & Sports 2,996 11,388 8,209 12,559 36,344 Information & Media 34,623 17,866 7,673 1,877 2,654 Internal Affairs 242 2,666 2,924 1,221 15,999 Public Sector Management 36,774 68,808 59,840 29,907 29,656 Environment 10,388 7,010 6,487 41,187 38,793 Figures do not necessarily add up due to rounding off Source: Ministry of Finance Economic Sectors A total of R22 million was allocated to key economic sectors, of which R19 million went to the fisheries sector. The sector benefitted from a R16 million grant from the Japanese government to construct artisanal fisheries facilities. A total of R2.8 million was spent on agricultural projects

51 Infrastructure and Utilities Capital expenditure on infrastructure and utilities stood at R22 million for the year under review. A total of R20 million was allocated to transport, representing an increase of almost 90 per cent relative to A significant amount was spent on road infrastructure, given that extensive work had to be undertaken in several areas around the country. Another significant component was the installation of street lights in various districts. However, a decline of 53 per cent and 90 per cent was recorded in respect of allocation to water supply and sanitation and land bank infrastructure, respectively Services Services accounted for the largest component of the capital budget. In 2010, the government spent R529 million on this sector. As in the past, housing received the largest portion of funds, amounting to R213 million. This reflected partly the construction works undertaken under the Ile Perseverance housing project as well as some smaller ones in various districts around Seychelles. Capital expenditure on housing was 218 per cent higher than the previous year s level. Internal Affairs received R16 million to cater for the cost of the prison extension project. Other areas that benefitted from budget support were social development for R93 million, education for R56 million, youth & sports for R36 million, and health for R32 million. It is to be noted that only three sectors received less than the previous year s allocation and these were namely education (21 per cent), environment (6.0 per cent) and public sector management (0.8 per cent). 5.6 Net Lending Net lending are short-term lending facilities that the government extends to public sector organisations on condition that they are fully repaid by the end of the year. At the end of December 2010, net lending stood at negative R389 million relative to the budgeted negative R330 million. This implies a faster repayment of facilities than anticipated. 5.7 Financing The forecasted government s net financing needs in 2010 was R4.0 million. However, given the decline in domestic borrowing and the rescheduling of the country s external debt, actual financing stood at negative R289 million. In line with its commitment to reduce public debt to a sustainable level, government opted on retiring a large portion of T-Bills and Bonds issued in the past. The stock of domestic debt declined gradually from R4,267 million in December 2009 to stand at R3,901 million in December This represented a drop of approximately 8.6 per cent

52 Chart 5.4: Stock of Domestic Debt (Jan Dec 2010) 3, , , ,600.0 Rmillion 3, , , , , ,000.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Months Source: Central Bank of Seychelles, Ministry of Finance Treasury Bills A gradual shift in the preferred maturity of T-Bills issued was noticed in Whereas in the past the main instrument was the 91-day bills, during 2010, there was an increase in the amount of 365-day T-Bills issued and conversely, a reduction in both 91-day and 182-day bills. Despite this, there was an overall decline in the amount of outstanding T-Bills in the order of 15 per cent from December 2009 to December 2010, from R2,952 million to R2,506 million. Given the excess liquidity in the banking system and the consequent low yields on these instruments, commercial banks remained the most active participants in the auctions. Interest rates on all maturities fell throughout The rates on 91-day, 182-day and 365-day bills stood at 0.48 per cent, 1.23 per cent and 2.38 per cent, respectively, at the end of the year

53 Table 5.3 Treasury Bills; /2/3/ Stock outstanding 1/3/ 1, , , , , day bills (tender issue) 1, , , day bills (tender issue) day bills (tender issue) Stock outstanding 2/3/ 1, , , , , day bills (tender issue) 1, , , day bills (tender issue) day bills (tender issue) held by 3/ -0.1 commercial banks 1, , , , ,251.8 other financial institutions others / At cost value. 2/ At face value. 3/ End of period data. Source: Central Bank Of Seychelles Treasury Bonds Government did not issue any new bond in 2010, but focused on repaying the current stock of bonds in its portfolio. At the end of the year, there was R584 million worth of Treasury bonds on its books, a reduction of 28 per cent from 2009 when it stood at R813 million

54 Table 5.4 Treasury Bonds; / (R million) Stock outstanding 1/ 2, , , %, 3-yr %, 5-yr %, 7-yr (7%) %, 10-yr (8%) %, Esmeralda II (8.25%) %,3-yr %,3-yr %,5-yr (10%) %,3-yr (6%) Held by : 1/ Commercial banks 1, , Other financial institutions Others CBS 1.0-1/ End of period data. Note: With effect from July 2006 there were new issues of bonds; 6.0%,3-yr; and 10.0%,3-yr. In May 2007 there was the issue of 10.0%, 5-yr bond. In November 2007 there was the issue of 6.0%, 3-yr bond. With effect from January , all interests on Government Treasury Bond were doubled. Effective January 01, 2010 interests on all Government Treasury Bonds have been revised. Source: Central Bank Of Seychelles

55 5.7.3 Government Stocks The outstanding government stocks worth R100 million remained throughout the year. These instruments will eventually be phased out as they mature. Table 5.5 Government Stocks; 1/ (R million) Stock outstanding %, %, 2005/ %, %, Held by Commercial banks Others / End of period data. Source: Ministry of Finance and Central Bank Of Seychelles

56 SECTION SIX The External Sector 6.0 Overview Activities in the external sector continued to be heavily influenced by external events given the country s high dependency on the rest of the world. The domestic currency remained very stable against the major world currencies during Compared to 2009, on average, the Seychelles rupee appreciated against the three most traded currencies, namely the US dollar, euro and UK Sterling. The good performance of the domestic currency was supported by strong inflows of foreign exchange mostly in the form of tourism earnings and to a lesser extent inward investments. This helped cushion the impact of the increased demand for foreign exchange and contributed to the stability of the domestic currency. Against this backdrop and partly due to receipts of funds from external parties in support of the economic reform programme, the Central Bank accumulated international reserves further in At the end of the year, gross official reserves stood at US238 million, equivalent to 2.3 per cent of annual imports of goods and services. This is a significant improvement compared to only a few days of import cover in mid Net international reserves by the year-end stood at US207 million compared to the US$168 million end-december 2010 target. Particularly notable was the positive performance of the tourism industry and therefore an important result for Seychelles in consideration of the sector s imperative contribution to the economy. For the year under review, a record 174,529 tourists visited the country which was also an increase of 11 per cent compared to last year. This outcome followed a fresh, aggressive marketing strategy which saw the active participation of both government and the private sector stakeholders. In line with the increase in numbers, tourism earnings increased to US$231 million compared to US$209 million last year. In the absence of major external shocks, such positive performance should continue in An important element of the ongoing economic reform programme is the debt reduction strategy. Fundamental progress was made in 2010 on this front following the successful signature with a number of Paris Club creditors to formalise the cancellation of the second tranche of the 45 per cent of debt due to the latter. Notably in early 2010 an agreement was also reached with private external creditors such that resulted in around 50 per cent of commercial debt being cancelled

57 Chart 6.1: The overall balance, current account and capital and financial account of the BOP from 2000 to 2010 R million 8,250 7,500 6,750 6,000 5,250 4,500 3,750 3,000 2,250 1, ,500-2,250-3,000-3,750-4,500-5,250-6,000-6, Years CURRENT ACCOUNT CAPITAL AND FINANCIAL ACCOUNT OVERALL BALANCE Source: Central Bank of Seychelles Despite the strong performance on tourism earnings imports increased significantly during 2010, due largely to major investment projects, which resulted in a significant widening of the current account deficit. 6.1 Current account Preliminary data shows that the current account deficit widened in This amounted to R5,625 million or equivalent to 50 per cent of the country s GDP which is considerably larger than R3,647 million or 34 per cent of GDP reported in the previous year. Inherently, the current account deficit is for the most part attributed to a net import of goods which exceeds the total value of net exports of services. Of note is that in 2010, the enlarged current account deficit was predominantly due to investment-related imports which are expected to fall significantly in the coming year. As such, the current account balance is expected to improve in Trade in goods Given the country s high dependency on imports, the balance under trade in goods is therefore in deficit which depicts this net import. For the year 2010, the deficit widened to R6,155 million or by 34 per cent compared to the previous year. This outcome is attributed to an expansion in import payments as well as a decline in the total value of exports

58 Chart 6.2: Trade in Goods ( ) 15,000 10,000 R million 5, ,000-10, Years Merchandise exports (f.o.b.) Merchandise imports (f.o.b.) Merchandise, Net Source: National Bureau of Statistics, Central Bank of Seychelles The provisional BOP figures show an increase of 6.1 per cent in the aggregate value of imported goods, primarily driven by a growth under merchandise demanded across most economic sectors. On the exports side, there was a drop of 16 per cent associated with a fall in exports classified under food and live animals which represented the majority of the country s total exports earnings Merchandise exports On aggregate, the total value of merchandise exports (f.o.b.) for 2010 stood at R2,641 million, showing a decline of 19 per cent compared to Similar to last year, exports earnings primarily originated from the fisheries sector, and thus, represents commodities such as fish and fish-related products. Canned tuna continued to account for the bulk of exports in It amounted to R2,382 million or 90 per cent of the country s total merchandise exports earnings. Compared to the previous year, the aggregate value of exported canned tuna fell by 20 per cent in rupee terms. In most part the decrease in tuna exports reflected increased piracy activities in the Western Indian Ocean, which impacted directly on fish catch. However, in US dollar terms, it declined by 10 per cent despite the marked increase in observed in the fourth quarter of 2010 compared to the same period last year when an exceptional drop in production was recorded

59 Table 6.1 (a) Seychelles Balance of Payments; to (R million) Prov. Prov. 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 licence fees Other grants Debits Other sectors Credits Debits CAPITAL AND FINANCIAL ACCOUNT CAPITAL ACCOUNT FINANCIAL ACCOUNT Direct investment Abroad In Seychelles Portfolio investment Assets Liabilities Other investment Assets Liabilities Net errors and omissions OVERALL BALANCE Financing of overall balance Reserve assets (2) 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) (Months of imports) Exchange Rate (Rupee/US$; period average) Notes (1) Data series may differ from previous publications due to revisions (2) (-) sign indicates increase in reserves Source: Central Bank of Seychelles

60 Table 6.1 (b) Seychelles Balance of Payments; to Prov. (US$ 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 licence fees Other grants Debits Other sectors Credits Debits CAPITAL AND FINANCIAL ACCOUNT CAPITAL ACCOUNT FINANCIAL ACCOUNT Direct investment Abroad In Seychelles Portfolio investment Assets Liabilities Other investment Assets Liabilities Net errors and omissions OVERALL BALANCE Financing of overall balance Reserve assets (2) Arrears Memorandum items: Current account (percentage of GDP) Trade Balance (f.o.b.) (merchandise exports less imports) Stock of Reserves (Gross) (US$ million) Stock of Reserves (Gross) (Months of imports) Exchange Rate (Rupee/US$; period average) Notes (1) Data series may differ from previous publications due to revisions (2) (-) sign indicates increase in reserves Source: Central Bank of Seychelles

61 The high dependency on tourism and fisheries is an illustration of the vulnerability of the country s exports sector. In addition to piracy during 2010, the sector faced other challenges such as elevated transport and thus operational costs in consideration that increasingly, fishing activities are concentrated in zones further away from Port Victoria Merchandise imports Given the limited availability of resources domestically, import is critical for both private consumption and business purposes. For the year 2010, the provisional figures show total import of merchandise (f.o.b.) at R10,482 million which is an increase of 10 per cent compared to the previous year. A closer analysis of the breakdown of total merchandise imports shows that the most significant increase was recorded under the category manufactured goods and miscellaneous manufactured articles and this was by R405 million (16 per cent). The outcome was consistent with the higher level of construction activity inclusive of the implementation of FDI projects. The increase in construction activity also contributed to the growth of R159 million or 7.7 per cent in the value of machinery and transport equipment brought into the country. As regards to the importation of mineral fuel, this was R249 million (10 per cent) higher than the value reported in the previous year. This increase represents both price and volume effects. As regards to the distribution by import category, the main component was manufactured goods and miscellaneous manufactured articles, with a share of 27 per cent. Import of mineral fuel accounted for 25 per cent of the aggregate amount, followed by machinery and transport equipment with a share of 21 per cent. Beverages and tobacco accounted for the smallest percentage of total import with a share of only 1.2 per cent

62 Table 6.2 Description Imports (c.i.f.)- by HS 1 Sections; (R million) Total Imports 4, , , , ,881.2 Food, live animals & vegetable oils , , ,285.9 Beverages and tobacco Mineral fuels , , ,692.2 Chemicals Manufactured goods & misc. manufactured articles , , ,381.0 Machinery and transport equipment* , , ,606.8 Other commodities Notes: 1 Harmonised System Source: National Bureau of Statistics and Central Bank of Seychelles Chart 6.3: Imports (f.o.b.) 2010 Mineral fuels 25.1% Chemicals 4.4% Manufactured goods & misc. manufactured articles 27.4% Beverages and tobacco 1.2% Machinery and transport equipment 21.1% Food, live animals & vegetable oils 18.5% Other commodities 2.1% Source: National Bureau of Statistics Goods procured in ports by carriers This is an important component of the goods account. Overall, 2010 recorded a surplus of R1,782 million. This outcome was primarily attributed to the re-exports of fuel to non-resident ships and aircrafts

63 6.2 Services Consistent with the previous years, the services account balance showed a net export of services to the rest of the world, which further underlines the importance of this sector to the domestic economy. The surplus amounted to R1,213 million which is a contraction compared to R1,697 million recorded in the previous year in rupee terms. This was attributed to higher payments, mainly freight, insurance and construction services. Tourism remained the most prominent contributor to the services account. Tourism earnings in 2010 was estimated at R2,785 million or US$231 million representing an increase of 11 per cent year-on-year in US dollar terms, consistent with the growth in visitor arrivals 13. Other notable services account transactions include a decline in inflows under passenger services attributed to a reduction in the market share by the national airline in favour of non-resident airlines. Additionally, the higher value of imported merchandise implies higher payments for insurance as well as freight services. Moreover, there was a growth in import of construction services, associated with an increase in the participation of foreign contractors in the implementation of a number of FDI projects. 6.3 Income A significant component of the income account represents accrued interest payments, particularly that on public external debt. Given Seychelles relatively large external indebtedness, the income account is in deficit, largely attributed to net interest payments. Nevertheless for the year 2010, the account shows a deficit of R987 million which was a reduction compared to the previous year. This development was primarily due to the fall in the amount of accrued short-term interest payable by the government as a result of the successful debt restructuring exercise which started in The period also observed a reduction in dividend payments made by resident companies to their nonresident counterparts or investors. Notable however, is that following the liberalisation of the exchange rate regime in November 2008, transfer of dividends from Seychelles rose somewhat rapidly in 2009 which contributed to a major income account outflow in that year. 13 It should be noted that some important inconsistencies exist between various indicators of tourism earnings. The figures reported here is a combination of bank and survey data. The Central Bank is working with the other authorities such as the Revenue Commission, which also produces tourism earnings based on GST data, which could lead to a possible revision of the tourism data series

64 6.4 Transfers In 2010, Seychelles continued to be a net recipient of transfers from the rest of the world with the bulk of the flows representing official inward transfers. Notwithstanding the improvements in economic conditions and performance during the year, the country received further donations or current transfers from other countries as well as international organisations. In total, inward official transfers were estimated at R318 million representing both cash and non-cash donations. 6.5 Capital and financial account The capital and financial accounts show a surplus which was higher than in the previous year. The value of capital transfers was particularly significant on account of debt forgiveness entries which followed from the successful outcome of negotiations between Seychelles and its external creditors. As for the financial account, the main component is inward FDI Capital account The capital account surplus was wholly attributed to capital inflows, estimated at R3,345 million compared to R690 million in The majority represents the value of official debt that was forgiven during the year, notably the debt cancelled by commercial creditors, and the further 22.5 per cent debt reduction agreed by the Paris Club, which represented half of the total 45 per cent debt reduction by the Club Financial account The provisional BOP statistics show a financial account surplus or net financial inflows. This amounted to R4,371 million, which to a large extent was attributed to a considerable increase in FDI. Gross inflows of FDI amounted to R3,900 million (or US$323 million) which was an increase compared to R3,698 million (US$272 million) in Similar to previous years, FDI largely represented hotel construction. However, the year under review also included a high-scale real estate project as well as other commercial developments. With regards to portfolio investment transactions, these remained at relatively low value throughout 2010 and amounted to around US$1.0 million in total for the year as a whole. As for the balance under other investment, total inflows equivalent to R551 million is estimated. 6.6 External reserves One of the key targets under the country s economic reform programme since the latter part of 2008 is accumulation of external reserves. This objective has been facilitated with receipts of funds (loans or grants) in support of the economic programme from organisations such as the IMF, World Bank, European

65 Union and the African Development Fund as well as partner countries. In addition, when conditions permit, the Central Bank has also purchased foreign exchange from the market for the purpose of building up reserves but consistent with its reserve money targeting goal. At the end of 2010, total gross external reserves at the Central Bank stood at US$238 million compared to US$169 million in The year 2010 position was equivalent to 2.3 months of import and significantly above pre-reform levels which at some point was as low of a only few days. Official reserves at the end of the previous year represented 1.6 months of import cover. As regards to the net international reserves, this correspondingly increased to end the year at US$207 million, significantly higher than the programme target of US$168 million. Table 6.3 External Reserves; (US Million) Gross official reserves Central Bank Government Central Bank's External Liabilities Net official Reserves End of period data 2 This represents loan facility under the Stand by Arrangement (SBA) and the Extended Fund Facility (EFF) under the economic reform programme which started in November 2008 Source: Central Bank of Seychelles 6.7 Exchange rates The Seychelles rupee remained very stable against major world currencies during The rupee traded at averages of , and against the US Dollar, Euro and Pound Sterling, respectively. In all three cases the rupee appreciated compared to the previous year. Against these three main currencies, the most significant rupee appreciation was relative to the euro and this was by 265 cents or 14 per cent. Notwithstanding domestic factors, the euro depreciation was generally

66 consistent with the latter s performance in the international market on the back of the European debt crisis, particularly in Greece and Ireland. With regards to the SCR/USD rate, this has a direct implication on price level given that the majority of the country s external payments, including for importation of commodities, are settled in US dollar. The annual average appreciation of the rupee against the US dollar was 151 cents or 11 per cent. As for the appreciation of the rupee against the Pound sterling, this was by 242 cents or 11 per cent. Table 6.4 Exchange Rates; (Seychelles Rupees per currency unit) Euro US Dollar Pound Sterling Japanese Yen South African Rand Singapore Dollar Period Averages Note: There was a change from a fixed to a floating regime in November 2008 Source: Central Bank of Seychelles Chart 6.4: Exchange rate movements of the three main currencies ( ) SCR Years Euro US Dollar Pound Sterling Source: Central Bank of Seychelles

67 6.8 Offshore developments The Seychelles International Business Authority (SIBA) experienced another significant growth in activities during In total, 14,776 International Business Companies (IBC) were incorporated which represent a growth of 19 per cent compared to the previous year. An increase in the number of Companies (Special) Licence was also recorded to reach 235 in aggregate. The industry also saw the introduction of a new product in the form of Foundations registration. Four Foundation Service Providers were licensed whilst 36 foundations were registered during the year. Based on earnings generated from services it provides, SIBA paid R30 million in dividend to the government. 6.9 International Relations In 2010, the primary focus of Seychelles interactions with international partners on the economic front remained the attainment of its objectives agreed with the multilateral agencies in the context of Seychelles macroeconomic reform programme. Whilst on macroeconomic reform the International Monetary Fund remained Seychelles principal counterpart, the local authorities also continued to work very closely with key multilateral partners, notably the World Bank and the African Development Bank on structural and social sector reforms. The Central Bank continued to benefit from significant technical assistance from the Fund in 2010, notable in the areas of monetary framework and foreign exchange market, banking supervision, and payments system modernization. The European Union was another key partner in the reform process through its budget support program toward the government. Also in 2010 Seychelles resumed its membership negotiations to join the World Trade Organisation (WTO) during the year. In the realm of bilateral relations, 2010 also witnessed further strengthening of Seychelles relations with a number of countries. The latter expressed their support to the country s reform programme by making various donations to meet financing gaps or provide technical assistance in order to bridge capacity building needs. A number of co-operation agreements were also signed aimed at enhancing economic ties between the country and its sovereign counterparts. On the regional front, the economic and financial integration agenda of both the South African Development Community (SADC) and Common Market for Eastern and Southern Africa (COMESA) continued to drive the country s diplomatic efforts

68 6.10 Multilateral Institutions The cordial relationship between Seychelles and its multilateral partners was enhanced during the course of International Monetary Fund (IMF) Following the approval of the Extended Fund Facility (EFF) by the IMF Executive Board on December 18, 2009, to replace the Stand-By Arrangement approved in 2008, Seychelles has maintained its impressive economic performance. All of the programme s quantitative performance criteria were met or exceeded, ensuring that the economic reform programme remains well on track. Economic growth in excess of 6.0 per cent, strong fiscal adjustment, stabilisation of the exchange rates and overall prices, as well as growing external reserves are just some of the indications that the economy is firmly on the path toward strong sustainable development. In addition to the Central Bank during 2010, the IMF also provided extensive technical assistance and training to the Ministry of Finance in the areas of tax and budgetary reform African Development Bank (AfDB) The AfDB remains an important partner in the socio-economic development of the country. In addition to the disbursement of the budget support package agreed in August 2009, in 2010 the Bank approved a grant of approximately US$432,577 for the formulation of a Seychelles Mariculture Master Plan (MMP). The latter will serve to guide and regulate responsible development and management of mariculture in Seychelles. The project is in line with government's efforts to enhance food security, promote investment opportunities for local and foreign investors, and to encourage marine resources conservation and socioeconomic development. To note, during the course of the year, the AfDB also provided a number of training opportunities, namely in macroeconomic management and statistics collection. Furthermore, the Bank played an instrumental part in the restructuring of the country's debts by providing partial guarantee to the government s commercial debt exchange offer World Bank In 2010, the World Bank enhanced its assistance to Seychelles. In August, it approved a grant amounting to US$425,800 under the IDF Trust Fund aimed at enhancing the institutional capacity of the Department of Public Administration to effectively manage the implementation of the broad public sector reform programme. The grant will also contribute towards improving macroeconomic management and fostering sustainable public debt by improving public sector wage bill management. The year under review also saw the disbursement of a US$19 million Development Policy Loan as part of the economic reform programme

69 World Trade Organisation (WTO) During 2010, Seychelles resumed its membership negotiations to access the WTO. On November 22, the Working Party responsible for the country's accession process hosted its first meeting (first initial working party meeting was held on February 20, 1997) whereby Seychelles' economic and trade regime were examined. Importantly, in the meeting, members of the Working Party supported a rapid accession of Seychelles to the WTO taking into account the economic situation of the country and its status as a Small and Vulnerable Economy (SVE)'. Nevertheless, there is still considerable work ahead before the negotiations are concluded. Moreover, with regards to bilateral market access, negotiations also resumed with interested WTO members on the basis of updated offers circulated in October Thus far, Seychelles has already signed its first bilateral agreement on market access for goods and services with Oman. Preliminary meetings have also been held with the European Union (EU) and the United States. The next Working Party meeting is scheduled for mid Bilateral Relations Seychelles relations with its bilateral partners flourished in Bilateral partners extended their support in a number of ways, namely through grants, debt relief, budgetary supports and technical assistance. Countries such as the United Arab Emirates (UAE), China, and India are some of the countries which made substantial contributions which have helped in the success of the economic reform programme. In order to help the country protects its exclusive economic zone and to fight against the scourge of piracy, the UAE government donated a naval base to the Seychelles Coast Guard at a cost of US$15 million. The base is expected to be completed by the middle of Moreover, the Seychelles coast guard received five patrol boats from the UAE government to boost its capacity to fight against piracy and other maritime threats. Seychelles and China signed an agreement on economic and technical cooperation in July 2010, which is expected to make available an additional US$6.0 million as supplementary help under the China-Africa Cooperation Programme. The money will be used to carry out projects mutually agreed upon by the governments of Seychelles and China. In addition, the People's Republic of China also donated a consignment of medical equipment to the Ministry of Health worth US$21,

70 As testimony of the strong ties that binds Seychelles and India, a high level Indian delegation was in the Seychelles in May, 2010 to participate in the 7 th Indo-Seychelles Joint Commission. Discussions centred on the on-going co-operation programmes between the two countries, mainly in the fields of health, education, trade and investment, defence co-operation, information technology as well as new areas of co-operation. Moreover, the Indian Defence Minister undertook an official visit to Seychelles in July During his visit, in support of Seychelles commitment to fighting piracy, a consignment of military communication equipment was presented to the Seychelles People s Defence forces. The Indian government has also pledged to donate three surveillance aircraft in 2011 which will boost the country s capacity to protect its exclusive economic zone (EEZ). Furthermore, 2010 saw India and Seychelles sign a memorandum of understanding to set up an information technology (IT) centre with the objective to upgrade the skills of IT technicians in the country. The centre is expected to become operational in In addition, the Indian government also donated a consignment of medicine to the Ministry of Health to the value of R2.5 million European Union Budget Support As part of its support to Seychelles economic reform programme, in 2010, the EU disbursed a total sum of around 10.4 million. This sum which was paid-out in two instalments is part of a total envelope of 16.5 million allocated for general budget support following the review of the Stand-By Arrangement (SBA) by the IMF in November Further disbursements are expected in 2011 and 2012 on the condition that the agreed performance indicators set by the EU are adhered to. Additionally, the EU has also made available a sum of 1.0 million for technical assistance. The Auditor General s Office, the Public Accounts and Finance Committee of the National Assembly and the Seychelles Revenue Commission have been identified as the main beneficiaries. The EU s Global Climate Change Initiative has agreed to give a 2.0 million grant to support the Seychelles national climate change strategy. It is envisaged that the grant will enable the country to minimise the impacts of climate change. In addition to providing financing, in May 2010, the EU s high representative for Foreign Affairs and Security Policy, Baroness Catherine Aston undertook a short visit to Seychelles to conduct discussions with the local authorities on how to address the issue of piracy. Subsequently, in recognition of the country s

71 effort in fighting piracy and promoting maritime security, the EU gave a 3.0 million grant via the European Development Fund (EDF) to the Seychelles government in December, Economic Partnership Agreement (EPA) The EPA negotiations 14 between the African, Caribbean and Pacific (ACP) countries, of which Seychelles is a member, and the EU, stalled for the most part of Nevertheless, in December, the EPA negotiations with the European Commission (EC) resumed and are expected to intensify in the coming year. Double Taxation Avoidance Agreements (DTAA) The year 2010 saw the Seychelles government sign three new double taxation avoidance and exchange of information agreements, with the Principality of Monaco, the Kingdom of Bahrain and Zambia. Consequently, at the end of the year, a total of 19 double taxation avoidance agreements had been signed whilst a handful is awaiting signing or ratification. Seychelles commitment to meeting international standards on tax transparency, financial regulation and financial crime has ensured that it remains on the Organisation for Economic Cooperation and Development's (OECD) white list of offshore centres. Moreover, the jurisdiction is in the process of reviewing its legal and regulatory framework guiding offshore activities so as to ensure that it remains upto-date with international best practices. The reviewing process is expected to continue in Debt Restructuring Throughout 2010, the government has remained committed to its debt reduction strategy which is an integral part of the economic reform programme. At the end of December 2010, the country s debt had been reduced significantly compared to end The objective of the Seychelles authorities is to bring the debt-gdp ratio to 50 per cent of GDP by Paris Club The year under review saw the Paris Club cancel a further 22.5 per cent (US$40 million) of debts owed to its members as part of an historic agreement reached with the grouping in April It is to be noted that the remaining balance is to be repaid over a period of 18 years beginning 2014 which would be the end of the 5-year grace period granted in 2009 as part of the package. 14 The EPA negotiations aim to ensure that the ACP-EU trade relationships are guided by the principles of reciprocity and non-discrimination. Thus, the EPA replaces all trade preferences which have been established between the EU and the ACP countries since 1975 under the Lomé Agreements, as well as progressively remove trade barriers between the two parties

72 Libya Early during the year, the Seychelles government successfully concluded a comprehensive debt cancellation agreement with the Socialist People's Libyan Arab Jamahiriya. The agreement makes provision for an upfront debt cancellation amounting to US$3.85 million. Thus, Libya's claim on Seychelles will be reduced from US$8.1 million to US$4.25 million. Repayment of the remaining balance started in October 2010 and will be carried out in five equal annual instalments accruing interest at 3.0 per cent ending in October Kuwait The Kuwait Fund for Arab Economic Development has agreed to extend the repayment of a US$7.8 million loan by the Seychelles government over a 10 year period. Commercial Creditors The successful closing of the Seychelles commercial debt exchange offer on February 14, 2010 marked a critical point in the implementation of the reform programme and government s effort to put its finances on a sustainable footing for the medium and long term. The offer which aims to restructure the bulk of the country s external commercial debt was launched in December 2009 and was broadly agreed upon following intensive discussions with key affected creditors. Claims with a face value of US$320 million were eligible to participate in the exchange offer, including the US$230 million Eurobond, the 55 million Amortising Notes and two commercial bank loans held by three banks. The debt exchange was supported by a US$10 million guarantee from the AfDB. At the end of the exchange offer period, 84 per cent of the Eurobond had been tendered, along with 100 per cent of the Amortising notes and the two bank loans. However, 100 per cent participation for the exchange was achieved following the triggering of the collective action clause in the Eurobond by bondholders. This ensured the cancellation of approximately US$225 million in principal, accrued interest and other charges. Overall there was a 50 per cent cancellation of all eligible commercial debt claims Regional Integration The ultimate goal of the African Union (AU) is to integrate the African continent both politically and economically to the mutual benefits of its population. Economic integration is to be achieved in stages with the eventual objective of setting up of the African Economic Community (AEC) as provided for by the Abuja Treaty. As a forerunner to the AEC, Regional Economic Communities (RECs) have been set-up namely SADC and COMESA as well as others in West and Central Africa and have actively been working towards integrating the economies of their members. To note that the various RECs are expected to merge to create the Africa-wide economic community with a borderless economy

73 As a member of the African Union and both SADC and COMESA, Seychelles has been actively involved in, and remains committed to the regional integration process. The Central Bank in particular has enhanced its involvement in the process and has participated in the majority of the activities organised by the two regional blocs such as seminars, workshops, meetings and surveys during the year. SADC Harmonisation Programme The year 2010 witnessed a strengthening of the cordial relationship between Seychelles and SADC which was epitomised by the visit of a high level delegation headed by the Executive Secretary of the SADC Secretariat H.E. Dr. Tomaz A. Salamao. The latter s visit was to enable him and his staff to familiarise themselves with the developments taking place in the country and to identify potential areas for further cooperation. Though SADC failed to set-up its customs union during the course of 2010 as planned, the regional bloc remains committed to its trade-related integration programme. To this effect, negotiations are still on-going towards the establishment of a customs union and are expected to intensify in To note, Seychelles is not party to the SADC Free trade Area (FTA) which was launched in 2008 and is yet to sign and ratify the SADC trade protocol. The regional bloc s macroeconomic convergence programme aimed towards harmonising the economies of the region and creating a monetary union is still ongoing. A delegation from the body responsible for coordinating the monetary integration programme, the Secretariat of the SADC Committee of Central Bank Governors (CCBG) visited Seychelles in November, The visit was geared towards sensitising key CBS officials about the CCBG s role and member states obligations in the monetary integration process. COMESA Integration Programme During 2010, Seychelles has maintained its participation within COMESA s regional integration programme. Since signing the COMESA FTA agreement in 2009, the necessary is being done to ensure its ratification. On the monetary side, for the second consecutive year, the CBS participated in the meeting of the COMESA Committee of Governors of Central Banks. The latter is a high-level forum which regroups all the central bank governors of the COMESA region. In November, 2010, a Charter setting up the COMESA Monetary Institute (CMI) was forwarded to member states for signature. The CMI will be responsible for

74 the creation of the COMESA Common Central Bank. The COMESA macroeconomic convergence programme remains on track towards setting a monetary union by

75 SECTION SEVEN Central Bank Operations 7.0 Policy, Market Operations and Statistics One of the primary objectives of the Bank is to promote price stability. It is the Policy, Market Operations and Statistics Division s (PMOSD) role to ensure that this objective is maintained, through its monetary policy operations. The division is responsible for data collection and analysis, primarily on the monetary and external sector. It is divided into three units: the Policy and Research Unit (PRU); Market Operations Unit (MOU); and the Statistics Unit. The division s responsibilities include cooperation-related tasks with partners, including regional bodies such as SADC and COMESA, as well as international institutions like the IMF and the World Bank. Building on the previous years endeavours, there were increased networking and exchange of information between the CBS and these organisations during Capacity Building and development As a means to boost human resources, the division increased its manpower with the addition of new staff in both the Statistics Unit and the PRU. Moreover, staff were given opportunities to extend their knowledge in key areas with the Bank facilitating both domestic and overseas training in relevant fields. These included staff attending workshops/seminars held by SADC, COMESA, BIS and the IMF amongst others. In addition, through IMF technical assistance missions, staff of the division gained insightful knowledge on the basis for future monetary policy in Seychelles and capacity building in monetary operations. A number of recommendations were made with regards to the PRU and the MOU, which will aid the division in improving overall output and gear itself towards placing more emphasis on research. 7.2 Policy Issues During the course of 2010, the PRU carried out research in areas such as interest rate transmissions and the use and choice of monetary policy instruments amongst others, which led to policy formulation and recommendations in several areas within the scope of the Bank s operations. With regards to monetary policy formulation, the unit was responsible for amendments of monetary policy instruments and addition of new instruments to the monetary policy framework (MPF). Amendments were made to existing

76 guidelines for foreign exchange auction (FEA) and the deposit auction arrangement (DAA). As regards to the DAA, the major change involved a lengthening of the term of the instrument to a maximum of ninety one (91) days. The change was necessary to ensure increased effectiveness in the Bank s monetary policy objective as it allowed for greater flexibility in steering short-term rates. A new instrument, namely the foreign exchange swap, was introduced as an additional liquidity management tool approved by the Board in August. The instrument, which is a contractual agreement between two parties for an immediate exchange of one currency against another, at an agreed exchange rate, and to re-exchange it at a later date, is aimed at enhancing the Bank s ability to manage liquidity. Other key changes to the MPF included amendments to the terms of reference of the Monetary Operation Committee (TOR-MOC) 15. This was done as a means to increase efficiency of the committee in delivering its approval. Revisions to the MPF are now done at least on a bi-annual basis. The unit is also tasked with periodical releases to various recipients. These included weekly updates within the monetary and external sector and monthly reports. In addition, in meetings of the investment committee, PRU staff were tasked with preparing and delivering foreign exchange outlook presentations. Staff members were also involved in other presentations, including one delivered to the Seychelles Broadcasting Corporation (SBC) as part of the Bank s programme to promote economic awareness. The PRU is also working on a public information strategy which will identify relevant information activities towards various target groups. 7.3 Open Market Operations Open Market Operations are conducted by the Market Operations Unit (MOU), a unit formed following the restructuring of the division in The MOU is mandated in the execution of policy in terms of open market operations both in the money and foreign exchange markets. This is carried out through the use of the Liquidity Monitoring and Forecasting Framework for monetary and foreign exchange interventions. The MOU also acts as secretariat to the MOC and is also responsible for the production of the liquidity reports. The Bank s liquidity management has become gradually more challenging. This is due to an increased level of liquidity in the banking system, mainly as a result of the debt reduction strategy of government. To 15 The MOC is established by the Central Bank Board with the responsibility to formulate and oversee the implementation of monetary policy within the general guidelines determined by the Central Bank Board

77 improve liquidity forecasts, starting mid-2010, a Liquidity Working Group was established which includes representatives from the Central Bank and Ministry of Finance (MOF). Through weekly meetings the working group was able to refine the liquidity forecasting framework and this has resulted in an improvement in liquidity management. This has been complemented by the implementation of the Core banking system in early December, which has allowed access to real time data from Banking Services Division (BSD), thus improving liquidity assessment and forecast. 7.4 Statistics Section The primary responsibility of the unit is the collecting, processing and disseminating of monetary and financial sector, as well as external sector statistics Monetary and financial statistics Monetary and Financial data is compiled in accordance with the IMF s Monetary and Financial Statistics Manual (MFSM) One of the key tasks in 2010 was to work towards the production of a financial survey. The first step was the inclusion of data from financial institutions, namely the Bank Muscat International (BMI) (an offshore bank), the Development Bank of Seychelles (DBS), and the Seychelles Credit Union. However, the data has not yet been published. The complete financial survey will be extended to capture the activities of the Housing Finance Company (HFC), as well as insurance companies External Sector Statistics With the objective to improve external sector statistics, new members of staff to the unit were recruited in early One of the first tasks was to revise the reporting forms used for the collection of balance of payments (BOP) statistics. Revisions of the forms also include provisions for the collection of stock data for the purpose of starting the compilation of International Investment Position (IIP) 16 data. The new forms were introduced to all survey participants through seminars. An important change was the increase in the frequency of the survey from quarterly to monthly. The introduction of the new BOP forms also coincided with the launch of the Coordinated Direct Investment Survey (CDIS). The CDIS is a global statistical data collection initiative led by the IMF, and designed to improve the availability and quality of data on foreign direct investment, both overall and by immediate counterpart economy. It was launched in However, in view of limited response, the information collected from the survey was viewed as unsatisfactory. A new survey will be launched in International Investment Position (IIP) is a financial statement setting out the value and composition of the country s stock of external financial assets and liabilities at a given point in time

78 8.0 Financial Services Supervision 8.1 The supervisory portfolio One of Central Bank s main objectives is to promote a sound financial system. The goal is accomplished through the functions of Financial Services Supervision Division (FSSD). FSSD is organised into two distinct sections, namely the Banking and Foreign Exchange Section, and the Insurance Supervision Section. The former is responsible for regulating banks, bureaux de change and other institutions 17, whilst the Insurance Supervision Section oversees the activities of insurance companies and intermediaries. In 2010, the supervisory portfolio consisted of seven commercial banks, five of which are holders of banking business licences 18, whist one holds both an offshore 19 and banking business licence. The remaining one holds an offshore banking licence. As regards to the number of bureaux de change, this remained unchanged at 24, representing the net effect of granting four new licences and four surrendered licences. Banks and bureaux de change are regulated in line with the legislative framework provided by the Financial Institutions Act 2004 (FIA) as well as Regulations and other instructions which have been issued to supplement the Act. In addition, three domestic insurance companies 20 formed part of Central Bank s supervisory ambit. As regards to the number of insurance intermediaries, this amounted to forty three during the year under review. The Insurance Act 2008 provides the legal framework for the regulation and supervision of insurance companies and intermediaries. The supervisory portfolio of the Central Bank also includes the Seychelles Credit Union (SCU), Housing Finance Company (HFC) and Development Bank of Seychelles (DBS). These were formally delegated under Central Bank s supervision in In this respect, the Development Bank of Seychelles Decree 1977 and the Seychelles Credit Union Act 2009 also form part of the regulatory framework. Of note is that the Application of Act Regulations was issued in 2010 to make certain sections of the FIA applicable to DBS and HFC. 17 The supervision of the Development Bank of Seychelles (DBS) and the Housing Finance Company (HFC) were formally transferred to FSSD in The Application of Act Regulations 2010 specifies certain sections of the FIA which are applicable to DBS and HFC. 18 A banking business licensee is allowed to conduct business with residents and non-residents and in all currencies. 19 An offshore banking business licensee is allowed to conduct business only with non-residents and in foreign currency. 20 Domestic insurance business means insurance business which is restricted by a licence issued under the Insurance Act and subject to such other restrictions or limitations as may be prescribed to only Seychelles policies

79 8.2 Regulation and Supervision of institutions within Central Bank s supervisory portfolio FSSD s mandate to ensure a sound financial system is achieved principally through its licensing, offsite and onsite functions Licensing In 2010, one formal application was received for an offshore banking licence which was not approved on the basis that it did not meet all the requirements stipulated by Section 6 of the FIA. However, a number of interests in the banking business were also received during the year in the form of queries from investors. As regards to bureaux de change licences, a notable decrease was observed in the number of applicants with only four licences issued in This compared to 15 of such licenses granted in 2009 after the introduction of a facilitated licensing process for bureaux de change against the backdrop of a newly liberalised foreign exchange market in late Of note is that only two bureaux de change were operational prior to the launch of the reform programme in On the insurance side, a clear sign of increased confidence in the market was highlighted by the entrance of a new foreign-owned domestic insurer. In December 2010, there was an acquisition of a Mauritian company that was the third insurer licensed to carry on general insurance business (in August 2009) by another Mauritian company. The acquisition was approved by the CBS. The participation of internationally affiliated organisations has contributed to increased competition in the local insurance market. In addition, a notable increase was observed in the number of sub-agents 21 with a 55 per cent increase in registrations of these sales professionals recorded between 2009 and Offsite Supervision Offsite supervision involves the ongoing monitoring of performance, based on financial reports submitted to FSSD. Through such exercise, the offsite team is able to detect signs of problems and ensure that corrective measures are taken in a timely manner. Offsite supervision involves both micro-prudential and macro-prudential supervision. The former entails conducting periodic analysis of the financial condition and performance of individual financial institutions whilst macro-prudential supervision brings an industry perspective into the analysis. 21 Insurance sub-agent means a person (not being an insurer, insurance manager, insurance agent or insurance broker) who solicits directly or through advertising or other means, domestic business on behalf of an insurer, insurance agent or insurance broker

80 Offsite supervision provides an important complement to onsite examinations by facilitating ongoing assessment of institutions and providing vital input to the pre-examination process Onsite Supervision Whilst onsite inspection of bureaux de change is geared principally towards ensuring adherence with regulations and guidelines that of SCU adopts the PEARLS approach which assesses the institution s Protection, Effective financial structure, Asset quality, Rates of return, Liquidity, and Signs of growth. As regards to onsite supervision of banks, this is carried out in line with the CAMELS bank rating system, adopting a risk-focused approach to the assessment of banks Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. Onsite supervision allows in-depth understanding of risks faced by institutions and the manner in which these risks are managed by commercial banks. Moreover, the accuracy of returns sent to the offsite unit is also physically verified by the onsite team. Four onsite inspections were conducted on banks in As regards to on-site inspection of insurance companies and intermediaries, this featured on the calendar of the Insurance Supervision Section for the first time in Full scope on-site inspections were conducted on two licensed insurance brokers 22. The findings from both of these on-site inspections indicate that there is a need to enhance supervision in the insurance sector. To this end, an on-site inspection schedule for 2011 has been drafted Supervision of DBS and HFC In 2010, offsite supervision of DBS and HFC was not conducted in its totality whilst no onsite supervision was carried out. As a first step towards effective supervision of these institutions, the Central Bank commissioned a special audit of these institutions to be conducted by independent auditors. The purpose of the exercise was to obtain a detailed overview of HFC and DBS in order to allow for effective adoption of a risk-based approach to their supervision of these institutions. In the coming year, onsite and offsite supervision of DBS and HFC is anticipated to be conducted on a fully-fledged basis. 8.3 Developments in the bank supervisory framework The exercise to improve the regulation and supervision of institutions within Central Bank s supervisory portfolio formally started in 2007 in line with an action plan prepared by FSSD staff in conjunction with TA 22 Insurance broker means a person who arranges insurance business with insurers on behalf of prospective policyholder, or as a representative of a policyholder, and includes a reinsurance broker carrying on reinsurance brokering for an insurer

81 IMF. In 2010, the strengthening of the supervisory framework remained a priority for FSSD, which was achieved among other things, through the promulgation of the following regulations and circulars: Capital Adequacy Regulations The Financial Institutions (Capital Adequacy) Regulations were gazetted in November The purpose of the Capital Adequacy Regulations is to ensure that banks maintain adequate capital as a buffer against potential losses. It sets out the new minimum capital requirement for a banking business license, which has been doubled compared to the preceding requirement of R20 million. This revision has been prompted by the global financial crisis which has underscored the importance of capital to banks soundness. Banks which are currently not meeting this requirement have been allowed a transitional period of up to December 31, Whilst the Basel I approach to credit risk has been maintained, provisions have been included for the incorporation of the basic indicator approach of Basel II to capture operational risk. In this regard, the Regulations adopt a more risk sensitive approach compared to the previous standards Credit Classification and Provisioning Regulations The Financial Institutions (Credit Classification and Provisioning) Regulations, which were also gazetted in November 2010, ensure that banks prudently classify loans and provision for potential losses accordingly. Similar to the previous guidelines, the Regulations require that banks classify their loans into five categories, namely Pass, Special Mention, Substandard, Doubtful and Loss. The Regulations have therefore made the criteria to be considered when classifying loans more comprehensive. As regards to the provisioning requirements, this has been revised for certain classifications to be more reflective of potential risks that the loans carry and to bring them in line with international norms. The Regulations also provide for the reconciliation of differences between the regulatory requirements and International Accounting Standards and address the issue of write-offs which was not dealt with in the previous guidelines Bank Licence Fees Regulations and Circular The Financial Institutions (Bank Licence Fees) Regulations, 2010, which set out the application processing fee as well as the annual fee to be paid by banks, became applicable as at the beginning of The

82 Regulations stipulate revised fees which are more reflective of the cost of functions and procedures carried out in relation to applicants and licensed banks. Whilst the application processing fee is set at R20,000 for a banking business licence and US$2,000 or equivalent in any freely convertible currency for an offshore banking licence, the annual fee is calculated on the basis of the bank s total assets as shown in table 7.1. This is based on the premise that a larger bank with greater asset base typically requires more supervision from the Central Bank. Table 7.1 Banks licence fees Total assets Annual Fees Less than R300 million R250,000 R300 million or more, but less than R1 billion R500,000 R1 billion or more, but less than R5 billion R750,000 R5 billion or more Source: Central Bank of Seychelles R1,000,000 The Regulations have been supplemented by a circular titled Bank Licence Fees which explains that total assets for the purpose of computation of the annual fee refers to total assets as per the audited financial statements dated two years prior to the year in which the licence fee is due. It also clarifies that the annual fee is payable in Seychelles rupees for both domestic and offshore banks Circular on Investment of Capital This circular was issued to inform that Central Bank no longer prescribes the manner in which banks invest their paid-up capital and reserve funds Circular on Presentation of Audited Accounts Given that banks are being required to adopt International Accounting Standards/ International Financial Reporting Standards (IAS/IFRS), the above circular was issued on the manner in which audited accounts should be presented. Essentially, the circular requires that banks disclose the minimum line items and requirements under IAS/IFRS as it is more comprehensive than the formats formerly prescribed by the Central Bank

83 8.3.6 Circular on Publication of Audited Accounts in Local Newspaper This circular was issued to remind banks that as per amendments which had been effected to the FIA in 2009, banks are required to publish their audited financial statements in (a local) newspaper within 5 months after the end of the financial year. Banks were also informed that disclosure of directors signature is not mandatory for that purpose. The idea behind this amendment is to improve disclosure to the public as the former requirement was for banks to publish their financials in the Official Gazette only, which is not necessarily accessible to the general public Circular on Publication of Particulars of Abandoned Property The circular was issued to inform that banks are not required to disclose amounts held in abandoned accounts in the newspaper publications and at their premises as per past practices. This step was taken in order to mitigate against fraudulent claims that may arise when the amount of abandoned property is publicised. The circular highlights that the names of the owner and the nature of the property (for example, if it is a current/savings account) will still need to be disclosed. 8.4 Developments in the banking sector During 2010, one of the most pertinent issues was in relation to indications of a low level of competitiveness in the banking sector. This amongst other things, manifested through the high level of complaints received from the public, generally high level of profit recorded by the banks, as well as high interest rates on lending and high spreads between lending and deposit/savings rates. In light of this, the CBS initiated a study in 2010 to identify the reasons for the lack of competition with a view of introducing policies that would promote competition within the banking sector. Despite the effects of the global financial crisis, banks in Seychelles recorded exceptionally high profits in 2007 and The high profits in 2009 were mainly driven by revaluation gains on banks holdings of assets denominated in foreign currency, whilst those of 2009 reflected exceptionally high returns on government securities which rose sharply in the first half of 2009 after liberalization of the financial markets in November Although their profitability decreased in 2009 and 2010 compared to the previous two years, the industry s Return on Equity remained higher than that recorded by many other countries. As regards to their liquidity positions, the banking sector remained highly liquid throughout the year, as indicated by a high ratio of broad liquid assets to total assets, which remained above 58 per cent

84 Although the ratio of non-performing loans to gross loans reached a high of 8.3 per cent during the year compared to the industry norm of 4.0 per cent, this did not represent a deterioration in the loan portfolio per se. In essence, this was the product of banks reclassification of loans which had been misclassified as observed by the onsite team. It must be noted that, despite the increase in the ratio, it stayed well below that observed in many countries in Africa. Furthermore, the capitalisation levels of the banking system remained high throughout the year. This was evidenced by the capital adequacy ratios both on a weighted and un-weighted basis which remained above 20 per cent and 8.7 per cent respectively. 8.5 Co-operation with other domestic and foreign supervisory authorities Central Bank recognises the importance of maintaining good relationships with supervisory peers both locally and internationally in order to promote co-operation on issues of common interest and provide a platform for effective exchange of information. Currently, the Central Bank has signed only one Memorandum of Understanding (MOU) and this is with Bank of Mauritius in the interest of promoting effective supervision of the Mauritius Commercial Bank s branch in Seychelles. With the BMI Offshore Bank s establishment in 2008, the Bank has established relationship with its parent supervisor, Bank of Bahrain and is in the process of negotiating a Memorandum of Understanding. Domestically, the Bank also seeks to maintain relationships with other authorities, such as the Ministry of Finance, National Bureau of Statistics (NBS), Seychelles International Business Authority (SIBA), and the Fair Trading Commission (FTC). With respect to the NBS, the principal objective is to have in place a proper channel for mutual exchange of statistical information. As regards to FTC, this is a newly established authority whose objective is the promotion of competition and consumer protection. Work has begun on a MOU between FTC and Central Bank to set the platform for co-operation between the authorities in the common pursuit of the above-mentioned objective. 8.6 Financial Stability Assessment In the year 2010, the Central Bank made use of different available tools to monitor the health of individual institutions under its supervisory ambit and the banking sector as a whole through the use of stress testing and other industry-wide analysis. These were done in collaboration with IMF consultants. However, it should be noted that the Bank endeavours to further increase its capacity in assessing systemic risk being faced by the financial system

85 Correspondingly, in its attempt to promote the stability of the financial system as a whole, the Central Bank also hosted a workshop on Crisis Preparedness in October and this was conducted by the Toronto Centre 23. At the request of the Bank, the Toronto Centre carried out a four day workshop on crisis preparedness that was attended by a team comprising staff of the Central Bank, Ministry of Finance and SIBA. This has initiated work on Seychelles' crisis binder which contains tabs on inter alia communication and coordination strategies, resolution options and challenges which may impede effective resolution of a crisis. Furthermore, an action plan will be devised to address gaps which have been identified during the exercise. 8.7 Stress testing of the banking sector Stress testing is used as an Early Warning System tool to identify weaknesses in the financial condition of banks and other institutions under the supervision of the Central Bank at an early stage. Stress tests have been used at several instances and have helped in the formulation of numerous policy decisions. When necessary, the Central Bank performs stress testing to identify potentially problematic banks and provide solutions before the problem arises. The following are some of the variables that Central Bank conducted stress tests on; Credit risk Liquidity Risk Foreign exchange risk Interest rate risk Exchange rate risk 8.8 Developments in the insurance sector Supervision of the insurance sector was set up within the Central Bank in 2008 as part of the Securities and Financial Markets Division (SFMD) and became part of FSSD in 2010 when most of the functions of the now dissolved SFMD were transferred to the SIBA. In 2010, both the commercial and the regulatory environment of the insurance sector have experienced some changes. This is expected to lead to a more positive outlook for the sector as indicated by increases in gross written premiums of 7.1 per cent and 17 per cent in 2009 and 2010 respectively. 23 The Toronto Centre is an organisation with the mission of enhancing the capacity of financial regulators from around the world to help improve their agency s crisis preparedness and to promote change that will lead to a more sound and inclusive financial system. Its founding sponsors are the World Bank, Schulich School of Business at York University, and Canadian International Development Agency

86 Improved performance by insurers can be attributed to the healthier economy that has ensued from the reform programme launched in late Another aspect is increased public awareness of the need to prepare against unforeseen contingencies in the form of events which may happen when one least expects. In order to ensure a good communication flow between the insurance market and its regulator, in June 2010, Central Bank introduced meetings with insurance companies which are currently held every six weeks. Central Bank also held its first meeting with insurance brokers in 2010 and the same is scheduled at least twice per year. These meetings facilitate one-to-one discussions between the Central Bank and the market players on current issues and enable the proper dissemination of information between both parties. Amongst all these developments, in the first half of 2010, the Central Bank requested technical assistance from First Initiative, a major arm of the World Bank that provides capacity building in the financial sector to help CBS strengthen its regulatory and supervisory frameworks for the insurance sector. Currently in its set-up phase, the Insurance Supervision Section expects to benefit with technical assistance from experts in insurance supervision on an ongoing basis over the next two years. Furthermore, in the last quarter of 2010, the Commonwealth Secretariat announced its plan to host a 4-day insurance workshop in Seychelles in the first quarter of 2011, which will be attended by participants from various Commonwealth countries. This activity is expected to better equip insurance supervisors with technical knowledge for effective insurance supervision, provision of a high degree of security to policyholders and maintain confidence in the industry. 9.0 Banking Services The Banking Services Division is comprised of the Banking/Accounts Section, the Currency and Numismatic Section, the Domestic Debt Section and the National Payment System Unit. The Division operates as banker to local commercial banks, the Seychelles and foreign governments, and agencies. 9.1 Safeguard To ensure better transparency in its reporting and application of accounting treatment in line with best international practice, the Central Bank has adopted the International Financial Reporting Standard (IFRS) since the financial year 2009 onwards. The internal control system of Banking Services operations has also improved in line with both the safeguard assessment and the external auditor s recommendations. More segregation of duties has been put in place and this has further been enhanced with the implementation of the new Core banking system

87 9.2 Payment and Settlement System Since the establishment of the National Payment System Unit in June 2008 and the ongoing technical support from the IMF Regional Payment System Advisor, the National Payment System project continues to develop in its reform and modernisation strategy. Several important steps which were initiated in 2009 continued in This included the establishment of a complete requirements and standards document for electronic funds transfers that replaced the manual settlement system. The adoption of the new cheque standard documents in the new clearing house rules and the introduction of the National Clearing and Settlement system Act were also implemented during the year, the latter of which was approved in July The purpose of this legislation is to provide strong supporting pillars for the National Payment Systems and create it as a legal entity. Furthermore, it will provide a clear mandate for the undertaking of the payment systems oversight, entry and participation criteria, recognition and supervision of systems for clearance and settlement. Table 7.2 Bankers' Clearing House Activities (Total) Number of items cleared 596, , , , ,156 Amount (R'000) 2,339,696 2,382,069 2,652,751 3,838,803 3,536,888 (Daily Average) Number of items cleared 2,416 2,519 2,624 2,896 3,115 Amount (R'000) 9,472 9,528 10,569 15,479 13,980 Source: Central Bank of Seychelles As regards to clearing house activities, whilst the average daily number of items cleared fell by 7.6 per cent to 3,115 items, the daily average amount declined by 9.7 per cent to R14 million. Nevertheless, the 2010 averages were higher than the previous five-year daily averages by 15 per cent for the number of items cleared and by 18 per cent for the amount. 9.3 Core Banking Project The major improvement in the efficiency of CBS operational following the implementation of a Core banking system at the Central Bank underscores the impact that information technology can have in advancing the financial sector and represents a firm policy commitment by the Bank to modernisation of the

88 sector. The new system has changed the way banking services are provided and will bring additional benefits to the financial market by offering more efficient payment and settlement services of great benefit to the all parties concerned. The CORE Banking System became operational December 01, 2010 and provides the platform for future payment system integration such as the introduction of a local rupee switching system; the Electronic Clearing House; Electronic Funds Transfer and the Real Time Gross Settlement. With the implementation of the above projects in the future, customers will greatly benefit from a more secure and efficient payment system environment. 9.4 Management of External Reserves In terms of managing external reserves of the country, the Bank has been more active in such activities since early 2010 following some training of key Officers. The observed result is a significant increase in the overall return on investment. By end of year, reserves had increased in part aided by the Bank s policy in reserve accumulation but also by prudent and sound management decisions by the investment committee. The strategy for 2011 is to use the services of Asset Management of reputable public institutions such as the Bank for International Settlement, Crown Agents and the World Bank. Besides their more favourable terms, these institutions also provide invaluable technical assistance in the area of capacity building and training of the Bank s internal managers. 9.5 Management of Domestic Public Debt Throughout 2010, the Treasury bills auctions were executed on a weekly basis, offering the following instruments: 91 day Treasury bills, 182 day Treasury bills and 365 day Treasury bills. As in the previous years, the commercial banks were the most active participants in these auctions. No Treasury bonds were issued in 2010 as the government pursued its public debt reduction strategy. It is worth noting that the Bank, in its capacity as agent to the government, facilitated the issuance of Development Bank of Seychelles (DBS) bonds for a value of R100 million in total, which were fully guaranteed by the government. Two such bonds were issued in July 2010 a 5.5 per cent three year DBS bond worth R50 million and a 5.0 per cent two year DBS bond worth R50 million. The bonds were fully subscribed

89 The Bank, through recapitalisation by the government obtained three tranches of marketable Treasury bills in 2010 worth R188 million. The first and second tranches were in the form of 91-day bills worth R63 million each and were issued on June 15, 2010 and September 15, 2010, respectively. The third tranche of R62 million was issued in the form of 365 -day bills on December 15, Technical Services Supervision The Technical Services Division (TSD) is responsible for the provision of information technology infrastructure and support functions that enable staff members, clients, and stakeholders to effectively communicate and collaborate with each other. A key milestone for TSD during 2010 was the finalisation by Deloitte International of a complete IS audit on the Bank s network infrastructure and submission of a report of its finding. Based on a timeframe proposed by Deloitte and accepted by CBS Management, TSD has the task of addressing all the issues raised from the audit IT projects The successful implementations of the first Phase of the Core Banking Project, Payroll System and the deployments of new computer hardware have been the highlights of the division during Furthermore, TSD has revamped and centralised the Data Centre Infrastructure by installing new servers and equipment using latest technology to ensure high security, availability, and stability of the bank s information. The Division, with the help of an external consulting firm DCDM, successfully developed a Business Continuity Management Systems (BCMS) for the Bank as one of its other major projects, however the key challenge remains to build a Disaster Recovery Site (DR Site). This will be key in ensuring that the Bank will be able to consistently meet its objectives in the event of a natural or manmade disasters, or unforeseen circumstances. The DR equipments are temporary housed at the Department of Information and Communication Technology (DITC). One key target for 2011 is to deploy the Business Supervision Application with the objective to enhance the functions of FSSD and PMOSD in processing input from the Banks stakeholders, namely commercial banks and Exchanges Bureaus. The Division will also upgrade the Bank s main application, Microsoft Office from the 2003 version to the 2010 s version. This will be done in a phase by phase process after all the divisions have tested their applications in Office

90 11.0 Administration and Human Resources The Administration and Human Resources Division is responsible for planning and executing of a comprehensive scope of administrative services necessary to support office operations of the Bank. These responsibilities cover the full range of procedures, upkeep of property, general support services, occupational health and safety, personnel management, training and career development, human resources planning and among others, the Bank's security. In addition, it maintains all personnel records for all employees and ensures they are kept up to date Management Team Following the departure of Ms Jennifer Morel in May 2010, Ms Caroline Abel, previously Head of PMOSD, was appointed as Deputy Governor in July Since then, the Director of PMOSD, Mr. Brian Commettant has been acting as Head of Division. Ms Jenifer Sullivan, Head of FSSD, proceeded abroad to pursue further studies and the Director of FSSD, Mr. Naadir Hassan, has been deputising as acting head during her absence Human Resources As the Bank continues spearheading its restructuration programme, the number of staff employed by the end of December 2010 had reached 126. Improvements in service delivery and meeting greater functional demands are some of the objectives justifying the need for a larger workforce. In total, the year saw 25 new appointments and 6 resignations. The Bank held its second annual staff retreat in December. This event allows the Governor and management team to meet staff away from the work place, to listen and respond to questions and concerns raised by the staff and to discuss or review pertinent work issues. Staff input into this process is vital to the success of this event. In December, for the first time, employees were given the opportunity to rate their respective Heads of Division, Governor and Deputy Governor, through a staff survey with the aim of improving their performance. A salary survey was undertaken with a view to align jobs within the same levels to similar positions in the private and financial sector. Following the results of the survey, the salaries of all staff were reviewed. As part of the Bank s commitment to develop its human resources and provide quality services, a total of 49 staff had the opportunity to attend local and international meetings and conferences. These have included the High Level Offshore Seminar, and the Risk Management and International Control Seminar. Under the

91 Bank s higher education scheme, one staff member was sent for an undergraduate course, whilst two were sent for their Master Degree. A further 26 have completed short courses abroad, covering broad topics such as Monetary and Financial Statistics, External Vulnerabilities, and Financial Soundness Indicators. The year 2010 has also seen 13 employees participating in online courses, the majority of which have been provided by UNITAR and the World Bank Institute. These online courses have improved the flexibility of training services provided to the staff. In addition to short courses, 5 employees from FSSD were able to familiarise themselves with Islamic banking at the Central Bank of Kenya whilst 4 staff from Banking Services and PMOSD proceeded on 1 week attachment at the Bank of Mauritius to better understand the automated operations and market operation. These attachments were but some of the means used to develop staff knowledge in Central Bank operations Governance Issues In the last two years, the Central Bank has been enhancing its governance structures to increase accountability, transparency and efficiency. In the year under review, a number of milestones were achieved and in some areas work is still ongoing for the coming year. As part of its strategy to move to a risk-based audit approach, the Bank contracted Ernest & Young to conduct a risk assessment evaluation of its functions in May The evaluation enabled the identification of pertinent risks of the Bank and grouped them in a priority listing. The realisation of a riskbased audit methodology has become a key element in the Bank and it will be an on-going activity that will lead to a full implementation of a Bank-wide Risk Management Framework. This involves, among other things, assessing key enterprise risks, measuring risk-mitigation effectiveness, assessing ethics and codes of conduct, and reviewing and assessing IT governance. As part of this framework, a Management Committee, through the Investment and Risk Implementation Committee (IRIC), was set up to drive the process of risk management. Alongside the risk assessment, the Bank contracted a consulting firm Deloitte to carry out an Information Security (IS) audit to assess areas of vulnerabilities with regards to its information security (see above). From these two exercises, a consolidated risk matrix has been compiled and some of the identified measures have started to be implemented from the last quarter of The bulk of the work to be delivered especially from the IS Audit will be implemented in One of the critical elements which were identified from the two exercises was a pressing need for the Bank to have a Business Continuity Plan. In the process, the Bank initiated the implementation of a Business

92 Continuity Management System (BCMS) for which the Bank gained the expertise of BDO in putting together the best solution for the institution. However, given the extent of the work to be done, this project is being spread out over a period of two years. Whilst the Bank has made progress through its own initiative, it has also benefited from significant support in the form of technical assistance from the IMF to improve governance. In October, an IMF Consultant on accounting, internal control and risk management conducted a visit to assess the progress made in those areas as well as to review the recommendation implementation of the safeguard assessment conducted early in the year. To close an eventful year in the area of governance, the Bank invited a key international figure in this field as Guest Speaker for its Annual Anniversary Lecture and to mark the 31 st anniversary of the Bank. Dr. Gavin Bingham who is the Secretary General of the Central Bank Governance Forum from the Bank of International Settlement gave a lecture with the theme The Implications of the Financial Crisis for the Governance of Central Bank. His lecture put into context the challenges Central Banks face across the world, especially at the time of the recent financial crisis and how this crisis has put forth questions on the governance structures of such institutions in this new era. From this event, the Bank, through the Governor and Deputy Governor also detailed, in their respective speeches, the work that has been done and put into context the challenges that it faces when changes needs to be implemented such that they are at par with international best practice Board of Directors The Board of Directors work plan was also reviewed during the year. In view of the many changes at the Bank level, the Directors approved the proposal to have a Board Secretariat that would provide the effective support for efficient planning of Board meetings and delivery of documents. In total, there were eight Board meetings and discussions and approvals were mainly in the areas of monetary policy, changes in the bank supervision framework and reserve management to name a few Appreciation The Board and Management of the Central Bank wish to express their appreciation to all staff members of the Bank for their valuable contributions and absolute commitment to the operations of the institution. CBS staff members have continued to discharge their responsibilities in a professional, ethical and exemplary manner as befitting a central monetary institution and in doing so further develop the role of the Bank. Now more than ever in an open and market led economy, continued commitment by staff is vital to the

93 development of the domestic economy. On this note, the Board and Management look forward to another successful year ahead

94 CENTRAL BANK OF SEYCHELLES FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010

95 CENTRAL BANK OF SEYCHELLES Page 1 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2010 CONTENTS PAGES OPINION OF THE AUDITOR GENERAL 2-3 AUDIT REPORT TO THE AUDITOR GENERAL 4-5 STATEMENT OF FINANCIAL POSITION 6 STATEMENT OF COMPREHENSIVE INCOME 7 STATEMENT OF DISTRIBUTION 8 STATEMENT OF CHANGES IN EQUITY 9 STATEMENT OF CASH FLOWS 10 NOTES TO THE FINANCIAL STATEMENTS 11-63

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101 CENTRAL BANK OF SEYCHELLES Page 7 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2010 Notes SCR 000 SCR 000 Interest income 25 81, ,609 Interest expense 26 ( 37,295) ( 38,717) Net interest income 43, ,892 Fee and commission income 27 48,383 62,787 Losses arising from dealings in foreign currency transactions 28 ( 2,818) ( 23,079) Gains/(losses) arising from revaluation of foreign currency monetary assets and liabilities ,939 ( 440,696) Other income 1,864 5,031 Staff costs 29 ( 33,030) ( 23,490) Currency expenses 30 ( 2,684) ( 2,172) Depreciation 13 ( 2,137) ( 1,796) Amortisation charge 14 ( 264) ( 29) Professional charges 31 ( 6,003) ( 3,417) Other operating expenses ( 20,413) ( 10,926) Net profit/(loss) and total comprehensive income/(loss) for the year 173,791 ( 240,895) ======= ======= The notes on pages 11 to 63 form an integral part of these financial statements.

102 Page 8 CENTRAL BANK OF SEYCHELLES STATEMENT OF DISTRIBUTION FOR THE YEAR ENDED 31 DECEMBER SCR 000 SCR 000 Net profit/(loss) and total comprehensive income/(loss) for the year 173,791 ( 240,895) Adjusted as follows Retained earnings b/f Unrealised (gains)/losses transferred (to)/from revaluation reserve ( 146,939) 278, Distributable earnings 26,852 38,420 ======= ======= Distributable as specified by the CBS Act Transfer to Authorised Capital 12,186 19,210 Transfer to General Reserve 1,240 - Transfer to Government Consolidated Fund 13,426 19,210 The above information has been compiled from information contained in the statement of changes in equity as set out on page 9 and does not form part of the primary statements. The notes on pages 11 to 63 form an integral part of these financial statements.

103 CENTRAL BANK OF SEYCHELLES Page 9 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2010 Authorised General Revaluation Retained Total capital reserve reserve earnings equity SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 At 1 January ,000 20, , * 244,521 Transfer from Government Consolidated Fund ,794 28,707 84,501 Transfer to authorised capital 28, ( 28,707) - Net loss and total comprehensive loss for the year ( 240,895) ( 240,895) Transfer from revaluation reserve - - ( 278,972) 278,972 - Transfer to authorised capital 19, ( 19,210) - Transfer to Government Consolidated Fund ( 19,210) ( 19,210) At 31 December ,917 20, ,917 Recapitalisation 36, , ,000 Net profit and total comprehensive income for the year , ,791 Transfer to revaluation reserve ,939 ( 146,939) - Transfer to authorised capital 12, ( 12,186) - Transfer to general reserve - 1,240 - ( 1,240) - Transfer to Government Consolidated Fund ( 13,426) ( 13,426) At 31 December , , , ,282 ======== ======== ======== ======== ======== *Retained earnings arising from transition to IFRS The notes on pages 11 to 63 form an integral part of these financial statements.

104 CENTRAL BANK OF SEYCHELLES Page 10 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2010 Notes SCR 000 SCR 000 Cash flows from operating activities Cash flows from/(used in) income and expenses 135,021 ( 433,678) Cash flows from changes in operating assets and liabilities 430,981 1,183, Net cash generated from operations , , Cash flows from investing activities Payments of currency replacement costs 12 ( 10,279) - Payments for acquisition of property, plant and equipment 13 ( 3,852) ( 4,011) Payments for acquisition of intangible assets 14 ( 11,234) ( 5) Proceeds from disposal of property, plant and equipment Interest received 193, ,160 Proceeds from redemption of Government securities 1, Net cash generated from investing activities 169,548 99, Cash flows from financing activities Increase in currency in circulation 98,854 77,437 Long term borrowings from IMF 177, ,063 Paid to Government Consolidated Fund ( 19,210) ( 66,982) Net cash from financing activities 257, , Increase in cash and cash equivalents 993,041 1,048,081 Cash and cash equivalents at start of the year 2,094,206 1,046, Cash and cash equivalents at end of the year 3,087,247 2,094,206 ========= ========= The notes on pages 11 to 63 form an integral part of these financial statements.

105 CENTRAL BANK OF SEYCHELLES Page 11 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER GENERAL INFORMATION The Central Bank of Seychelles (the Bank ) is established and domiciled in Seychelles. The address of its registered office is P. O. Box 701, Independence Avenue, Victoria, Mahe. The Bank is established by statute under Section 3 of the Central Bank of Seychelles Act 2004, as amended in 2009, hereafter referred to as the CBS Act. Section 3 of the CBS Act states; there is hereby established the Central Bank of Seychelles which shall be a body corporate with perpetual succession and a common seal. The financial statements for the year ended 31 December 2010 have been approved for issue by the Board of Directors on 28 March Neither the Bank nor the Goverment has the power to amend the financial statements after issue. The objectives of the Bank are: to promote price stability; to advise the Government of Seychelles (the Government ) on banking, monetary and financial matters, including the monetary implications of proposed fiscal, credit policies or operations of the Government; and to promote a sound financial system. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented unless otherwise stated. 2.1 Basis of preparation In accordance with Section 45(2) of the CBS Act, the financial statements of the Bank shall be maintained at all times in conformity with the applicable law, if any, and an internationally recognised financial reporting framework. The financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) under the historical cost convention. The disclosures on risks from financial instruments are presented in the financial risk management report contained in Note 34. The finanical statements comprise the statement of financial position, the statement of comprehensive income, the statement of distribution, the statement of changes in equity, the statement of cash flows and the notes. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bank s accounting policies. Changes in assumptions may have a significant impact on the financial statements in the period the assumptions changed. Management believes that the underlying assumptions are appropriate and that the Bank s financial statements therefore present the financial position and results fairly. The areas involving a higher degree of judgement or complexity or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3.

106 CENTRAL BANK OF SEYCHELLES Page 12 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.1 Basis of preparation (Continued) Changes in accounting policy and disclosures (a) New and amended standards adopted by the Bank The amendments to existing standards below that are part of the Annual Improvements Project 2009 are applicable for financial year beginning on/after 1 January 2010 and are relevant to the Bank s operations: IAS 1, Presentation of financial statements. The amendment clarifies that the potential settlement of a liability by the issue of equity is not relevant to its classification as current and non-current. By amending the definition of current liability, the amendment permits a liability to be classified as non-current provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period. The application of the amendment does not have any impact on the Bank s financial statements. IAS 17, Leases. The amendment clarifies that when a lease includes both land and buildings elements, an entity shall assess the classification of each element as a finance or an operating lease separately. The application of the amendment does not have any impact on the Bank s financial statements. IAS 36, Impairment of Assets. The amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purposes of impairment testing is an operating segment, as defined by paragraph 5 of IFRS 8, Operating Segments (that is, before the aggregation of segments with similar economic characteristics). The application of the amendment does not have any impact on the Bank s financial statements.

107 CENTRAL BANK OF SEYCHELLES Page 13 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.1 Basis of preparation (Continued) (b) New and amended standards, and interpretations mandatory for the financial year beginning 1 January 2010 but not relevant to the Bank: Standard/ Interpretation Title Applicable for financial years beginning on/after IFRS 1 First-time Adoption of International Financial Reporting 1 July 2009 Standards - Additional exemptions for first-time adopters IFRS 2 Share-based payment (part of Annual Improvement 1 July 2009 Project 2009) Scope of IFRS 2 and revised IFRS 3 IFRS 2 Share-based payment Group cash-settled share 1 January 2010 based payment transaction IFRS 3 Business combinations 1 July 2009 IFRS 5 Non-current Assets Held for Sale and Discontinued 1 January 2010 Operations (part of Annual Improvement Project 2009) Disclosures of non-current assets (or disposal groups) classified as held for sale or discontinued operations IFRS 8 Operating segments 1 January 2010 IAS 27 (revised) Consolidated and Separate Financial Statements 1 July 2009 IAS 38 Intangible assets (part of Annual Improvement 1 July 2009 Project 2009) Additional consequential amendments arising from revised IFRS 3 IAS 39 Financial Instruments: Recognition and Measurement (part of Annual Improvement Project 2009) (i) Treating loan prepayment penalties as closely related embedded derivatives (ii) Scope exemption for business combination contracts 1 January 2010 IFRIC 9 & IAS 39 Reassessment of embedded derivatives & Financial 30 June 2009 Instruments: Recognition and Measurement IFRIC 17 Distribution of non-cash assets to owners 1 July 2009 IFRIC 18 Transfers of assets from customers 1 July 2009 (c) Standards and interpretations issued but not yet effective The following new standards, amendments to existing standards and interpretations have been issued and are mandatory for the Bank's accounting periods beginning on or after 1 January 2011 or later periods and are not expected to be relevant to the Bank, except for IFRS 9.

108 CENTRAL BANK OF SEYCHELLES Page 14 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.1 Basis of preparation (Continued) (c) Standards and interpretations issued but not yet effective (Continued) Standard/ Interpretation Title Applicable for financial years beginning on/after IFRS 1 (amended) First-time Adoption of International Financial Reporting Standards Limited exemption from comparative IFRS 7 disclosures for first-time adopters IFRS 9 Financial instruments part 1: Classification and measurement IAS 32 (amended) Financial instruments: Presentation Classification of rights issue IFRIC 14 IAS 19 The limit on a defined benefit asset, (amended) IFRIC 19 minimum funding requirement and their interaction Extinguishing Financial Liabilities with Equity Instruments 1 July January February January July 2010 IFRS 9, Financial instruments part 1: Classification and measurement and part 2: Financial liabilities and Derecognition of financial instruments IFRS 9, part 1 was issued in November 2009 and replaces those parts of IAS 39 relating to the classification and measurement of financial assets. Key features are as follows: Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity's business model for managing its financial instruments and the contractual cash flow characteristics of the instrument. An instrument is subsequently measured at amortised cost only if it is a debt instrument and both the objective of the entity's business model is to hold the asset to collect the contractual cash flows, and the asset's contractual cash flows represent only payments of principal and interest (that is, it has only 'basic loan features'). All other debt instruments are to be measured at fair value through profit or loss. All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. There is to be no recycling of fair value gains and losses to profit or loss. This election may be made on an instrument-byinstrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment. While adoption of IFRS 9 is mandatory from 1 January 2013, earlier adoption is permitted. The Bank is considering the implications of the Standard, the impact on the Bank and the timing of its adoption by the Bank.

109 CENTRAL BANK OF SEYCHELLES Page 15 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.1 Basis of preparation (Continued) (c) Standards and interpretations issued but not yet effective (Continued) IFRS 9, part 2 was issued in October 2010 and includes guidance on financial liabilities and derecognition of financial instruments. The accounting and presentation of financial liabilities and for derecognising financial instruments has been relocated from IAS 39, Financial instruments: Recognition and Measurement, without change except for financial liabilities that are designated at fair value through profit or loss. Under the new standard, entities with financial liabilities at fair value through profit or loss recognise changes in the liability s credit risk directly in other comprehensive income. There is no subsequent recycling of the amounts in other comprehensive income to profit or loss, but accumulated gains or losses may be transferred within equity. Improvements to IFRS Improvements to IFRS were issued in May The amendments that are relevant to the Bank s operations relate to: IFRS 7, Financial Instruments: Disclosures and IAS 1, Presentation of financial statements. Most of the amendments are effective for annual periods beginning on or after 1 January 2011 with early application permitted. IFRS 7, Financial Instruments: Disclosures. The amendment emphasises the interaction between quantitative and qualitative disclosures about the nature and extent of risks associated with financial instruments. IAS 1, Presentation of financial statements. The amendment clarifies that an entity must present an analysis of other comprehensive income for each component of the entity, either in the statement of changes in equity or in the notes to the financial statements. (d) Early adoption of standards Amendment to IAS 24 Related party disclosures is effective for annual periods beginning on or after 01 January 2011, however earlier application is permitted. The Bank has early adopted the amendment during the year ended 31 December The amendment removes the disclosure of all transactions for government-related entities to disclose details of all transactions with the government and other government-related entities. This will result in more simplified disclosures to be made restrospectively in respect of related parties in the financial statements. 2.2 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (the functional currency ). The financial statements are presented in Seychelles Rupees ( SCR ), which is the Bank s functional and presentation currency.

110 CENTRAL BANK OF SEYCHELLES Page 16 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.2 Foreign currency translation (Continued) (b) Transactions and balances Transactions denominated in foreign currencies are translated into SCR and recorded at the rates of exchange prevailing at the date of the transaction. Monetary items denominated in foreign currencies are translated into SCR at the mid exchange rates ruling on the reporting date. Foreign exchange differences resulting from the settlement of foreign currency transactions and from the translation at year end mid exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. All foreign exchange gains and losses recognised in the statement of comprehensive income are presented net. Unrealised foreign exchange gains and losses are transferred from retained earnings to revaluation reserve, in accordance with the CBS Act, as these are not allowed for distribution. The exchange rate of the SCR is determined by the market and the rates applied on all foreign currency transactions are the weighted average trading exchange rates of all banks. The following rates of exchange were applied at 31 December 2010: IMF Special Drawing Rights XDR 1 = SCR United States Dollars USD 1 = SCR British Pound Sterling GBP 1 = SCR Euros EUR 1 = SCR Australian Dollars AUD 1 = SCR The XDR is defined in terms of a basket of currencies. Its value is determined as the weighted sum of exchange rates of the four major currencies (Euro, Japanese Yen, Great Britain Pound Sterling and US dollar). For accounting purposes, XDR is treated as a foreign currency. 2.3 Financial instruments A financial instrument is defined as any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. The Bank recognises all financial instruments on its statement of financial position when it becomes a party to the contractual provisions of the instrument. It also classifies its financial assets as loans and receivables and all its financial liabilities as financial liabilities at amortised cost. The main classes of financial assets are: cash and cash equivalents, investment securities, long term deposits with banks, loans and advances and other assets. The main classes of financial liabilities are: currency in circulation, deposits from Government, deposits from banks, deposits from other financial institutions, other deposits, Open Market Operations, other liabilities and International Monetary Fund ( IMF ) obligations. Their sub classes are disclosed within the notes to each of these classes of financial assets and financial liabilities.

111 CENTRAL BANK OF SEYCHELLES Page 17 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.3 Financial instruments (Continued) (a) Financial assets Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are initially recognised at fair value, which is the value of the consideration given for it including any transaction costs, and measured subsequently at amortised cost using the effective interest method. Interest on financial assets is included in the statement of comprehensive income and is reported as Interest income. The Bank uses trade date accounting for regular way contracts when recording financial asset transactions. Financial assets, consisting of investment securities, that are transferred to a third party but do not qualify for derecognition remain within investment securities but disclosed as pledged as collateral, if the transferee has the right to sell or repledge them. (b) Financial liabilities at amortised cost The Bank recognises all its financial liabilities (including borrowings from the IMF) initially at fair value, which is the value of the consideration received for it including transaction cost, and subsequently states them at amortised cost. (c) Derecognition Financial assets are derecognised when the contractual rights to receive cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards of ownership have not been transferred, the Bank tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition). Financial liabilities are derecognised only when the obligation is discharged, cancelled or expired. Investment securities furnished by the Bank under standard reverse repurchase agreements or securities lending and borrowing transactions are not derecognised because the Bank retains substantially all the risks and rewards on the basis of the predetermined repurchase price, and the criteria for derecognition are therefore not met. 2.4 Repurchase agreements In the course of its financial market operations, the Bank engages in repurchase agreements involving investment securities. Securities sold and contracted for repurchase under reverse repurchase agreements ( reverse repos ) remain classified as Investment securities and are disclosed as pledged assets, when the transferee has the right by contract or custom to sell or repledge the collateral; the counterpart obligation to repurchase the securities is reported in the statement of financial position as Open Market Operations and carried at amortised cost. Securities purchased under agreements to resell ( repos ) are recorded as loans and advances. The difference between the sale and repurchase price is treated as interest and accrued over the term of the agreements using the effective interest method.

112 CENTRAL BANK OF SEYCHELLES Page 18 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.5 Balances with International Monetary Fund ( IMF ) (a) Receivables Deposits with the IMF are included in cash and cash equivalents and represent the membership quota of the Sovereign Realm of Seychelles with the IMF. Special Drawing Rights ( XDR ) relates to the amounts with the IMF that are available for day-to-day operations of the Bank. The XDR is defined in terms of a basket of currencies. Its value is determined as the weighted sum of exchange rates of the four major currencies (Euro, Japanese Yen, Pound Sterling and US dollar). For accounting purposes, XDR is treated as a foreign currency. Reserve tranche position is the extent to which the IMF's holdings of a member's currency (excluding holdings that reflect the member's use of IMF credit, and holdings in the IMF number two account that do not exceed 10 percent of quota) are less than the member's quota. The reserve tranche position is part of the member country's external reserves. (b) Liabilities Borrowings from the IMF are financial liabilities of the member deposited at the Bank, denominated in XDR and are included under the International Monetary Fund obligations in the statement of financial position. Borrowings from the general resources of the IMF bear interest at rates set by the IMF twice weekly and are repayable according to the repayment schedules of the agreements. The interest rate amounts to 0.32 percent as at 31 December 2010 ( percent). All borrowings from the IMF are guaranteed by promissory notes which are issued by the Government. Liabilities to the IMF are carried at amortised cost. 2.6 Impairment of financial assets The Bank assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

113 CENTRAL BANK OF SEYCHELLES Page 19 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.6 Impairment of financial assets (Continued) The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: (a) (b) (c) (d) (e) (f) (g) (h) significant financial difficulty of the issuer or obligor; a breach of contract, such as a default or delinquency in interest or principal payments; the lender, for economic or legal reasons relating to the borrower s financial difficulty, granting to the borrower a concession that the lender would not otherwise consider; it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; or observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including: adverse changes in the payment status of borrowers in the portfolio; and national or local economic conditions that correlate with defaults on the assets in the portfolio. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. The amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of comprehensive income. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Bank may measure impairment on the basis of an instrument s fair value using an observable market price. Impairment charges relating to loans and advances to banks and customers are classified in impairment charges on the statement of comprehensive income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the statement of comprehensive income.

114 CENTRAL BANK OF SEYCHELLES Page 20 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.7 Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. 2.8 Cash and cash equivalents Cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including foreign currency notes, balances held with banks abroad, holdings of Special Drawing Rights and Reserve Tranche with the International Monetary Fund ( IMF ). 2.9 Currency replacement cost Currency note printing and coin minting costs incurred are deferred and are charged to the statement of comprehensive income. Useful lives are currently estimated to be 5 years but this is reviewed at least annually. The unamortised cost of purchased bank notes in issue is included in Currency replacement cost in the statement of financial position. When notes and coins are returned to the Bank by the commercial banks, Government entities and the general public they are removed from currency in circulation and, depending on their condition or legal tender status, they are either sent for destruction or held for re-issue Property, plant and equipment Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of comprehensive income during the financial year in which they are incurred. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: - Buildings 50 years; - Office furniture and fittings 5 10 years; - Office machine and equipment 4 years; - Motor vehicles 5 years. Depreciation is charged on a pro-rata basis during the year for both acquisition and disposal of property plant and equipment. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

115 CENTRAL BANK OF SEYCHELLES Page 21 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.10 Property, plant and equipment (Continued) An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset s fair value less costs to sell and value in use. No property, plant and equipment were impaired as at 31 December 2010 (2009 NIL). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the statement of comprehensive income Intangible assets Intangible assets comprise computer software licences which are recognised at cost. The computer software has a definite useful life and is depreciated using the straight line method over its useful economic life. At the end of each reporting period, intangible assets are reviewed for indicators of impairment or changes in estimated future economic benefits. If such indications exist, the intangible assets are analysed to assess whether their carrying amount is fully recoverable. An impairment loss is recognised if the carrying amount exceeds the recoverable amount. The Bank chooses to use the cost model for the measurement after recognition. Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable and unique software products controlled by the Bank are recognised as intangible assets when the following criteria are met: - it is technically feasible to complete the software product so that it will be available for use; - management intends to complete the software product and use or sell it; - there is an ability to use or sell the software product; - it can be demonstrated how the software product will generate probable future economic benefits; - adequate technical, financial and other resources to complete the development and to use or sell the software product are available; and - the expenditure attributable to the software product during its development can be reliably measured. Directly attributable costs that are capitalised as part of the software product include the software development employee costs and an appropriate portion of relevant overheads. Other development expenditures that do not meet these criteria are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. Computer software development costs recognised as assets are amortised over their estimated useful lives, which does not exceed five years.

116 CENTRAL BANK OF SEYCHELLES Page 22 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.12 Currency in Circulation Currency in circulation represents money released to the public for circulation. This represents an unserviced liability of the Bank and is recorded in the statement of financial position at its face value Deposits Deposits held by the Bank, whether SCR or foreign deposits are initially measured at fair value and carried at amortised cost in the statement of financial position. Whilst Government deposit earn no interest, commercial bank s demand deposits earn interest only on their minimum reserve requirement (see Note 17). Both deposits are not normally allowed to be overdrawn. In the event of an overdraft on the Government general account and commercial bank s demand deposit accounts, the Bank will grant temporary short term advances and this will be charged at the applicable interest rates. Foreign currency deposit accounts are revalued to reflect the market exchange rate at the reporting date. Long term deposits carry interest and are stated at cost Retirement benefit obligations The Bank operates various types of employee benefits. (a) Defined benefit plan A defined benefit plan defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. (b) Gratuities The Bank also provides for a payment of gratuity to permanent employees. Gratuities are paid every five years (except in the case of early retirement) as from January 2007, for continuous service. The amount provisioned every year is based on the number of years the employee has made. Both types of employee benefits have characteristics of a defined benefit plan. The liability recognised in the statement of financial position in respect of the defined benefit plan is the present value of the defined benefit obligation at the date of the statement of financial position less fair value of plan assets together with adjustments for unrecognised actuarial gains and losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the esitmated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10 percent of the value of plan assets or 10 percent of the defined benefit obligation are charged or credited to the profit or loss over the employees expected average remaining working lives. Past service costs are recognised immediately in the statement of comprehensive income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.

117 CENTRAL BANK OF SEYCHELLES Page 23 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.14 Retirement benefit obligations (Continued) (c) Defined contribution plan A defined contibution plan is a pension plan under which the Bank pays fixed contributions into a separate entity. The Bank has no further payment obligations once the contributions have been paid. The Bank contributes to the Seychelles Pension Fund ( SPF ) in accordance with the Seychelles Pension Fund Act. Payments to the SPF are charged as an expense as they fall due Provisions Provisions for legal claims are recognised when: the Bank has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are made on present value basis Authorised capital The statutory capital of the Bank was established by the CBS Act. The Bank maintains the General Reserve to provide for events which are contingent and non-foreseeable, including covering losses from exceptionally large falls in the market value of its holdings of domestic and foreign securities that cannot be absorbed by its other resources. The initial authorised capital of the Bank was SCR 1 million and thereafter it shall be built to 3.33 percent of monetary liabilities by transferring from retained earnings. All capital stock of the Bank as and when issued shall be for the sole account of the Government and shall not be transferable or subject to encumbrances. As per CBS Act, all authorised capital shall be deemed to be fully paid up Revaluation Reserve The Bank also holds a Revaluation Reserve Account. Gains and losses arising from changes in the valuation of the Bank's assets and liabilities denominated in foreign currencies and other units of account as a result of alterations of parity of the SCR are credited or charged to the statement of comprehensive income and are subsequently transferred to the Revaluation Reserve Account, in accordance with Sections 45(5) and 45(6) of the CBS Act Interest income and expense Interest income and interest expense are recognised in the statement of comprehensive income for all financial instruments measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability and allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instruments to the net carrying amount of these instruments. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or group of similar financial assets have been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

118 CENTRAL BANK OF SEYCHELLES Page 24 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.19 Fees and commission income Commission on foreign exchange dealings are recognised on the dates of transactions. Fees and commissions are generally recognised on an accrual basis when the service has been provided Comparatives Except when a standard or an interpretation permits or require otherwise, all amounts are reported or disclosed with comparative information. Where IAS 8 applies, comparative figures have been restated or regrouped where necessary to conform with changes in presentation in the current year. 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The Bank s financial statements and its financial result are influenced by accounting policies, assumptions, estimates and management judgement, which necessarily have to be made in the course of preparing the financial statements. The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. All estimates and assumptions required in comformity with IFRS are best estimates undertaken in accordance with the applicable standard. Estimates and judgements are evaluated on a continuous basis, and are based on past experience and other factors, including expectation of future events that are believed to be reasonable under the circumstances. Accounting policies and management s judgements for the following are especially critical for the Bank s results and financial situation due to its materiality. Employee benefits The present value of the employee benefits, consisting of gratuity and compensation, depends on a number of factors that are determined on an actuarial basis using a number of assumptions. Any changes in these assumptions will impact the carrying amount of the employee benefit obligations. The main assumption used in determining the net cost/(income) for employee benefits is the discount rate. The Bank determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the employee benefit obligations. In determining the appropriate discount rate, the Bank considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related liability. Other key assumptions for the employee benefits obligations are based on current market conditions. The carrying amount of the defined benefit obligation at 31 December 2010 is SCR 1,553,000 (2009 SCR 1,287,000). Details of the defined benefit obligation is disclosed in Note 21.

119 CENTRAL BANK OF SEYCHELLES Page 25 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued) The financial assumptions used for purposes of these calculations are as follows: Discount rate: 6.0 percent p.a. Salary increase rate: 4.5 percent p.a. It has been assumed that all employees will opt for retirement on reaching age 63. No allowance has been made for withdrawal from service or pre-retirement mortality as the benefits payable in such circumstances are not materially significant and the turnover ratio for cases other than death, retirement or dismissal is low. 4 TRANSFER TO GOVERNMENT CONSOLIDATED FUND Transfer to the Government Consolidated Fund has been carried out in accordance with Section 16(2) of the CBS Act. Movements during the year are as follows: SCR 000 SCR 000 At 01 January 19, ,483 Reversal of transfer Revaluation reserve - ( 55,794) Reversal of transfer Retained earnings - ( 28,707) ,210 66,982 Paid to Government Consolidated Fund ( 19,210) ( 66,982) Transfer from retained earnings 13,426 19, At 31 December (Note 21) 13,426 19,210 ======= ======= Agreement between the Bank and the Ministry of Finance relating to the year 2009 On 31 March 2009, pursuant to an agreement made between the Bank and the Ministry of Finance, it was decided that upon completion of the external audit for the year 2008, the Bank shall: pay seventy percent (70%) of the 2008 audited net profit (SCR 95,688,391) from the Provisional Transfer to the Government Consolidated Fund Account to the Consolidated Fund (SCR 66,981,873); retain the remaining thirty percent (30%) of the Net Profit and the twenty percent (20%) distribution from the Revaluation Reserve Account, in the Provisional Transfer to the Government Consolidated Fund Account as stipulated in section 16 and 28(4) of the CBS Act 2004 amounting to SCR 28,706,518 and SCR 55,794,455 respectively. transfer the remaining thirty percent (30%) of the Net Profit to the Authorised Capital and General Reserve;

120 CENTRAL BANK OF SEYCHELLES Page 26 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 4 TRANSFER TO GOVERNMENT CONSOLIDATED FUND (Continued) Central Bank of Seychelles Act 2004, as amended in Section 16 of the Central Bank of Seychelles Act 2004, as amended in 2009, requires that the distributable earnings of the Bank be calculated as follows: a) net profit, less an amount equal to the total amount of unrealised gains, included in the net profit; b) by adding to the amount remaining after applying paragraph (a), the total amount of unrealised gains in respect of assets, if those unrealised gains, included in the net profit of a previous year, are realised; and c) by the retention of the unrealised valuation losses to the extent that they exceed any balance in the relevant Revaluation Reserve Account. Where the Bank has distributable earnings, 50 percent of those earnings shall be distributed in the following priority to the statutory capital until: a) the Authorised capital reaches 3.33 percent of monetary liabilites; and b) the General Reserve reaches 6.67 percent of monetary liabilities. Any residual distributable earnings remaining after distribution to statutory capital shall be transferred to the Governement Consolidated Fund. Where the distributable earnings of the Bank is less than zero, they shall be offset against the General Reserve.

121 Page 27 CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 5 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2009 ASSETS Foreign currency Local currency Restated 2009 SCR 000 SCR 000 SCR 000 Cash and cash equivalents 2,094,206-2,094,206 Investment securities - 1,133,813 1,133,813 Long term deposits with banks 112, ,499 Loans and advances - 11,306 11,306 Other assets - 6,097 6,097 Currency replacement costs - 4,381 4,381 Property, plant and equipment - 52,779 52,779 Intangible assets Total assets 2,206,705 1,208,409 3,415,114 ========== ========== ========== LIABILITIES Currency in circulation - 555, ,010 Deposits from Government 9, , ,035 Deposits from banks 169, , ,158 Deposits from other financial institutions Other deposits - 14,286 14,286 Open Market Operations - 1,225,821 1,225,821 Other liabilities - 32,790 32,790 International Monetary Fund obligations 355, , Total liabilities 534,578 2,811,619 3,346, EQUITY Capital and Reserves Authorised capital - 48,917 48,917 General reserve - 20,000 20,000 Revaluation reserve Retained earnings Total equity - 68,917 68, Total Equity and Liabilities 534,578 2,880,536 3,415,114 ========== ========== ==========

122 Page 28 CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 6 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2008 ASSETS Foreign currency Local currency Restated 2008 SCR 000 SCR 000 SCR 000 Cash and cash equivalents 1,046,125-1,046,125 Investment securities - 1,001,405 1,001,405 Long term deposits with banks 165,732 40, ,005 Loans and advances - 147, ,398 Other assets - 5,076 5,076 Currency replacement costs - 6,437 6,437 Property, plant and equipment - 51,045 51,045 Intangible assets Total assets 1,211,857 1,251,691 2,463,548 LIABILITIES ========== ========== ========== Currency in circulation - 477, ,573 Deposits from Government 252,521 6, ,071 Deposits from banks - 685, ,178 Deposits from other financial institutions Other deposits - 448, ,533 Open Market Operations - 16,000 16,000 Other liabilities - 164, ,638 International Monetary Fund obligations 167, , Total liabilities 420,258 1,798,769 2,219,027 EQUITY Capital and Reserves Authorised capital - 1,000 1,000 General reserve - 20,000 20,000 Revaluation reserve - 223, ,178 Retained earnings Total equity - 244, , Total Equity and Liabilities 420,258 2,043,290 2,463,548 ========== ========== ==========

123 CENTRAL BANK OF SEYCHELLES Page 29 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 7 CASH AND CASH EQUIVALENTS SCR 000 SCR 000 Balances held abroad and foreign currency notes 2,944,542 1,956,094 Holdings of Special Drawing Rights 142, ,054 Reserve tranche with IMF ,087,247 2,094,206 ========= ========= Current 3,087,247 2,094,206 ========= ========= Included in cash and cash equivalents are pledged and encumbered balances held abroad equivalent to SCR 206,634,279 and SCR 13,876 respectively ( pledged SCR 175,728,107 and encumbered SCR 5,748,270). These represent funds earmarked by the Bank for the purpose of developing projects, foreign currency miniumum reserve requirements of local banks or other pledges and contingent liabilities. 8 INVESTMENT SECURITIES SCR 000 SCR 000 Government treasury bonds - 1,030 Investment in Government treasury bills 1,207,270 1,132, ,207,270 1,133,813 ========= ========= Current 1,207,270 1,132,813 Non-current - 1, ,207,270 1,133,813 ========= ========= During the year under review, the Bank s holding of Government treasury bills carry interest rates as follows: 1.08 percent to 4.45 percent per annum for 91-day ; 3.20 percent to 5.45 percent per annum for 182-day and 2.97 percent to 6.43 percent per annum for 365 day. The Bank s holding of Government treasury bonds were sold out on the secondary market in 2010.

124 Page 30 CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 8 INVESTMENT SECURITIES (Continued) Securities pledged as collateral As at the reporting date, there were no reverse repurchase agreements and as such none of the Bank s securities were pledged as collateral. In 2009, Government treasury bills pledged as collateral amounted to SCR million. 9 LONG TERM DEPOSITS WITH BANKS SCR 000 SCR 000 USD deposit facility with a local bank - 112,499 ========= ========= Current - 112,499 ========= ========= The amount of SCR 112,499,000 in the previous year represented deposit with a local bank and was earning interest at the rate of 0.1 percent per annum. The deposit which was pledged with a local bank for letter of credit provided in favour of the Government matured during the year under review. 10 LOANS AND ADVANCES SCR 000 SCR 000 Staff loans 24,682 11,306 ========= ========= Current 3,574 1,801 Non-current 21,108 9, ,682 11,306 ========= ========= The Bank grants loans to its employees at preferential rates. The loans are initially recognised at fair value, based on the market interest rate, and the difference between the fair value on initial recognition and the loans proceeds is accounted for as prepaid employee benefits and is amortised over the lower of the life of the loan or the remaining working lives of employees. The loan is subsequently measured at amortised cost, using the effective interest rate method, with the effective interest being the market rate of interest of the type of loan at the initial recognition date.

125 CENTRAL BANK OF SEYCHELLES Page 31 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 11 OTHER ASSETS SCR 000 SCR 000 Cheques held for clearing 19,329 3,127 Items due and not received 1,896 1,847 Others 1,513 1, ,738 6,097 ========= ========= Current 22,738 6,097 ========= ========= 12 CURRENCY REPLACEMENT COSTS SCR 000 At 1 January 2009 Acquisition cost 10,678 Accumulated amortisation ( 4,241) Net book value 6, Year ended 31 December 2009 Opening net book value 6,437 Amortisation charge ( 2,056) Closing net book value 4, At 31 December 2009 Acquisition cost 10,678 Accumulated amortisation ( 6,297) Net book value 4, Year ended 31 December 2010 Opening net book value 4,381 Additions 10,279 Amortisation charge ( 2,517) ========= Closing net book value 12,143 =========

126 CENTRAL BANK OF SEYCHELLES Page 32 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 13 PROPERTY, PLANT AND EQUIPMENT Office furniture Office machine Motor Land Buildings and fittings and equipment vehicles Total SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 At 1 January 2009 Acquisition cost 2,200 55,214 2,800 4,531 1,482 66,227 Accumulated depreciation - ( 8,633) ( 2,208) ( 3,974) ( 367) ( 15,182) Net book value 2,200 46, ,115 51, Year ended 31 December 2009 Opening net book value 2,200 46, ,115 51,045 Additions - 2, , ,011 Disposals - ( 4) - ( 4) ( 473) ( 481) Depreciation charge - ( 864) ( 140) ( 626) ( 166) ( 1,796) Closing net book value 2,200 48, , , At 31 December 2009 Acquisition cost 2,200 57,581 3,111 5,713 1,152 69,757 Accumulated depreciation - ( 9,497) ( 2,348) ( 4,600) ( 533) ( 16,978) Net book value 2,200 48, , , Year ended 31 December 2010 Opening net book value 2,200 48, , ,779 Additions , ,852 Disposals - - ( 11) ( 50) ( 47) ( 108) Depreciation charge - ( 1,161) ( 216) ( 626) ( 134) ( 2,137) ========= ========= ========= ========= ========= ========= Closing net book value 2,200 47,836 1,367 1,896 1,087 54,386 ========= ========= ========= ========= ========= =========

127 CENTRAL BANK OF SEYCHELLES Page 33 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 14 INTANGIBLE ASSETS Computer software SCR 000 At 1 January 2009 Acquisition cost 114 Accumulated amortisation ( 57) Net book value Year ended 31 December 2009 Opening net book value 57 Additions 5 Amortisation charge ( 29) Closing net book value At 31 December 2009 Acquisition cost 119 Accumulated amortisation ( 86) Net book value Year ended 31 December 2010 Opening net book value 33 Additions 11,234 Amortisation charge ( 264) ======= Closing net book value 11,003 =======

128 CENTRAL BANK OF SEYCHELLES Page 34 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 15 CURRENCY IN CIRCULATION Notes and coins in circulation are shown at face value, net of the notes and coins held in the tills and vaults at the Bank SCR 000 SCR 000 Notes issued 622, ,450 Coins issued 31,197 28, Total notes and coins issued 653, ,010 ========== ========== Current 653, ,010 ========== ========== 16 DEPOSITS FROM GOVERNMENT Government Foreign Exchange Deposits (Project Accounts) SCR 000 SCR 000 Government rupee deposits 482, ,647 Government foreign exchange deposits (project accounts) 13,613 9,328 Government deposits with IMF Central Bank of Seychelles blocked foreign deposits , ,035 ========== ========== Current 496, ,035 ========== ========== These represent amounts deposited by the Government at the Bank and have been earmarked for specific local projects to be undertaken by the Government. The deposits are denominated in foreign currencies and are non-interest bearing.

129 CENTRAL BANK OF SEYCHELLES Page 35 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 17 DEPOSITS FROM BANKS Restated Restated SCR 000 SCR 000 SCR 000 Banks demand deposits 899, , ,534 Foreign currency minimum reserve requirement 192, ,657 - Pipeline deposit accounts (repayable on demand) - - 4,805 Deposit facility from a local bank 40,273 40,273 42, ,132, , ,178 ========== ========== ========== Current 1,132, , ,339 Non-current , ,132, , ,178 ========== ========== ========== (a) Bank demand deposits Commercial banks hold demand deposit accounts with the Bank to facilitate settlement of interbank transactions. Furthermore, as per regulations issued under the CBS Act, they are required to maintain a minimum amount which is adjusted on the basis of the monetary policy stance as approved by the Board of Directors. In 2009, the banks were paid interest on the minimum statutory required reserves of 10 percent of the liable rupee deposits at 0.25 percent up to 31 March This was revised in April 2009 whereby rupee reserves above a 10 percent threshold were paid interest at a rate equivalent to half the weighted average lending rate charged by the banks to their customers. Remuneration on rupee reserve up to 10 percent remained at an interest rate of 0.25 percent. On 01 October 2009, the minimum reserve requirement for SCR deposits amounted to 10 percent of their customers' deposits (Rupee deposits held as demand, savings and time deposits and the equivalent in SCR of foreign currency deposits held by residents but exclude inter-bank and foreign currency deposits held by non-residents) and earn interest at 25 basis points. In 2010, whilst the minimum statutory reserves requirement was maintained at 10 percent, the remuneration was revised as follows; increased to 1.75 percent in February, reduced to 1.00 percent in August and to 0.75 percent in October. (b) Foreign Currency Minimum Reserve Requirement Since its introduction in April 2009, the Bank has not paid any interest on foreign currency reserve requirement in view of the low interest earned by the Bank on its overnight placements in US dollar and Euro. This arrangement continued in (c) Deposit facility from a local bank The deposit from a local bank carried interest at 5.00 percent per annum up to 30 December The deposit was renewed on 31 December 2010 for a 3 months period at the market rate of the 91 day treasury bills at 0.48 percent per annum. Interest is payable monthly in SCR.

130 CENTRAL BANK OF SEYCHELLES Page 36 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 18 DEPOSITS FROM OTHER FINANCIAL INSTITUTIONS SCR 000 SCR 000 Demand deposit 44,641 - ========== ========== Current 44,641 - ========== ========== Other financial institutions hold demand deposit accounts with the Bank to facilitate inter-bank and other external transactions. The deposits are non-interest bearing and repayable on demand. 19 OTHER DEPOSITS SCR 000 SCR 000 Special deposits Abandoned property account 9,254 7,393 Policy Owner s Protection Fund 7,053 5,815 Others 1, ,225 14,286 ========== ========== Current 18,225 14,286 ========== ========== (a) Abandoned Property Account As per the Financial Institutions Act 2004, as amended in 2009, commercial banks are required to publish and report to the Bank, abandoned/dormant accounts of clients, where no transaction has been made for at least 10 years. In the 11th year, unclaimed funds are transferred to the Bank. The Abandoned Property Account is non interest bearing and refundable to the clients on demand. (b) Policy Owner s Protection Fund ( POPF ) In accordance with section 88 of the Insurance Act 2008, the Bank shall establish and maintain a POPF for the purpose of: - indemnifying and compensating or assisting or protecting policy owners and others who have been prejudiced in consequence of the inability of registered insurers to meet their liability under life policies and compulsory insurance policies issued by them; - compensating persons in respect of damage arising out of the use of a motor vehicle on a road, whether or not such use is required to be covered by a policy of insurance in respect of third party risks under the Motor Vehicles Insurance (Third Party Risks) Act. In compliance with section 89 of the Act a general business levy and a life business levy of 1% of premiums is imposed and paid annually to this account by every domestic licensed insurers.

131 CENTRAL BANK OF SEYCHELLES Page 37 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 20 OPEN MARKET OPERATIONS Restated Restated SCR 000 SCR 000 SCR 000 Reverse Repurchase Agreement - 375,000 - Deposit Auction Arrangement 1,095, ,821 16, ,095,000 1,225,821 16,000 ========= ========= ========= Current 1,095,000 1,225,821 16,000 ========= ========= ========= In the pursuit of continuing implementation of the monetary policy reforms, the Bank developed the scope and accuracy of its Monetary Policy Framework to attain its overall objective of price stability through the Reserve Money Targeting Program. (a) Reverse Repurchase Agreement The Reverse Repurchase Agreement ( RRA ) is a liquidity management tool which involves the withdrawal of liquidity whereby the Bank sells securities to commercial banks at a specific price, with an understanding to repurchase the same securities at the original selling price at a particular future date. As at reporting date, there were no RRA transaction in the books of the Bank. The amount of SCR 375 million in 2009 carried interest rates ranging from 3.75 percent to 4.5 percent per annum matured during the year. (b) Deposit Auction Arrangement The Deposit Auction Arrangement ( DAA ) which is an Open Market Operation, is a liquidity management tool made available by the Bank to the commercial banks for better liquidity management by both parties. The Bank uses the instrument to mop up excess liquidity in the system whilst the commercial banks use it as a convenient means for them to invest their excess reserves and earn a competitive return. Following its introduction in September 2008, the Bank offered deposits with maturities in multiples of seven (7) days but no greater than ninety-one (91) days. Under this scheme, commercial banks are called to state the amount of funds they would like to bid in any of these maturities at the desired interest rate. The Monetary Operation Committee of the Bank decides whether to accept or reject any bid as guided by the liquidity position in the financial system and depending on the sterilisation needs. In previous years the DAA were classified under Deposits from Banks (Note 17) and in view of the purpose of using this instrument in the monetary operations of the Bank, the DAA has been reclassified under Open Market Operations. At the reporting date, the amount of SCR 1,095 million was held by the Bank and had a maturity periods of 7, 14 and 28 days. In 2009, the corresponding figure stood at SCR million with maturity periods of 7, 14 and 28 days.

132 CENTRAL BANK OF SEYCHELLES Page 38 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 21 OTHER LIABILITIES SCR 000 SCR 000 Payable to Government Consolidated Fund (Note 4) - Transfer from retained earnings 13,426 19,210 Provision for staff gratuities - contractual 1,362 1,121 Provision for staff gratuities continuous (Note 21(a)) Provision for staff compensation (Note 21(a)) 1,232 1,028 Items due and not yet paid 4,855 5,935 Others 6,071 5, ,267 32,790 ========= ========= Current 27,267 32,790 ========= =========

133 Page 39 CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 21 OTHER LIABILITIES (Continued) (a) Employee Benefit Obligations Total Compensation Gratuity (continuous) SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 Present value of unfunded obligation 2,880 2,008 2,559 1, Unrecognised actuarial loss ( 1,327) ( 721) ( 1,327) ( 721) Liability recognised in the statement of financial position at the end of the year 1,553 1,287 1,232 1, ========= ========= ========= ========= ========= ========= Current service cost Interest cost Actuarial loss recognised Total included in staff costs ========= ========= ========= ========= ========= ========= Movements in liability recognised At 01 January 1,287 1,268 1,028 1, Total expenses as above Contributions and benefits paid ( 336) ( 375) ( 178) ( 276) ( 158) ( 99) At 31 December 1,553 1,287 1,232 1, ========= ========= ========= ========= ========= ========= Discount rate 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% Future salary increases 4.50% 4.50% 4.50% 4.50% - -

134 CENTRAL BANK OF SEYCHELLES Page 40 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 21 OTHER LIABILITIES (Continued) (a) Employee Benefit Obligations (Continued) Total Compensation Gratuity (continuous) SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 Present value of obligation: At 01 January 2,008 1,443 1,749 1, Current service cost Interest cost Benefits paid ( 336) ( 375) ( 178) ( 276) ( 158) ( 99) Liability gain ,880 2,008 2,559 1, ========= ========= ========= ========= ========= ========= Fair value of plan assets: Employer contributions Benefits Paid ( 336) ( 375) ( 178) ( 276) ( 158) ( 99) At 31 December ========= ========= ========= ========= ========= ========= Fair value of plan assets Present value of defined obligation ( 2,880) ( 2,008) ( 2,559) ( 1,749) ( 321) ( 259) Deficit ( 2,880) ( 2,008) ( 2,559) ( 1,749) ( 321) ( 259) Asset experience gain/(loss) Liability experience gain/(loss) ( 690) ( 586) ( 626) ( 548) ( 64) ( 38) Expected employer contribution The Bank does not have any plan assets as the employee benefit relates to unfunded obligation in relation to compensation and gratuities.

135 CENTRAL BANK OF SEYCHELLES Page 41 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 22 INTERNATIONAL MONETARY FUND OBLIGATIONS SCR 000 SCR 000 Purchases outstanding - Stand By Arrangement and Extended Fund Facility 378, ,520 Allocation of Special Drawing Rights 154, ,073 IMF no. 1 account IMF no. 2 account , ,097 ========= ========= Current 155, ,577 Non-current 378, , , ,097 ========= ========= Seychelles became a member of the IMF on 30 June 1977 and was initially assigned a quota of XDR1,000,000. The quota allocation determines the financial and organisational relation with the IMF. Subsequent increases in quota subscription were effected over the years; the last increase effected on 10 February 1999 brought the quota subscription to XDR 8,800,000 and remained unchanged as at reporting date. The portion payable in SCR is paid by way of non-negotiable, non-interest bearing promissory notes issued by the Government in favour of the IMF, which are repayable on demand. These promissory notes are lodged with the Bank acting as custodian for the IMF. Seychelles maintained the following balance sheet accounts with the IMF under heading IMF Obligation: IMF Purchases Outstanding Account: SDR Allocation Account, IMF No.1 Account and IMF No. 2 Account. Other balance sheet accounts classified under cash and cash equivalents include SDR Holdings Account and Reserve Tranche Account. Seychelles also holds an off balance sheet item called the IMF Securities Account backed by Government issued promissory notes amounting to SCR 515,384,317 as at the reporting date (2009 SCR 454,849,305). SDR Allocations are subject to charges while SDR holdings earn interest on a quarterly basis. The IMF Purchases Outstanding account was opened in November 2008 as a result of the IMF Reform Programme. In support of the IMF Reform Programme, the Government was granted a two-year Stand-by Arrangement for an amount of XDR 17.6 million (200 percent of quota). Under the Stand-by Arrangement XDR 11.0 million has been disbursed. In December 2009, the Government was granted continued support for their reform effort through a three-year arrangement under the Extended Fund Facility ( EFF ). This was a new arrangement which replaced the Stand-by Arrangement. Under the EFF an amount of XDR 19.8 million (equivalent to 225 percent of quota) was granted of which XDR 8.36 million was disbursed in 2010 (2009 XDR 0.88 million). The Bank revalues the IMF accounts in its Statement of Financial position in accordance with the practices of the IMF Treasury Department. In general, the revaluation is effected annually on 30 April and whenever the Fund makes use of SCR in accordance with the IMF designated plan. For accounting purposes, the IMF accounts have been revalued using exchange rates at the reporting date.

136 Page 42 CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 22 INTERNATIONAL MONETARY FUND OBLIGATIONS (Continued) The repayment terms are as follows: XDR 000 SCR 000 XDR 000 SCR years 8, ,640 3,410 60,140 Over 3 years 11, ,901 8, , Total 20, ,541 11, ,520 ========= ========= ========= ========= 23 STATUTORY CAPITAL SCR 000 SCR 000 Authorised capital 97,746 48,917 General reserve 172,597 20, ,343 68,917 ========= ========= As per section 14 of the Central Bank of Seychelles Act 2004, as amended in 2009, the initial authorised capital of the Bank shall be SCR 1,000,000 and accumulate as per the distributable earnings (see Note 4) in section 16 of the Act. The statutory capital of the Bank shall be 10 percent of monetary liabilities of which 3.33 percent shall relate to authorised capital and the remaining 6.67 percent shall relate to General reserve. (a) Authorised Capital In 2010, the Government recapitalised the Bank through the issuance of marketable securities of which SCR 36.6 million was used to build the Authorised Capital. In addition, transfer from distributable profit of SCR million resulted in the Authorised Capital to reach the set limit (2009 limit was 1.9 percent) as per the CBS Act.

137 CENTRAL BANK OF SEYCHELLES Page 43 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 23 STATUTORY CAPITAL (Continued) (b) General Reserve The General Reserve shall be established and maintained in accordance with Section 15 of the Central Bank of Seychelles Act 2004, as amended in Transfer to the General Reserve shall be made from distributable earnings until it reaches 6.67 percent of monetary liabilities. However, in 2010 the Government recapitalised the Bank through the issuance of marketable securities of which SCR million was used to build the General Reserve. In addition, transfer from distributable profit of SCR 1.24 million resulted in the General Reserve to reach 5.88 percent of monetary liabilities ( percent). Where the distributable earnings of the Bank is less than zero, they shall be offset against the General Reserves. Where the General Reserves accumulates a balance of less than zero, the Government shall within 30 days of publication of the annual accounts, recapitalise by transfering marketable securities to the ownership of the Bank to restore the General Reserve to zero. 24 REVALUATION RESERVE Gains and losses arising from changes in the valuation of the Bank's assets and liabilities denominated in foreign currencies and other units of account as a result of alterations of parity of the Seychelles rupee have been credited or charged to the statement of comprehensive income and subsequently transferred to the revaluation reserve account in accordance with Section 45(5) and 45(6) of the Central Bank of Seychelles Act 2004, as amended in INTEREST INCOME SCR 000 SCR 000 Interest on investment securities 54, ,191 Interest on deposits with banks 26,336 5,132 Interest on loans and advances to Government - 1,303 Interest on advances to staff and local banks , ,609 ========= =========

138 CENTRAL BANK OF SEYCHELLES Page 44 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 26 INTEREST EXPENSE SCR 000 SCR, 000 Interest on Minimum Reserve Requirement 5,996 4,562 Interest on Deposit Auction Arrangement 8,622 18,927 Interest on fixed deposit with local banks 3,222 3,222 Interest on reverse repurchase agreements 19,385 11,993 Other interests ,295 38,717 ========= ========= 27 FEES AND COMMISSION INCOME SCR 000 SCR 000 Commission 43,517 59,684 Licence fees - Financial institutions 3, Licence fees Insurance companies Deficiency fees - Minimum Reserve Requirement - 1, ,383 62,787 ========= ========= 28 GAINS/(LOSSES) ARISING FROM DEALINGS IN FOREIGN CURRENCIES SCR 000 SCR 000 Foreign currency transactions (realised) ( 2,818) ( 23,079) Revaluation of foreign currency monetary assets and liabilities (unrealised) 146,939 ( 440,696) ,121 ( 463,775) ========= =========

139 CENTRAL BANK OF SEYCHELLES Page 45 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 29 STAFF COSTS SCR 000 SCR 000 Salaries and allowances 19,697 15,442 Staff training 9,766 4,736 Other staff costs 3,567 3, ,030 23,940 ========= ========= 30 CURRENCY EXPENSES SCR 000 SCR 000 Notes and coins expense Amortisation of currency replacement cost (Note 12) 2,517 2, ,684 2,172 ========= ========= 31 PROFESSIONAL CHARGES SCR 000 SCR 000 Fees paid payable to auditor: - Statutory audit Audit related services Others Consultancy fees 1,347 1,118 Legal fees Directors fees and allowances Others 2, ,003 3,417 ========= =========

140 CENTRAL BANK OF SEYCHELLES Page 46 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 32 RECONCILIATION OF NET PROFIT TO NET CASH FLOWS FROM OPERATIONS SCR 000 SCR 000 Net profit/(loss) for the year 173,791 ( 240,895) Adjustments for: Provisions for employee benefits Interest receivable ( 81,249) ( 235,609) Interest payable 37,295 38,717 Depreciation and amortisation charges 2,401 1,825 Amortisation of currency replacement costs 2,517 2,056 Loss on disposal of property, plant and equipment Operating cash flows from/(used in) income and expenses 135,021 ( 433,678) Increase/(decrease) in deposits 519,495 ( 220,172) (Decrease)/increase in Open Market Operations ( 130,821) 1,209,820 (Decrease)/increase in other liabilities ( 3) 403 Decrease in placements with banks 112,499 93,506 (Increase)/decrease in loans and advances ( 13,376) 136,092 Increase in other assets ( 15,658) ( 1,021) Interest paid ( 41,155) ( 34,848) Operating cash flows from changes in operating assets and liabilities 430,981 1,183, Net cash generated from operations 566, ,102 ========== ==========

141 CENTRAL BANK OF SEYCHELLES Page 47 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 33 RELATED PARTY TRANSACTIONS In the normal course of its operations, the Bank enters into transactions with related parties. Related parties include Government and key management personnel, consisting of members of the Board of Directors, with voting powers. Unless stated, all transactions with related parties take place at arm s length. As banker to the Government, the following are transactions entered into: Banking services; Foreign exchange transactions; Payment and settlement facility; Investment in Government Securities; Agent to the Government in raising domestic debt; Material transactions with the Government are as follows: SCR 000 SCR 000 Purchase of foreign currency 1,158,928 1,731,766 Sale of foreign currency 606,428 1,157,232 Investment in Government Securities 1,207,270 1,133,813 The Bank, in its capacity as fiscal agent to the Government in raising domestic debt, executes auctions, carries out back office operations, promotes the development of financial markets, works towards improving trading and settlement infrastructure. The Bank executed the following treasury bills auction: Year ended 31 December SCR 000 SCR day treasury-bills 376,000 3,924, day treasury-bills 497,053 1,227, day treasury-bills 312, , Total 1,185,053 5,800,585 ========= =========

142 CENTRAL BANK OF SEYCHELLES Page 48 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 33 RELATED PARTY TRANSACTIONS (Continued) Other transactions with the Government consist of receipts and payments in SCR made on behalf of the Government. Outstanding balances from the Government consist of Investment securities whilst outstanding balances to the Government consist of deposits from Government and the payable to the Government Consolidated Fund under Other Liabilities, as disclosed in the financial statements and its notes. Key Management Personnel Key Management Personnel comprise the Governor, Deputy Governor and the Non-Executive board members. The latter are considered to be part of the key management personnel as they have the authority and responsibility for planning, directing and controlling the activities of the Bank. The aggregate remuneration paid to key management personnel comprised: SCR 000 SCR 000 Salary and allowances 3,413 2,011 Car benefits Short-term benefits Total 3,769 2,238 ======== ======== Movements in loans to key management personnel are as follows: SCR 000 Balance as at 01 January Total loans granted 3,623 Total repayments ( 306) Balance as at 31 December ,833 Total loans granted 929 Total repayments ( 654) Balance as at 31 December ,108 ========

143 CENTRAL BANK OF SEYCHELLES Page 49 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT The Bank's functional obligations requires it to take risks and limits its ability to manage them. The Bank is exposed to a variety of financial risks: market risk, credit risk and liquidity risk. A description of the significant risk factors is given below together with the risk management policies applicable. (i) Market risk Market risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises interest rate risk, currency risk and other price risk. In respect of the Bank, market risk arises from open positions in interest bearing and foreign currency denominated financial instruments, all of which are exposed to general and specific market movements. The Bank's exposure to market risk is the result of both trading and asset/liability management activities. The market risk is managed by limiting transaction to mature markets. (a) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Interest rate risk is managed as follows: Foreign reserve interest rate risk management Interest rate risk increases or reduces the total return on the portfolio which consists mainly of demand and short term deposits and is measured by daily calculation of the effective portfolio duration of the foreign exchange reserves and comparison with the interest rate benchmark specified in the Reserve Management Guidelines. The limits on interest rate risk aim to avoid reporting losses as a result of market valuation changes over a one year reporting period. Domestic market operations interest rate risk The Bank s exposure to interest rate risk that arises from domestic market operations is constrained by an effective duration limit, which ensures that interest rate exposures are of short-term nature, such as standing credit facility, short-term reverse repurchase agreements to banks and investment in Government treasury bills. The Bank cannot manage interest rate risk in view that interest rate is a policy tool used by the Bank.

144 CENTRAL BANK OF SEYCHELLES Page 50 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (i) (a) Market risk (Continued) Interest rate risk (Continued) The table below summarises concentration of the interest rate re-pricing risk categorised by the earlier of contractual re-pricing or maturity dates: As at 31 December 2010 Financial assets Demand and 1 to 3 3 to 12 1 to 5 Over 5 Non-interest up to 1 Month months months years years bearing Total SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 Cash and cash equivalents 3,062, ,592 3,087,247 Investment securities 768, ,218 62, ,207,270 Loans and advances ,559 10,195 10,913-24,682 Other assets ,738 22, Total financial assets 3,832, ,807 64,640 10,195 10,913 47,330 4,341, Financial liabilities Currency in circulation , ,864 Deposits from Government , ,665 Deposits from banks 1,092,308 40, ,132,581 Deposits from other financial institutions 44, ,641 Other deposits ,225 18,225 Open Market Operations 1,095, ,095,000 Other liabilities ,714 25,714 International Monetary Fund obligations 154, , , , Total financial liabilities 2,386,853 40, , ,036 1,194,968 4,000, Net financial position 1,445, ,534 64,640 ( 259,309) ( 98,123) ( 1,147,638) 341,303 ========== ========== ========== ========== ========== ========== ==========

145 CENTRAL BANK OF SEYCHELLES Page 51 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (i) (a) Market risk (Continued) Interest rate risk (Continued) Demand and up to 1 Month 1 to 3 months 3 to 12 months 1 to 5 years Over 5 years Non-interest bearing Total SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 As at 31 December 2009 Financial assets Cash and cash equivalents 1,942, ,201 2,094,206 Investment securities 747, ,000-1, ,760 1,133,813 Long term deposits with banks , ,499 Loans and advances ,332 4,752 4,752-11,306 Other assets ,097 6, Total financial assets 2,689, , ,831 5,752 4, ,058 3,357, Financial liabilities Currency in circulation , ,010 Deposits from Government , ,035 Deposits from banks 740,885-40, ,158 Other deposits ,286 14,286 Open Market Operations 1,225, ,225,821 Other liabilities ,503 31,503 International Monetary Fund obligations 146, , , Total financial liabilities 2,112,779-40, , ,338 3,344, Net financial position 576, ,313 73,558 ( 203,768) 4,752 ( 688,280) 13,011 ========== ========== ========== ========== ========== ========== ==========

146 CENTRAL BANK OF SEYCHELLES Page 52 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (i) (a) Market risk (Continued) Interest rate risk (Continued) Sensitivity to Interest Rate Risk The table below presents the sensitivity analysis of the Bank s financial assets and liabilities in relation to changes in interest rates. Total gain/(loss) impacting Statement of comprehensive income Total gain/(loss) impacting Statement of comprehensive income SCR 000 SCR 000 Impact of: An increase of 100 basis point in the domestic market interest rates 272 1,221 A decrease of 100 basis point in the domestic market interest rates ( 272) ( 1,221) An increase of 100 basis point in the market interest rates for foreign currencies 4 58 A decrease of 100 basis point in the market interest rates for foreign currencies ( 4) ( 58) Exposure to interest rate risk might not change materially both on foreign and local financial assets given the conservative approach of the Bank as directed by the reserve management guidelines and monetary policy in the open market operations, respectively. (b) Currency risk Currency risk refers to the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign exchange rates. The Bank s foreign reserves management function requires it to operate internationally and assume material exposures to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows primarily with respect to the United States Dollar, the Euro, Pound Sterling, Australian Dollar and IMF Special Drawing Rights. The Bank s functional responsibilities prevent it from hedging against currency risk. Exchange gains and losses arising from the revaluation of assets and liabilities denominated in foreign currencies are accounted in the statement of comprehensive income and are transferred to the Revaluation Reserve Account in accordance with Section 16 of the Central Bank of Seychelles Act 2004, as amended in 2009.

147 CENTRAL BANK OF SEYCHELLES Page 53 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (i) (b) Market risk (Continued) Currency risk (Continued) The table below discloses all on balance sheet financial assets and financial liabilities by concentration of currency risk. Euro US $ GBP XDR SCR AUD Others Total As at 31 December 2010 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 Financial assets Cash and cash equivalents 775,632 1,355, , , ,201-3,087,247 Investment securities ,207, ,207,270 Loans and advances , ,682 Other assets , , Total financial assets 775,632 1,355, , ,705 1,254, ,201-4,341, Financial liabilities Currency in circulation , ,864 Deposits from Government 11,026 2, , ,665 Deposits from banks 77, , , ,132,581 Deposits from other financial institutions , ,641 Other deposits , ,225 Open Market Operations ,095, ,095,000 Other liabilities , ,714 International Monetary Fund obligations , , Total financial liabilities 88, , ,444 3,260, ,000, Net financial position 687,507 1,237, ,406 ( 390,739) ( 2,006,190) 707, ,303 ========== ========== ========== ========== ========== ========== ========== ==========

148 CENTRAL BANK OF SEYCHELLES Page 54 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (i) (b) Market risk (Continued) Currency risk (Continued) Euro US $ GBP XDR SCR AUD Others Total SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 As at 31 December 2009 Financial assets Cash and cash equivalents 865,316 1,063,837 26, , ,094,206 Investment securities ,133, ,133,813 Long term deposits with banks - 112, ,499 Loans and advances , ,306 Other assets , , Total financial assets 865,316 1,176,336 26, ,054 1,151, ,357, Financial liabilities Currency in circulation , ,010 Deposits from Government 1,321 8, , ,035 Deposits from banks 69, , , ,158 Other deposits , ,286 Open Market Operations ,225, ,225,821 Other liabilities , ,503 International Monetary Fund obligations , , Total financial liabilities 70, , ,593 2,810, ,344, Net financial position 794,580 1,068,087 26,941 ( 217,539) ( 1,659,116) ,011 ========== ========== ========== ========== ========== ========== ========== ==========

149 CENTRAL BANK OF SEYCHELLES Page 55 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (i) (b) Market risk (Continued) Currency risk (Continued) Sensitivity to foreign currency risk The table below presents the sensitivity analysis of the Bank s financial assets and liabilities in relation to changes in exchange rates. Impact of: Total gain/(loss) impacting Statement of comprehensive income Total gain/(loss) impacting Statement of comprehensive income SCR 000 SCR 000 An appreciation of 5% in the value of the Seychelles Rupees against all other currencies. ( 117,415) ( 83,636) A depreciation of 5% in the value of the Seychelles Rupees against all other currencies. 117,415 83,636 The Bank s exposure to foreign currency risk can change materially over time given that the net exposure to foreign currency is expected to continue to rise based on the new adopted Reserve Management guidelines and the Bank s monetary policy. Foreign currency risk is limited to Bank s foreign currency short term deposit. (c) Other price risk Other price risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. The Bank has no exposure to other price risk.

150 CENTRAL BANK OF SEYCHELLES Page 56 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (ii) Credit risk Credit risk refers to the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. (a) Credit risk measurement The Bank s maximum exposure is reflected in the carrying amount of financial assets in the statement of financial position. The Bank manages its credit risks by adopting a practice of investing international reserves in short term deposit instruments so as to ensure that the necessary level of liquid assets is always maintained and holding demand deposits only with counterparts with high credit worthiness such as other Central Banks, the Bank for International Settlements and international commercial banks as guided by the Bank s Reserve Management guidelines. As such, the Bank is not exposed to significant credit risk, which is the risk that its counterparties will be unable to fulfil their contractual obligations. Credit risk related to the placement of deposits with international commercial banks, including correspondent banks, is guided by credit ratings obtained from Standard and Poor s, Moody s Investors Services, or Fitch Ratings. To be eligible for deposits, including holdings on correspondent account, the international bank must be rated AA and equivalent ratings, or better, by any one of these agencies. The Bank currently holds deposits with ratings not meeting these criteria which will be reviewed in accordance with the revised reserve management guidelines. To limit credit risk, no more than 15 percent of reserves are invested in claims on international commercial banks. To diversify exposure to international commercial banks, no more than 2 percent of the foreign exchange reserves, are placed with any international commercial bank at any time. Reflecting uncertainties regarding banks, the maturity of international commercial banks deposits should not exceed 6 months. Investment with international commercial banks would best take the form of tradable instruments such as certificates of deposit, as these are more liquid and exposure can be cut in case of downgrades. The maturity of investments in tradable instruments of banks can exceed 6 months. The exposure to credit risk in the local markets is limited due to the largest amount of domestic financial assets in the portfolio of Government securities which carries sovereign risk. Furthermore, given that the Bank is the regulatory authority for banks, any investment and transactions with them such as reverse repurchase agreement and foreign currency swap will be treated as low risk as such transactions are secured. The following table presents the Bank s financial assets based on Standard & Poor s, Fitch and Moody s credit rating of the issuer. AAA is the rating used for identification of highly reliable international financial institutions such as the Bank for International Settlements. This rating indicates the entity has an extremely strong capacity to pay interest and principal. AA is a high grade-rating, indicating a very strong capacity and A is an upper-medium grade, indicating a strong capacity to pay interest and principal. BBB is the lowest investment grade-rating, indicating a medium capacity to pay interest and principal. Ratings lower than AAA can be modified by + or signs to indicate relative standing within the major categories. N/R indicates the entity has not been rated by Standard & Poor.

151 CENTRAL BANK OF SEYCHELLES Page 57 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (ii) (a) Credit risk (Continued) Credit risk measurement (Continued) Financial assets Cash and cash equivalents - Demand deposits Credit Rating % of % of Amount Financial Amount Financial SCR 000 Assets SCR 000 Assets AAA 2,905, % 1,939, % A 14, % - 0% A+ - 0% 42 0% B+ - 0% 2, % BBB % - 0% - SDR holdings AAA 142, % 138, % - Foreign currency cash No risk 24, % 14, % Investment in Government securities B+ 1,207, % - 0% B- - 0% 1,133, % Loans and advances N/R 24, % 11, % Long term deposit with banks N/R - 0% 112, % Other assets N/R 22, % 6, % ,341, % 3,357, % ========== ========== ========== ========== As at the reporting date, the Bank held SCR 19,425,954 (2009 SCR 11,305,894) as collateral on its financial assets on resident counterparts. (b) Concentration of risk - Geographical sectors The table below breaks down the Bank s main credit exposure at the carrying amounts, as categorised by geographical region as of 31 December Exposures have been allocated by region based on the country of domicile of its counterparties.

152 CENTRAL BANK OF SEYCHELLES Page 58 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (ii) (b) Credit risk (Continued) Concentration of risk - Geographical sectors (Continued) Europe US Seychelles Other countries Total SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 At 31 December 2010 Financial Assets Cash and cash equivalents 2,888, ,624 24, ,087,247 Investment securities - - 1,207,270-1,207,270 Loans and advances ,682-24,682 Other assets ,738-22, Total financial assets 2,888, ,624 1,279, ,341,937 ========== ========== ========== ========== ========== At 31 December 2009 Financial Assets Cash and cash equivalents 1,896, ,183 14,148 2,489 2,094,206 Investment securities - - 1,133,813-1,133,813 Long term deposit with Banks , ,499 Loans and advances ,306-11,306 Other assets - - 6,097-6, Total financial assets 1,896, ,183 1,277,863 2,489 3,357,921 ========== ========== ========== ========== ========== As at the reporting date, the Bank did not have any assets that was past due or impaired and has not experienced such situation in the past.

153 CENTRAL BANK OF SEYCHELLES Page 59 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (iii) Liquidity risk Liquidity risk refers to the risk that the Bank will encounter difficulty in meeting obligations associated with financial liabilities. It refers to the possible difficulties in selling (liquidating) large amounts of assets quickly, possibly in a situation where market conditions are also unfavourable, resulting in adverse price movement. Given its power to issue the national currency, the Bank s exposure to liquidity risk is limited to its foreign currency positions. To that end, the liquidity of each financial instrument eligible for investment is duly considered by the Bank before an investment is made. As per the reserve management guidelines, to reduce liquidity risk of the total reserve portfolio, a minimum of 20 million US dollar equivalent of reserves shall be invested in cash and overnight deposits with other central banks and eligible commercial banks. To reduce liquidity risk of investment in debt securities, debt instruments with maturity of up to 6 months shall have an issue amount equivalent to at least US Dollar 250 million, and with maturity exceeding 6 months equivalent to at least US Dollar 500 million. At the reporting date, no such instrument was in issue. (a) Contractual maturity of financial assets and liabilities The table below analyses the Bank s financial assets and liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the maturity table are the undiscounted cash flows. Such undiscounted cash flows differ from the amount included in the statement of financial position which is based on discounted cash flows. Balances due within one month equal their carrying balances, as the impact of discounting is not significant.

154 CENTRAL BANK OF SEYCHELLES Page 60 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (iii) (a) Liquidity risk (Continued) Contractual maturity of financial assets and liabilities (Continued) Demand and up to 1 month 1 to 3 months 3 to 12 months 1 to 5 years Over 5 years Total SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 At 31 December 2010 Financial liabilities Currency in circulation 653, ,864 Deposits from Government 496, ,665 Deposits from banks 1,092,308 40, ,132,629 Deposits from Other Financial Institutions 44, ,641 Other deposits 18, ,225 Open Market Operations 1,095, ,095,095 Other liabilities 25, ,714 International Monetary Fund obligations 154,904 1,244 3, , , , Total financial liabilities 3,581,416 41,565 3, , ,429 4,023, Financial assets Cash and cash equivalents 3,087, ,087,247 Investment securities 771, ,018 63, ,211,909 Loans and advances ,730 10,873 12,492 27,030 Other assets 22, , Total financial assets 3,881, ,641 66,569 10,873 12,492 4,348, Net liquidity gap ( 299,933) ( 336,076) ( 62,773) 273,744 99,937 ( 325,101) ========== ========== ========== ========== ========== ==========

155 CENTRAL BANK OF SEYCHELLES Page 61 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (iii) (a) Liquidity risk (Continued) Contractual maturity of financial assets and liabilities (Continued) Demand and up to 1 month 1 to 3 months 3 to 12 months 1 to 5 years Over 5 years Total SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 At 31 December 2009 Financial liabilities Currency in circulation 555, ,010 Deposits from Government 381, ,035 Deposits from banks 741, , ,379 Other deposits 14, ,286 Open Market Operations 1,230, ,230,665 Other liabilities 31, ,503 International Monetary Fund Obligations 146, , , , Total financial liabilities 3,099,725 1,026 44, ,082-3,358,997 ========== ========== ========== ========== ========== ========== Financial assets Cash and cash equivalents 2,094, ,094,206 Investment securities 891, , ,076-1,146,029 Long term deposit with banks , ,499 Loans and advances ,514 5,529 6,072 13,647 Other assets 6, , Total financial assets 2,992, , ,044 6,605 6,072 3,372,478 ========== ========== ========== ========== ========== ========== Net liquidity gap 107,492 ( 252,498) ( 69,880) 207,477 ( 6,072) ( 13,481) ========== ========== ========== ========== ========== ==========

156 CENTRAL BANK OF SEYCHELLES Page 62 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 34 FINANCIAL RISK MANAGEMENT (Continued) (iv) Fair value of financial assets and liabilities The table below summarises the carrying amounts and fair values of investment securities which is not presented on the Bank s statement of financial position at fair value: Carrying value Fair value Carrying value Fair value SCR 000 SCR 000 SCR 000 SCR 000 Financial assets Investment securities 1,207,270 1,209,302 1,133,813 1,140,689 ========== ========== ========== ========== The fair value of investment securities classified as loans and receivables is based on market prices of the Government treasury bills as at the date of the statement of financial position. The fair value of Government treasury bills has been computed using the compounded interest method at interest rates of 0.48 percent, 1.23 percent and 2.38 percent for the 91 day, 182 day and 365 day treasury bills, respectively. For all other financial assets and liabilities, their carrying amounts are a reasonable approximation of fair value. (v) Capital management The statutory capital of the Bank which comprises the Authorised Capital and General Reserve shall be built up to 10 percent of monetary liabilities and can be more in one year should the monetary liabilities decrease. Section 16(2) of the CBS Act states that where the Bank has distributable earnings for any financial year, 50 percent of those earnings shall be distributed in the following priority, to the statutory capital: (a) (b) Authorised Capital until it reaches 3.33 per cent of monetary liabilities; and The General Reserve until it reaches 6.67 per cent of monetary liabilities. As at 31 December 2010 statutory capital stood at 9.21 percent of monetary liabilities ( percent). In the event of the General Reserve falling below zero the Government shall recapitalize the Bank with marketable securities to restore the general reserve to a zero balance. (vi) Non financial risk management Operational risk management Operational risk is the risk of financial loss and business instability arising from failures in internal controls, operational processes or other supporting systems. It is understood that such risks cannot be entirely eliminated and the cost of controls in minimising these risks may outweigh the potential benefits. As part of the implementation of the Bank's risk strategy, independent checks on risk issues are undertaken by the internal audit unit.

157 CENTRAL BANK OF SEYCHELLES Page 63 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2010 (CONTINUED) 35 TAXATION The Bank is exempted from taxation under Section 49 of the CBS Act. 36 CURRENCY The financial statements are presented in thousands of Seychelles rupees.

158 Annex II OFFICERS OF THE CENTRAL BANK OF SEYCHELLES (as at December 31, 2010) Mr Pierre Laporte - Governor Ms Caroline Abel - Deputy Governor Governor s Office Mr Kevin Samson - Director Corporate Affairs Legal Unit Miss Martine Faure - Legal Officer Miss Shannon Jolicoeur - Legal Officer Internal Audit Division Miss Nathalie Houarau - Internal Auditor Miss Rachel Hoareau - Internal Auditor Administration and Human Resources Division Mrs Juliana AhThew-Rose - Head of Division Administration & Human Resources Vacant - Director Administration Mrs Levina Francoise - Senior Human Resources Officer Mr Brian Nicette - Human Resources Officer Miss Natasha Savy de St Maurice - Human Resources Support Mr Alain Florentine - Administration Manager

159 Banking Services Division Mr Christophe Edmond - Head of Division Banking Services Mr Mike Tirant - Director of Banking, Currency & Payment System Services Mrs Noemie Gobine - Assistant Accountant Mrs Jeannette Payet - Banking & Currency Officer Mr Terry Adrienne - Payment System Officer Miss Liz Julienne - Payment System Officer Miss Danielle Robert - Senior Domestic Debt Officer Miss Vanessa Bijoux - Domestic Debt Officer Miss Shirley Mendes - Domestic Debt Officer Financial Services Supervision Division Ms Jenifer Sullivan - Head of Division Financial Services Supervision Mr Naadir Hassan - Director Financial Services Mr Georges Tirant - Director Insurance Supervision Mr Francis Payet - Financial Services Analyst Miss Joan Lespoir - Financial Services Analyst Mr Jean-Paul Barbier - Financial Services Analyst Mr James Jean - Financial Services Analyst Mrs Janine Henriette - Financial Services Analyst Miss Audrey Morel - Financial Services Analyst Mr Edouard Rose - Financial Services Analyst Mr Aaron Leong-Pon - Financial Services Analyst Mr Tyron Scholastique - Financial Services Analyst Ms Samanta Andimignon - Financial Services Analyst Miss Shirlee Agricole - Financial Services Analyst Ms Selma Valentin - Financial Services Analyst Ms Vivienne Volcere - Financial Services Analyst Mr Hubert Bouchereau - Financial Services Analyst

160 Policy, Market Operations and Statistics Division Vacant - Head of Division Policy, Market Operations & Statistics Mr Brian Commettant - Director Policy, Market Operations & Statistics Miss Moyra Alexis - Economist Mrs Hilda Palconit - Economist Miss Ingrid Sinon - Economist Mr Lenny Palit - Economist Mr Davis Laporte - Economist Miss Nadine Boniface - Economist Mr Naddy Marie - Economist Miss Sarah Lloyd - Economist Mrs Gina Rosette - Statistician Miss Dorotha Michel - Statistician Technical Services Division Vacant - Head of Division Technical Services Mr Jude Woodcock - Director Technical Services Mr Darell Edmond - Network Systems Administrator Mr Elvis Serret - Business Applications Administrator (Banking) Mr Desire Larue - Business Applications Administrator (Others) Mr Rusell Moustache - Project Manager

161