CENTRAL BANK OF SEYCHELLES

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3 CENTRAL BANK OF SEYCHELLES Board of Directors (as at 31 st December 2011) Pierre Laporte - Governor and Chairman Caroline Abel - First Deputy Governor - Member Errol Dias - Director Wilfred Jackson - Director Ronny Govinden - Director Steve Fanny - Director Secretary to the Board Martine Faure

4 CONTENTS Page Letter of Transmittal Board of Directors List of Charts and Tables Section One Overview 1 Section Two Real Sector: Production, Labour and Prices 6 Section Three Monetary and Financial Sector 18 Section Four Government Finance 33 Section Five External Sector 43 Section Six Central Bank Operations 56 Annex I Financial Statements and Auditor s Report Annex II Officers of the Central Bank of Seychelles

5 List of Charts and Tables Chart No. Title Page Real Sector: Production, Labour and Prices 2.1 Visitor Arrivals ( ) Price Movements ( ) 17 Monetary and Financial Sector 3.1 Net Foreign Assets and Domestic Assets ( ) Money Supply ( ) Reserve Money (2011) Notes and coins in circulation ( ) Total Domestic Credit ( ) Commercial Banks Loans and Advances to Non-Government Sectors ( ) Loans by Development Bank by Economic Sectors ( ) CBS Advances to Commercial Banks ( ) Interest Rates ( ) 30 Government Finance 4.1 Government Finance Outcome ( ) Major Revenue Flows in Current Receipts ( ) Government Capital Expenditure ( ) 37 External Sector 5.1 Overall balance, current account and capital & financial account of the BOP ( ) Trade in Goods ( ) Imports (f.o.b.) Exchange rate movements of the three main currencies ( ) 50 Central Bank Operations 6.1 Number of Cheques presented at the Clearing House ( ) Value of Cheques presented at the Clearing House ( ) Number of SWIFT instruction messages sent to the participants of the CBSITS ( ) Value of SWIFT instruction messages sent to the participants of the CBSITS ( ) 75

6 Table No. Title Page Overview 1.1 Quantitative Performance Criteria 4 The Real Sector: Production, Labour and Prices 2.1 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 Statistics ( ) Inflation Rates ( ) 17 Monetary and Financial Sector 3.1 Monetary Survey ( ) Reserve Money (Q to Q4-2011) 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 (2011) Weighted Average Reverse Repurchase Agreement (2011) 32 Government Finance 4.1 Government Budget: Summary ( ) Public Sector Capital Expenditure ( ) Treasury Bills ( ) Treasury Bonds ( ) Government Stocks ( ) 42 The External Sector 5.1 Seychelles Balance of Payments ( ) Imports (c.i.f.)-by HS Sections ( ) External Reserves ( ) 49

7 Table No. Title Page 5.4 Exchange Rates ( ) 49 Central Bank Operations 6.1 Treasury Bills Interest Rates ( ) CBS Holdings of Government Securities as at December 31, Projects Undertaken (2011) 77 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 Acronyms AfDB - African Development Bank AEC - African Economic Community ASYCUDA - Automated Systems for Customs Data AU - African Union BMI - Bank Muscat International BOP - Balance of Payments BSD - Banking Services Division CBS - Central Bank of Seychelles CBSITS - Central Bank of Seychelles Immediate Transfer Service CDIS - Coordinated Direct Investment Survey CIS - Credit Information System COMESA - Common Market for Eastern and Southern Africa CORE - Centralised Online Real-time Exchange CPI - Consumer Price Index DAA - Deposit Auction Arrangement

8 DBS - Development Bank of Seychelles DTAA - Double Taxation Avoidance Agreements EAC - East African Community EFF - Extended Fund Facility EU - European Union EUR - Euro FDI - Foreign Direct Investment FEA - Foreign Exchange Auction FIA - Financial Institutions Act FMD - Financial Markets Division FSSD - Financial Services Supervision Division FTA - Free Trade Area GBP - Pound Sterling GDP - Gross Domestic Product GST - Goods and Services Tax HFC - Housing Finance Company HR - Human Resources HRIS - Human Resources Information System IAD - Internal Audit Division IBC - International Business Company IC - Investment Committee ICS - Integrated Correspondence System IFRS - International Financial Reporting Standards IIP - International Investment Position IMF - International Monetary Fund IOT - Indian Ocean Tuna ISA - Information Systems Audit ISIC - International Standard of International Classification MIC - Middle Income Countries MICR - Magnetic Ink Character Recognition MOC - Monetary Operations Committee MRR - Minimum Reserve Requirement MUA - Mauritius Union Assurance NBS - National Bureau of Statistics NFA - Net Foreign Assets NIR - Net International Reserves OECD - Organisation for Economic Co-operation and Development

9 OMO - Open Market Operations PIT - Personal Income Tax PMU - Project Management Unit QPC - Quantitative Performance Criteria RETOSA - Regional Tourism Organisation of Southern Africa RRA - Reverse Repurchase Agreement RSD - Research and Statistics Division SADC - South African Development Community SCU - Seychelles Credit Union SEAS - Seychelles East African System SFA - Seychelles Fishing Authority SIBA - Seychelles International Business Authority SIC - Seychelles Industrial Classification SRC - Seychelles Revenue Commission SSA - Statistical and Supervisory Application STB - Seychelles Tourism Board TIACH - Truncated Image Automated Clearing House TIEA - Tax Information Exchange Agreements TIN - Tax Identification Number TSD - Technical Services Division UA - Units of Account UAE - United Arab Emirates UNCTAD - United Nations Conference for Trade and Development USD - US Dollar VAT - Value Added Tax

10 SECTION ONE Overview 1.0 External Developments The assessment of the global economic performance for the year 2011 by most analysts suggests a slowdown in economic recovery, coupled with fiscal and financial uncertainty. Based on the International Monetary Fund (IMF) s World Economic Outlook, activity not only slowed down but became uneven whilst confidence has fallen sharply. World output is projected to have grown by 3.6 per cent in 2011 compared to the estimated 4.8 per cent for the year One of the year s notable developments was the worsening of the sovereign debt crisis in the Eurozone which posed a risk to the economic and financial stability of the region and the world. Uncertainties emanating from the crisis, as well as fears of contagion to other parts of the region adversely impacted on investors confidence, the value of the euro and the overall economic performance of its member states. Such austere economic environment also threatened the ultimate survival of the euro area as an economic block. Eurozone s economic performance in the year ahead ultimately depends on the ability of its leaders to successfully undertake credible reforms which would effectively improve the regions longterm economic outlook. As regards to external price developments, preliminary estimates are that oil prices grew by 39 per cent in 2011, largely on account of adverse impacts of geo-political shocks on the supply side of the market. Prices of non-fuel primary commodities, predominantly food and beverages, are estimated to have risen by 18 per cent. 1.1 Domestic Economic Developments The open nature of the Seychelles economy makes it vulnerable to external shocks. Hence, the general uncertainty and pessimistic sentiment about the performance of world economies presented as some challenges for Seychelles during However, overall activity has been somewhat positive. All indications suggest that the economy has grown for the third consecutive year in 2011 following the downturn in 2008 when the IMF-supported reform programme to address some fundamental macroeconomic imbalances was launched in November of that same year. Preliminary estimates show that growth in Gross Domestic Product (GDP) was 4.9 per cent in real terms which, despite being at a reduced pace compared to 6.7 per cent in 2010, remains a positive performance

11 An important supporting factor of the recent recovery in economic activity is the level of confidence in the Seychelles economy which remained high and positive during As such, total investments, both in terms of expressed interest and implemented projects continued to be on the high side with the contribution of net foreign direct investments (FDI) inflows in the form of equity capital estimated at US$136 million in The majority of these were tourism projects and hence represent growth in capacity of this sector which has significant importance to the economy in terms of foreign exchange contributions, employment generation and GDP. Notwithstanding the crisis in the euro area which supplies the majority of visitors to the Seychelles, 2011 was the second consecutive record year for the industry in terms of the number of tourists to the country. Visitor arrivals amounted to 194,476 which were 11 per cent higher than in the previous year. Correspondingly, tourism earnings are estimated at US$291 million, representing a growth of 6.1 per cent in US dollar terms compared to the previous year. The positive performance of the tourism sector supported activity in other auxiliary industries and therefore the economy as a whole. Important was its contribution to supply in the foreign exchange market. During 2011, total foreign exchange supply in the market averaged US$40 million per month. Whilst such inflows remained strong, a marked growth in demand was observed in the second half of the year, primarily to meet import requirements. Given the relatively stronger demand, the Seychelles rupee started a depreciating trend against the major currencies and consequently finished the year at a weaker level relative to the three most domestically traded currencies, namely the US dollar (USD), British pound (GBP) and Euro (EUR). The depreciation of the rupee per USD was by 31 cents or 2.6 per cent, from an average of R in 2010 to R in Exchange rate movements are closely monitored by the Central Bank given its direct link to domestic inflation and thus the Bank s price stability objective, which since December has become more important following the amendment of the Central Bank of Seychelles (CBS) Act, In the second quarter of 2011, the Bank tightened monetary policy through a 3.0 per cent increase in the minimum reserve requirement (MRR) after taking into consideration the higher inflation expectations emanating from international developments, namely rising food and oil prices. Throughout the year, Seychelles continued to be exposed to such inflationary risks which coupled with the recent depreciation of the domestic currency have meant the maintenance of the tight monetary policy stance through the remainder of the 1 Under the amendment of the CBS Act 2004, price stability is now the primary objective of the Bank

12 year. At the end of December 2011, year-on-year inflation was 5.5 per cent whilst the 12-month average was 2.6 per cent. This compares to negative 2.4 per cent and 0.4 per cent respectively end Notwithstanding the tightened monetary policy stance, an increase in credit to the economy was observed in The growth in commercial banks credit to the private sector was by 5.3 per cent and this represents mainly loans to sectors such as tourism and building & construction. Notable is that since the launch of the reform programme in November 2008, the government has reduced its demand for credit which consequently increased the share allocated to the private sector to 56 per cent as at the end of December 2011 compared to 48 per cent end-december The decrease in demand for credit not only implies more opportunities for the private sector to expand but also allows for reductions in overall public debt. Such a feat has been possible given the attained fiscal performance. The budget outcome for the year was another positive one which further affirmed the government s commitment to maintain fiscal discipline and remain focused on its debt reduction strategy. The year finished with a primary surplus of 5.4 per cent of GDP compared to the targeted 4.5 per cent. Such performance was attributed to above-forecast collection of revenue, the latter of which was partly due to the introduction of various tax administration reforms. Consistently, the government remains on track to achieving its objective of reducing total public debt to 50 per cent of GDP by At the end of 2011, total public debt declined to 81 per cent of GDP from 84 per cent in the previous year. The stock of outstanding government securities held in the domestic market fell by 5.5 per cent, thus representing additional liquidity available at commercial banks. Throughout 2011, the financial system remained highly liquid with commercial banks holding reserves in excess of the stipulated level despite the marked reduction observed following the 3.0 per cent increase in the MRR to 13 per cent since April. The management of liquidity remained important, especially in the context of the current monetary targeting framework. Under such framework which assumes a strong and predictable relationship between monetary aggregates and inflation, the Central Bank has to ensure that the level of reserve money does not exceed a predetermined ceiling. The Bank achieves this through interventions in the open market which during the year were mainly to absorb liquidity. In 2011, the reserve money target was met on each occasion and as at the end of the year, the stock of liquidity withdrawn from the system amounted to around R1,500 million

13 Given the country s high dependency on imported goods, growth in activity tends to widen the current account deficit in the short term. For the year under review, based on preliminary estimates, the current account deficit stood at 22 per cent of GDP compared to 20 per cent of GDP in Whilst the current account balance is not expected to turn positive, an improvement is forecast in the medium term as FDIrelated imports decline with lower FDI inflows whilst further growth in earnings from exports sectors is achieved. Notwithstanding the worsened current account balance, during 2011 the Central Bank continued to accumulate external reserves. At the end of the year, gross official reserves stood at US$279 million or equivalent to 2.6 months of the country s imports of goods and services. On a net basis, official reserves finished the year at US$217 million or US$18 million above the target. During the year, Seychelles has continued to meet all the quantitative performance criteria (QPC) set out under the current economic reform programme. The performance relative to the target is illustrated in Table 1.1 below. Table 1.1: Quantitative Performance Criteria Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Reserve Money 1 SCR million Target 1,480 1,537 1,592 1,676 1,753 1,804 1,755 1,757 1,765 Actual 1,296 1,424 1,544 1,596 1,746 1,772 1,728 1,727 1,699 Net International Reserves 2 USD million Target Actual Primary Fiscal Balance 3 SCR million Target 1, Actual 1, ,071 1, The stated target is a ceiling. 2. The stated target is a floor. 3. The stated target is a cumulative floor

14 The Central Bank remained committed to the success of the programme and will ensure that the QPC under its responsibility is met. In terms of economic outlook, given that the Seychelles will continue to depend on external developments, the pessimistic global outlook implies another challenging year. The performance of tourism and other industries in the services sector remains key to the overall performance of the economy. In the absence of further shocks, the domestic exchange rate is expected to reach its stabilisation state. Given the associated inflationary pressures, the Central Bank would maintain a tightened monetary policy stance to ensure that inflation does not compromise growth prospects. Further accumulation of external reserves is being targeted in 2012 which will increase the level closer to 3 months import cover which should put the country in a better position to cushion any external shocks

15 SECTION TWO Real Sector: Production, Labour and Prices 2.0 Overview Preliminary estimates suggest that the Seychelles economy recorded positive economic growth in 2011, continuing a trend which began in Provisional data indicates a 4.9 per cent growth in GDP in real terms. Although this was at a slower pace compared to 6.7 per cent in 2010, such result was commendable in consideration of much uncertainty and pessimistic outlook that characterised the international economic environment on which domestic activity heavily depends. The services sector remained the main contributor to GDP with a share of 86 per cent and therefore continued to be the key driver of growth. The accommodation and food service activities sub-sector, which represents the direct contribution of tourism held its position as the largest single component of GDP with a share of 18 per cent. Moreover, real growth rate was the highest under the information and communication (13 per cent), followed by the electricity, gas, steam and air conditioning supply (8.0 per cent); two other components of the services sector. Tourism is also the sector with significant contribution to foreign exchange earnings and employment, which attracts the majority of FDI inflows into the country. However, by the end of the year, the announced downsizing strategy to be implemented by Air Seychelles had somewhat dampened optimism in the industry. The main concern relates to cancellation of operations in Europe, the continent which traditionally supplies the majority of visitors to Seychelles. The sector facing the most challenges was agriculture and these were from both domestic and external factors. As regards to the fisheries sector, the authorities in consultation with the fishermen have consolidated efforts with the objective to minimise the threat of piracy. However, there was a prominent sharp increase in fish prices relative to the preceding year. The situation in the labour market remains positive with the latest available data showing growth in total employment. Additionally, with the role of the government as more of a facilitator rather than being active in production activity, the share of private sector employment continued to increase during the year, reaching 72 per cent by September For the year under review, the unemployment rate fell to - 6 -

16 1.7 per cent compared to 2.6 per cent in The main challenge in the labour market is the skills mismatch between job seekers and the available vacancies which partly explains dependency on expatriate workers. There was an increase in inflationary pressure in the domestic economy compared to the previous year. The Consumer Price Index (CPI) shows an average inflation rate of 2.6 per cent compared to negative 2.4 per cent in The main sources of inflation were the rising commodity prices on the international market including food and oil, revision in utility tariffs and that in the Goods and Services Tax (GST) rate on tourism services towards the end of the year. 2.1 Primary sector In spite of some challenges experienced in 2011, output from the agriculture and fisheries sectors increased by 5.1 per cent and 11 per cent respectively. In the agricultural sector, the challenges were mainly the tough competition from imports and the adverse effect on output on account of the severe drought. As for the fisheries industry, whilst active diplomacy greatly contributed to diminish the piracy threat, fishing activities continued to be affected by this concern Fisheries In 2011, fisheries contributed 0.9 per cent of GDP which was similar to the previous year. This was in spite of a rebound in fisheries activities, resulting in growth of 8.0 per cent by contrast to the contraction of 14 per cent recorded in While rising fuel prices and potential losses of fuel subsidies were major concerns expressed by the industry, other challenges highlighted by stakeholders included the unusually long south monsoon season, insufficient stock and on-going threat of piracy attacks. Despite the challenges, credit to the sector increased by 16 per cent year-on-year with the majority of new loans disbursed by the Development Bank of Seychelles (DBS). In addition, the Seychelles Fishing Authority (SFA) and DBS announced incentives to encourage local involvement in the development of a fleet of long-liners by amending terms of an existing Memorandum of Understanding. Of note, is that loans to the sector continued to carry a 3.00 per cent interest 3, with repayment set over a ten-year period, preceded by a grace period of six months. The main source of this funding was from the Fisheries Partnership Agreement between the European Union (EU) and Seychelles. 2 Based on statistics collected by the Employment Department of the Ministry of Education, Employment and Human Resources. 3 Source DBS - 7 -

17 Other developments included strengthening fishing accords with Japan and Mauritius as well as the reopening of the rehabilitated semi-industrial fishing port. In addition, government spent R22 million on capital projects in the sector through the SFA. The sector also saw legislative changes, namely the ratified protocol for the fisheries agreement between the European community and Seychelles as a member of the African Caribbean and Pacific Group of States. As part of the amendments, the private sector, non-governmental organisations and other nonstakeholders can now increase their involvement in the development of the industry. In addition, more flexible mechanisms were put in place to facilitate investments in fisheries activity Agriculture As a share of GDP, the contribution of the agriculture sector remained unchanged in However, preliminary estimates suggest that the sector grew by 2.0 per cent relative to the previous year, supported by a 12 per cent growth in the value of loans disbursed to the sector. Production indicators for 2011 show a 20 per cent increase in egg production with the production of broiler chicks increasing by 14 per cent whilst output of layer chicks fell by 13 per cent. The number of livestock slaughters of the categories of chicken and pig increased by 13 per cent and 22 per cent respectively, whilst that of cattle declined by 56 per cent. Sentiments in the agricultural sector were mainly pessimistic. Increased competition from imports and a decline in synergies between the Seychelles Farmers Association and other entities, have contributed to expected declines in the local production of poultry and livestock. In addition, the limited local production of animal feed has forced many livestock producers to reassess their position in the sector. As such, the Association believes that going forward, the sector requires government aid in ensuring continued growth

18 Table 2.1 Gross Domestic Product by Kind of Economic Activity ( ) at constant market prices (1) 2010 (1) 2011 (2) (R million) GDP at 2006 constant market prices 6, , , , ,012.0 Change (%) 9.9% -1.0% 0.5% 6.7% 4.9% 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 to Nominal Sector Taxes less subsidies Value Added at basic prices 5, , , , ,988.0 Other Taxes on Production Taxes on Production and Imports Goods and Services Tax Less Subsidies Notes: 1 Provisional Estimates- National Bureau of Statistics (NBS) 2 Indicative Estimates- Seychelles Macroeconomic Framework Working Group comprising of the Forecasting and Analysis Branch (Ministry of Finance) and Research and Statistics Division (CBS) and NBS (i) (SIC) - Seychelles Industrial Classification and International Standard Industrial Classification (ISIC) Rev. 4 (ii) "Indicative" estimates are at an early stage and expected to be substantially improved with further work

19 Table 2.2 Gross Domestic Product by Kind of Economic Activity ( ) at current market prices (1) 2010 (1) 2011 (2) (R million) GDP at current market value 6, , , , ,558.1 Change 21.6% 30.7% 25.8% 1.5% 8.1% 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 1, , , 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 Value Added at basic prices 6, , , , ,432.6 Other Taxes on Production Taxes on Production and Imports , ,444.8 Goods and Services Tax Less Subsidies Notes: 1 Provisional Estimates- NBS 2 Indicative Estimates- Seychelles Macroeconomic Framework Working Group comprising of the Forecasting and Analysis Branch (Ministry of Finance), Research and Statistics Division (CBS) and NBS (i) SIC and ISIC Rev. 4 (ii) "Indicative" estimates are at an early stage and expected to be substantially improved with further work

20 2.2 Industries Outcome and sentiments from the industrial sector were mostly positive with construction continuing to be driven by FDI-related activities. Despite various companies facing increased competition from imports and elevated operational costs, overall, the manufacturing sector grew by 3.3 per cent in Construction With most major FDI projects such as the Kempinsky Hotel and Raffles Resort on Mahe and Praslin approaching completion, the annual growth rate for building materials declined by 14 percentage points to 1.6 per cent. The decline comes despite excluding major real estate projects from the previous year in the analysis. While views of contractors were mainly positive for the year, the increase in operational costs was one of the concerns raised. For the year 2011, credit extended to the building and construction sector was equivalent to 1.3 per cent of GDP. Compared to 2010, there was a growth of 0.5 percentage points in credit to the sector Manufacturing The share of the manufacturing sector to GDP remained relatively unchanged in However, in real terms, positive growth was recorded across most categories. The manufacturing of food grew by 6.0 per cent, supported by growth in sales from the Indian Ocean Tuna (IOT) despite a decline of 4.5 per cent in production volume. Whilst the company experienced an increase in operational cost during the year, the depreciation of the domestic currency was not a major concern for the company given that production is mainly for export markets. The output of beverages grew by 3.2 per cent in real terms, supported by increases in beer, stout and soft drinks production of 15 per cent, 3.4 per cent and 18 per cent, respectively. A strong increase of 17 per cent was also recorded in the production of tobacco. Nonetheless, on a different note, the output of paint and paint products fell by 5.4 per cent whilst the production of animal feed declined to near zero in the third quarter compared to the same period in To cater for the latter, the Farmers Cooperative resorted to importing finished feed

21 Sentiments from the sector varied significantly although competition from imports was the major concern. Whilst some manufacturers urged for increased protectionism, most were concerned with the recent movements in the exchange rates and the cost of energy. 2.3 Services The services sector accounted for over 80 per cent of GDP activity. For the year 2011, growth across all categories of the sector was either flat or positive. Services activity, principally tourism, is critical for the overall performance of the economy. The sector remains the largest employer and an important source of foreign exchange earnings Tourism The performance of the tourism sector heavily depends on the external environment which makes it highly vulnerable to factors beyond the control of the local authority. However, despite the financial crisis in the Eurozone and the fact that the majority of tourists to Seychelles originate from Europe, the year 2011 was generally a positive one for the tourism industry and its related sectors. A total of 194,476 tourists visited the country which is a new record and an increase of 11 per cent compared to the previous year. Europe remained the main market, supplying 74 per cent of total visitors. From an individual country perspective, France remained the leading market, with a contribution of 39,370 tourists, followed by Italy and Germany. The number of French tourists grew by 12 per cent. No change was recorded in the number of Italian visitors whilst the number from Germany rose by 11 per cent. Africa contributed 13 per cent of total visitor arrivals whilst the ratio for Asian tourists was 10 per cent. Visitors from Asia recorded the highest growth rate and this was by 32 per cent. In particular, new records were set by tourists from China and Middle East. The number of visitors from China increased by 97 per cent whilst those from the Middle East surpassed the 10,000 mark after recording growth of 42 per cent. During 2011, the authorities continued to focus on promoting the industry. New initiatives such as appointments of Seychelles Tourism Ambassadors and Friends of Seychelles Press were implemented, spearheaded by the Seychelles Tourism Board (STB). In addition, activities such as the Carnaval

22 International de Victoria held in March, has helped to raise the Seychelles profile and attract the attention of international press. The Carnaval is expected to be an annual event. In line with its diversification strategy, the authorities targeted new markets in the Middle East, Africa and Asia and continued its open skies policy which saw an increase in the number of flights offered by the Emirates Airlines and Qatar Airways. This saw Etihad Airways commence regular scheduled air service to Seychelles, whilst Ethiopian Airlines announced a similar move to be expected in the near future. Chart 2.1: Visitor Arrivals ( ) Number of visitors 250, , , ,000 50, Percentage Years Visitor Arrivals % Change 10.0 Source: NBS As regards to other tourism indicators, earnings are estimated at US$291 million in 2011, which is an increase of 6.1 per cent in US dollar terms. On average, visitors stayed for 10 nights during the year, the same as in With regards to hotel bed occupancy rate, this increased by 2.2 percentage points to 59 per cent (as at end June). Amongst the concerns expressed by stakeholders in the industry were energy prices, and the increase of 3.0 per cent in the rate of GST applicable on tourism and related activities. As regards to the latter, this relates to the timing of the revision which was felt to be too early given that the industry was still in a recovery phase and pricing its products competitively

23 Table 2.3 Tourism Indicators ( ) Visitors arrivals 161, , , , ,476 Average length of stay (nights) Tourism Earnings (R million) 1,901 2,437 2,841 2,450 2,750 Average expenditure per diem - Rupees 1,156 1, ,363 1,414 Memorandum Hotel bed occupancy rate (%) Hotel bed occupancy rate for 2011 is up to June Sources: NBS (except tourism foreign exchange earnings which are from CBS) However, a foremost concern towards the end of the year relates to the scaling down of Air Seychelles operations and plans to continue as a regional carrier. With a loss of direct flights to Europe, some shareholders are of the view that this will trigger a marked drop in arrivals and earnings, which would be worsened if the European financial crisis deteriorates. Nonetheless, confidence in the growth prospects of the tourism sector remains generally positive. This is supported by a rise in the number of resorts, rooms and beds that have become available. The number of tourism and related services such as restaurants, car hires, and tourist guides amongst others, has also risen Telecommunications In 2011, the telecommunications sector accounted for 3.3 per cent of GDP and this is an increase of 0.2 percentage points compared to the year In addition, production indicators show an increase in the number of hours of local and international calls by 15 per cent and 13 per cent, respectively. The sector is expected to receive a major boost with the implementation of Seychelles East African System (SEAS) submarine cable project. The project is a public-private partnership, with the three parties involved being the government of Seychelles, and two private companies, namely Cable & Wireless (Seychelles) and Airtel. Its objective is to connect the country to global internet exchange centres using high bandwidth links at relatively low cost and thus improve internet access. In addition, with further investments planned for the coming year, further improvement in telecommunication services is expected in the near term

24 2.3.3 Financial Services The financial services sector accounted for 4.0 per cent of GDP in 2011, which is a decrease of 0.2 percentage points compared to the previous year. Further expansion of the sector is expected in 2012 with the setting up of a Securities Exchange in Seychelles which is planned to become operational by mid The project is expected to provide for the required modern platform to promote growth in the industry. 2.4 Labour Market With the private sector playing an increasingly greater role, labour market conditions continued to adjust accordingly. During 2011, the number of published and registered vacancies increased by 61 per cent relative to the previous year. The majority were vacancies in the services sector. Notable is that the services sector also experienced a high turnover rate. In addition, there is a general perception of low productivity in some industries, especially amongst Seychellois workers Employment Data for 2011 indicates an average of 49,891 workers in the labour market, which is an increase of 13 per cent compared to the 2010 average. The private sector accounts for 72 per cent of total employment whilst the shares of that in the public and parastatal sectors were 18 per cent and 10 per cent, respectively. Table 2.4 Employment Statistics ( ) Total Employment 41,823 40,822 43,199 44,159 49,891 Private Sector 22,008 24,204 28,976 30,508 35,916 Parastatals 6,167 5,673 4,939 4,852 5,144 Government 13,648 10,945 9,284 8,799 8,831 Source: NBS Given shortages of skills in certain sectors, expatriate labour and expertise are required to sustain the level of economic activity. By the end of the year, expatriates accounted for 2.8 per cent of the public sector workforce whilst their share of employment at parastatals was 7.4 per cent

25 In the public sector, expatriate workers are mainly employed in education and human health. In the parastatal sector, their contribution are mainly in the administrative and support services activities industry as well as in transport and storage Unemployment Statistics from the employment department show an unemployment rate of 1.7 per cent. This is a decline of 0.9 percentage points compared to 2.6 per cent in December Whilst the issue of skills mismatch remained, the authorities believe there is a need to upgrade the skills of active jobseekers in order to improve compatibility with available opportunities Earnings For the first three quarters of the year, the average earnings across the private, parastatal and public sector stood at R7,408, R11,019 and R8,017, respectively. This represents increases of 15 per cent, 30 per cent and 22 per cent in the private, parastatal and public sectors, respectively. 2.5 Prices The period s average rate of inflation stood at 2.6 per cent compared to negative 2.4 per cent in The increase is partially explained by the effects of the deflationary trend observed during most part of 2010 and thus provides a lower comparison base for the 2011 period. However, the main economic factors which impacted on the general price level during 2011 included rising commodity prices on the international markets, mainly those of food and oil. The associated passthrough in the domestic market relate to the upward revision in energy prices as well as the cost of imported goods. Other influential factors in the latter half of the year were the depreciation of the domestic currency and the increase in the GST rate from 12 per cent to 15 per cent on tourism related services. Year-on-year inflation stood at 5.5 per cent, which was also the peak for the year. The major upward pressure on the general price level was observed in the final quarter of the year. After remaining below 4.0 per cent since October 2009, the price increase followed the upward revisions in utility prices applicable to both consumers and businesses in November. The direct effect on the category housing, water, electricity & gas spent by consumers increased by 10 per cent. The revision in utility tariff is also expected to contribute to secondary round effects on the CPI, given that energy is a significant input in production and that producers are expected to pass on such costs to consumers

26 Percent Chart 2.2: Price Movements ( ) Years Average Inflation Rate End of Year Inflation Source: NBS Across the three main categories in the CPI, namely fish, food items and non-food items, year-onyear prices increases were by 21 per cent, 4.8 per cent and 5.1 per cent, respectively. Table 2.5 Inflation Rates ( ) Weights (percentage ) (Annual Average) All Items Fish Other Food Items Non-Food Items (Year-on-Year) All Items Fish Other Food Items Non-Food Items Source: NBS

27 SECTION THREE Monetary and Financial Sector 3.0 Monetary Policy Development Price stability became the primary objective of the Central Bank in December with the amendment of the Central Bank of Seychelles Act, Under the adopted monetary policy framework, this objective is achieved through meeting a predefined reserve money level, with the latter being the operational target. As such, the framework assumes a strong and predictable relationship between the operational target and money supply as well as between the money supply and inflation. Hence, liquidity management continued to be of great importance throughout the year. Correspondingly, the Central Bank was active in the money market during 2011, to ensure that the level of reserve money did not exceed the predetermined ceiling with the target being met in each quarter. On the whole, the financial system remained highly liquid. Commercial banks held cash reserves in excess of the stipulated minimum levels. Consequently, the Bank s interventions in the market were to withdraw liquidity and this was mainly through the use of Deposit Auction Arrangements (DAA) and Reverse Repurchase Agreements (RRA). Given the liquid environment and in consideration of the potential threat to inflation due to rising food and fuel prices on the international markets, the Central Bank tightened monetary policy in April. This was through a 3.0 percentage point increase in the MRR and a lowering of the reserve money target. The result was a direct reduction in available liquidity at commercial banks but which did not require recourse to the Central Bank given that the level of cash reserves remained above the MRR. At the end of 2011, the monetary survey showed an expansion in the broadest measure of money supply, M3. Whilst this was due to growths in both domestic and foreign assets, the expansion in the latter was more significant. However, the change in monetary aggregates was partly due to depreciation of the Seychelles rupee currency against major currencies compared to the preceding year. In the money market, an increase in interest rate was observed and this was more significant in the second quarter of the year following the announced revisions in the MRR and reserve money target. However,

28 considering the end of the year figures, these higher money market interest rates were not reflected in the rates charged by the commercial banks. Table 3.1 Monetary Survey 1,3 ( ) (R million) Net Foreign Assets , , , ,477.1 Central Bank , , , ,302.7 Commercial Banks , ,174.4 Domestic Assets 5, , , , ,028.9 Claims on private sector 1, , , , ,935.5 Claims on public entities Claims on government (net) 3, , , , ,654.1 Money Supply, M3 4, , , , ,595.7 Money Supply, M2(p) 3, , , , ,189.5 Money Supply, M2 3, , , , ,189.5 Money Supply, M1 1, , , , ,697.0 Currency with public Transferable deposits 1, , , , ,073.5 (of which public entities) Quasi Money 2, , , , ,492.6 Fixed Term deposits 1, , , , ,040.4 (of which public entities) Savings deposits 1, , , , ,452.2 Pipeline deposits Foreign Currency Deposits , , , ,406.1 Other items, net 1, , , , ,910.4 Figures do not necessarily add up due to rounding off 1 End of period 2 Excludes government balances 3 Changes in previous figures are due to revisions Source: CBS The Central Bank is expected to maintain the tightened monetary policy stance in 2012, given expectations of rising inflation risks towards the end of the year, particularly emanating from the depreciation of the domestic currency. A tightened monetary policy stance implies increased liquidity absorption by the Central Bank. Government is expected to commit to its debt reduction objective and

29 continue to repay domestic debt at a relatively fast pace. As such, the need for coordination between monetary and fiscal policies becomes of increased importance. 3.1 Net Foreign and Domestic Assets At the end of 2011, the monetary survey showed an improvement in the banking sector s net foreign assets but a slight contraction in domestic assets. R million 7,000 6,000 5,000 4,000 3,000 2,000 1, ,000 Source: CBS Chart 3.1: Net Foreign Assets and Domestic Assets ( ) Years Net Foreign Assets Domestic Assets % Change in Total Assets Percentage The increase in net foreign assets was by 22 per cent in rupee terms, from R3,675 million to R4,477 million. In US dollar terms, the increase was by 7.8 per cent from US$303 million to US$326 million. Whilst this was due to an improvement in the position of both the Central Bank and commercial banks, that of the Central Bank was larger. Net foreign assets of the Central Bank increased by 22 per cent, from R2,709 million to R3,303 million in rupee terms, equivalent to an increase of US$18 million, or by 7.9 per cent in US dollar terms. The improved external position of the Central Bank is consistent with the reserve accumulation objective set out under the on-going economic reform programme. The building up of reserves was supported by the receipt of funds from foreign partners, including both multilateral organisations and bilateral partners in support of the economic reform programme

30 The increase in commercial banks NFA was also by 22 per cent in rupee terms, which in absolute US dollar terms was by around US$6.0 million or 7.6 per cent. The decline in domestic assets was by 0.8 per cent to end the year at R6,029 million. This was attributed to a decrease in commercial banks claims on government, notwithstanding increases in claims on the private and parastatal sectors. The increase in credit to the private sector was by 5.3 per cent whilst that of public entities was by 3.8 per cent. As regards to net claims on government, this fell by 7.3 per cent. 3.2 Money Supply As can be deduced from the above analysis, the year recorded an expansion in the money supply, driven by an expansion in net foreign assets. The broadest monetary aggregate, M3, rose by 4.5 per cent compared to the previous year, to stand at R7,596 million. Given the decline in M2, the increase in M3 was mainly attributed to the growth in foreign currency deposits which was by a significant 41 per cent in rupee terms or 25 per cent in US dollar terms. The decline in M2 was by 6.6 per cent as a result of a 17 per cent decrease in quasi-money despite growth of 5.0 per cent in M1. Chart 3.2: Money Supply ( ) 8, R million 6,000 4,000 2, Percentage Years Transferable deposits Fixed Term deposits Savings deposits Pipeline deposits Foreign Currency deposits Currency with public % Change in M3 Source: CBS The period s contraction in quasi money and increase in the stock of the most liquid monetary aggregate was consistent with the observed annual reduction in interest rates and thus lower opportunity cost of

31 holding liquid assets such as cash. This particularly relates to fixed-term deposits which fell by 38 per cent despite the growth of 10 per cent in savings deposits to end the year at R1,452 million. Notable, whilst statistics show a reduction in fixed-term deposits, there was an increase in demand for government securities by non-banks, likely to have been attracted by the relative increase in returns on such instruments. The expansion in M1 was a result of growth under both of its components. The stock of currency with the public rose by 7.5 per cent to R624 million whilst total transferable deposits increased by 4.3 per cent to end the year at R2,074 million. 3.3 Reserve Money Reserve money is one of the key quantitative performance criteria of the IMF-supported economic programme under the responsibility of the Central Bank. It consists of currency in circulation and other depository corporations 4 deposits held at the Central Bank. The stock of currency in circulation finished the year at R708 million which was 8.1 per cent higher than in the preceding year. Given that the majority of economic transactions are in cash, the increase in this indicator confirmed a higher level of economic activity between the two periods. However, other factors such as relatively higher domestic inflation as well as the reduction in savings rate and thus the low opportunity cost of holding cash are also other contributing factors. Table 3.2 Reserve Money (Q Q4 2011) Q4 Q1 Q2 Q3 Q (R million) Reserve Money (Target) 1, , , , ,765.0 Reserve Money (Actual) 1, , , , ,698.7 Currency in Circulation Other Depository Corporations' reserves 1, , , , Source: CBS As for the change in the stock of other depository corporations reserves held at the Central Bank, this declined from R1,072 million last year to R991 million end Currently this refers to commercial banks

32 Quarterly reserve money ceilings are set as targets, which the Bank has to meet through interventions in the money and foreign exchange markets. The target was lowered from R1,804 million in the first quarter to R1,755 million in the second quarter given rising inflation risks. However, it was raised slightly in the subsequent quarters and reached R1,765 million in the fourth quarter of Given the environment of excess liquidity, to meet the target, the Central Bank has to withdraw liquidity from the system through open market operations. The main instruments employed were DAA and RRA (see section on monetary policy instruments). As illustrated in Table 3.2, the Central Bank was successful in remaining below target for each of the four quarters of Chart 3.3: Reserve Money (2011) R million 1,850 1,825 1,800 1,775 1,750 1,725 1,700 1,675 1,650 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Months Targets Reserve Money Source: CBS Table 3.3 Notes and Coins in Circulation 1 ( ) Total Notes Coins % Change in Total Currency in Circulation Share % of Total 'Notes 'Coins / End of period data Source: CBS

33 R million Source: CBS Chart 3.4: Notes and coins in circulation ( ) Years Notes Coins % Change in Total Currency in Circulation Percentage 3.4 Domestic Credit Central Bank and Commercial Banks By end-2011, the stock of outstanding credit in the banking sector as a whole stood at R6,454 million, which is a decrease of 1.4 per cent compared to the previous year. This decline was due to a contraction in credit on the part of commercial banks whilst that of the Central Bank which is in the form of treasury bills remained unchanged. Chart 3.5: 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: CBS

34 The fall in commercial banks total value of credit was by 1.7 per cent. This was due to a contraction of 12 per cent in gross claims on government, which has also resulted in a further reduction in its share of commercial banks total credit to 36 per cent compared to 40 per cent last year. At the end of 2011, commercial banks outstanding loans portfolio to public entities rose by 3.8 per cent, whilst that to the private sector grew by 5.3 per cent. This compares to a 6.8 per cent decline in credit to public entities and a 19 per cent increase in that to the private sector observed in Table 3.4 Credit 1/2/3 ( ) (R million) Total Credit 5, , , , ,454.3 Commercial banks 4, , , , ,269.2 Claims on private sector 1, , , , ,935.5 Claims on parastal sector Claims on government 2, , , , ,894.3 of which: Dev. fund stocks (147.1) (147.1) (97.1) (97.1) (97.1) Treasury bonds (1,052.4) (747.1) Treasury bills (1,092.6) (1,231.1) (1,496.8) (1,230.6) (1,121.8) Central Bank 1, , , ,185.1 Claims on government 1, , , ,185.1 of which: Advances (86.4) (140.6) Treasury bonds (1,052.6) (747.1) Treasury bills (0.0) (251.0) (998.1) (1,185.1) (1,185.1) 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 previous figures are due to revisions Source: CBS Sectoral Allocation of Credit to Private Sector In broad terms, the overall allocation of the credit portfolio of commercial banks, by economic sector, remained largely unchanged. Loans under the category tourism facilities continued to account for the largest share, despite a reduction in its ratio from 33 per cent in 2010 to 27 per cent in Credit allocated to fisheries and agriculture & horticulture categories represented only 0.3 per cent and 0.6 per cent of banks total loan portfolio, respectively

35 Compared to the previous year, commercial banks outstanding credit to the private sector was higher under most categories. The exceptions were the tourism facilities, real estate, fisheries and financial institutions categories with the decline in the former by 15 per cent being the most significant which resulted in a further reduction in the proportion of credit allocated to this sector. The highest growth was recorded under the category manufacturing by 145 per cent, which went towards the financing of investment in new technology for the sector. The next most significant increase was by 82 per cent under the construction category. Table 3.5 Commercial Banks - Loans and Advances to Non-Government Sector by Economic Sectors 1/2 ( ) (R million) Percentage (%) Total Advances 1, , , , , of which: Foreign Currency Loan , Agriculture and horticulture Fisheries Manufacturing Real Estate Construction Transportation Tourism Facilities Wholesale & Retail trade Financial institutions Other businesss 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: CBS

36 Chart 3.6: Commercial Banks Loans and Advances to Non-Government Sectors ( ) 3,000 2,500 2,000 R million 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: CBS Development Bank s Credit DBS continued to offer credit to relatively smaller businesses at more competitive rates than commercial banks. DBS total loan portfolio increased by 22 per cent or R86 million in 2011, which reflected an expansion in credit allocated to most sectors. The highest increase was by 25 per cent or R27 million in credit to the tourism sector and that to other services by 24 per cent or R50 million. Notable is that in the second half of the year, the DBS took a policy decision to cease lending under certain categories, mainly requests that would otherwise be assisted by commercial banks. Table 3.6 Loans by Development Bank by Economic Sectors 1 ( ) 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: DBS

37 Chart 3.7: Loans by Development Bank by Economic Sectors ( ) R million Years Agriculture Fishing Industry Tourism Other services Source: DBS 3.5 Liquidity of the Commercial Banks Throughout 2011, on a consolidated basis, commercial banks remained highly liquid and did not require recourse to the Central Bank for funds. Table 3.7 CBS Advances to Commercial Banks ( ) ( R million) Advances Repayments Stock of Credit End-of-period data Source: CBS

38 Chart 3.8: CBS Advances to Commercial Banks ( ) 1,200 1, R million Years Advances Repayments Source: CBS 3.6 Interest Rates An overall reduction in commercial banks effective interest rates was observed in 2011 whereas those in the money market increased. Table 3.8 Interest Rates 1/3 ( ) Percentage Volume-weighted Average Deposits Savings Rate Fixed Term Deposits Rate 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 2 With effect from May 2009, 182-day Treasury bills were issued on tender 3 Changes in previous figures are due to revisions Source: CBS

39 Interest rates on fixed-term rupee deposits fell from an average of 3.01 per cent in 2010 to 2.80 per cent in 2011 despite the increase in rates on instruments in the maturity brackets above 3 months and up to 6 months and above 6 months and up to 12 months which rose by 75 and 115 basis points, respectively. The decline in interest rates was most significant on fixed-term deposits in the category above 12 months and this was by 2.1 percentage points. The smallest decline was by 37 basis points applicable on instruments in the maturity bracket of less than 7 days which fell from 1.43 per cent to 1.06 per cent. The average savings rate decreased from 1.58 per cent at the end of 2010 to 1.14 per cent in As for the average lending rate, this declined from per cent last year to per cent end The relatively faster decrease in savings rate compared to that of the lending rate resulted in an increase in the spread between the two interest rates from 9.90 per cent end-2010, to per cent end However, interest rates on government securities increased across all three maturities on offer compared to last year. The yield on the 91-day instrument recorded the most significant increase of 4.49 percentage points, from 0.48 per cent to 4.97 per cent. The rise in interest rates was by 4.36 per cent on bills with maturity of 182 days whilst the yield on 365-day treasury bills rose by 4.41 percentage points, from 2.38 per cent to 6.79 per cent. Of note is that the increase in yield on government securities predominantly started following the announcement of an upward revision in the MRR. Chart 3.9: Interest Rates ( ) Percentage Year Savings Deposit Rate Average lending rate Time Deposit Rate: > 6 months < =12 months 91 day treasury bill rate Source: CBS

40 3.7 Monetary Policy Instruments During 2011, CBS intervention in the open market was principally to absorb liquidity. As such, the liquidity providing facilities such as the Credit Auction Arrangement and the standing facilities were not used during the year. The main instruments employed were RRA and DAA. Additionally, other available instruments such as the foreign exchange swap and emergency loan facility were also not used Minimum Reserve Requirement The MRR started the year at 10 per cent of average applicable deposit liabilities. With effect from April 1, the rupee MRR was increased to 13 per cent given higher inflation expectations originating from rising commodity prices on the international markets. However, that on foreign exchange deposits increased incrementally from April, such that the ratio reached 13 per cent in June. With regards to remuneration on MRR, in February the rate was reduced from 0.75 per cent to 0.5 per cent. As of April 1, despite the rise in the MRR, no interest was paid above the 10 per cent threshold on rupee MRR. With effect from July 15, there is no remuneration on all MRR Deposit Auction Arrangement The DAA was the main liquidity absorbing tool used by the Bank during 2011, with auctions conducted largely on a daily basis. On average, interest rates on all maturities rose significantly over the year. At the end of 2011, the stock of outstanding DAA stood at R909 million compared to R1,180 million in the previous year. Table 3.9 Weighted Average Deposit Auction Arrangement Rates 1 (2011) Maturity Period Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Percentage 7-days days days days days days Notes: 1 End-of-month data Source: CBS

41 3.7.3 Repurchase Operations The repurchase and reverse repurchase agreements with government treasury bills as underlying instruments are two other tools available to the Central Bank for liquidity management. Given the need for liquidity absorption, the Central Bank only used the RRA during Table 3.10 Weighted Average Reverse Repurchase Agreement Rates 1 (2011) Maturity Period Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 5-days % 7-days % % 4.61% days 0.18% 0.17% % 5.46% 7.05% % days % 4.87% days % 4.90% days % 5.05% days % Notes: 1 End-of-month data Source: CBS Foreign Exchange Auction (FEA) The FEA can be used by the Central Bank for both liquidity and international reserves management. In 2011, CBS purchased US Dollars with the objective of building external reserves. However, the use of FEA to accumulate international reserves increases the level of rupees in the system which the Central Bank is required to withdraw such that the reserve money target is met

42 SECTION FOUR Government Finance 4.0 Overview The year 2011 s budget outcome continued to be positive which reflects the government s commitment to maintain fiscal discipline and remain focused on its debt reduction strategy. Notwithstanding unplanned expenditures in the second quarter of the year, the primary balance was a surplus of 5.4 per cent of GDP compared to the targeted 4.5 per cent. With regards to policy, the government pursued further tax reforms to broaden the tax base. This included revisions in the Personal Income Tax (PIT), as well as the GST. There was also further modernisation of the Seychelles Revenue Commission (SRC) such as the introduction of an automated data system aimed to improve customs administration and promote efficiency. Consistent with the public debt management strategy to attain a total public debt to GDP ratio of 50 per cent by 2018, the ratio declined to 80 per cent by the end of 2011 from 84 per cent in In terms of external debt commitment, final negotiations were completed with three creditors during the year, from which the country was successfully granted extended debt repayment schedules. 4.1 Policy changes The modernisation of the tax system continued in In January, the PIT was harmonised to 15 per cent for all workers. The PIT was first introduced in July 2010, at the rate per cent and 10 per cent for Seychellois and expatriate workers, respectively. The rate for the Seychellois workers was reduced to 15 per cent in October The GST rate for the tourism sector was increased from 12 per cent to 15 per cent as of November 01, This revision was in line with the government s aim to harmonise the tax rate and in preparation for the introduction of the Value Added Tax (VAT) in Further reforms are scheduled for 2012, including GST on residential rent which will be changed to a withholding tax under the Business Tax Act as of January Amongst the administrative reforms undertaken by the SRC were the introduction of the single tax identification number (TIN) and the electronic payroll system for businesses to improve efficiency in data

43 collection. A new Customs Management Act was also approved by the National Assembly in December 2011, in a bid to improve the efficiency and governance of SRC s Customs department. The 2011 budget made provision for setting up of a price Stabilisation Fund worth R50 million which was used to temporarily mitigate the effects of sharp increases in food and fuel prices arising from international price shocks. 4.2 External Debt Seychelles external debt restructuring has now reached its latest stage. Three debt rescheduling agreements were signed in the course of the year as the exercise neared completion. The country successfully received extended external debt repayment schedules from China, Germany and Abu Dhabi. Given the success of the external debt restructuring exercise, coupled with the positive fiscal performance that has been achieved since the start of the economic reform programme, the country s level of public external debt has now reached a more sustainable level, standing at US$454 million or 50 per cent of GDP as at the end of December Outcome for 2011 The fiscal outcome for 2011 was better than expected, which continued to reflect government s commitment to meeting the fiscal targets set under the on-going reform programme. Chart 4.1: Government Finance Outcome ( ) R million 6,000 5,000 4,000 3,000 2,000 1, Years R milliom Total Receipts (Primary Axis) Overall Balance (Secondary Axis) Total Outlays (Primary Axis) Source: Ministry of Finance

44 Revenue collection (excluding grants) over performed which was partly a result of the various tax administration reforms that were introduced. This allowed government to cater for some unbudgeted expenditure during the year. 4.4 Revenue Total annual revenue (including grants) stood at R5,081 million, which was below the budget by 0.7 per cent. This was mainly the result of receipts from grants which amounted to only R279 million as compared to the budgeted R455 million. On a better note, there was an over-performance in tax collections which stood above the projection by 1.8 per cent. The main revenue component where receipts exceeded forecast was the other tax subcategory, which finished at 8.7 per cent or R24 million above the budgeted amount. The exceptions where revenue collections amounted to less than expectations were the subcategories trade tax and GST. With regards to the non-tax revenue category, the only item that ended below its budget was dividends, by 17 per cent. Fees and Charges surpassed the projected amount by R87 million or 40 per cent, representing the most significant over-performance. R million Chart 4.2: Major Revenue Flows in Current Receipts ( ) 6,000 5,000 4,000 3,000 2,000 1, Years Fees and Charges Other Tax Income / Business Tax Trades Tax Source: Ministry of Finance

45 Table 4.1 Government Budget: Summary ( ) R 000 Actual 1 Budget Actual 1 Budget Total revenue and grants 4,108,303 5,116,363 5,081,288 5,425,249 Total revenue 4,007,515 4,660,999 4,802,377 4,985,175 Tax 3,533,448 4,156,453 4,232,328 4,369,630 Personal Income Tax 195, , , ,838 Social Security Tax 219, Trade Tax 355, , , ,485 Excise Tax 579, , , ,603 GST 1,047,429 1,215,069 1,208, ,124 Value Added Tax ,072 Business tax 789, , , ,998 Other Tax 345, , , ,114 Pension Fund Contributions - 63,582 67,060 97,397 Nontax 474, , , ,545 Fee and Charges 190, , , ,547 Dividends Income 206, , , ,771 Other Nontax 76,780 91, , ,227 Grants 100, , , ,074 Expenditure and net lending 3,814,932 4,924,704 4,782,383 5,164,084 Current expenditure 3,194,379 3,699,109 3,713,306 3,954,617 Primary Current Expenditure 2,482,013 3,325,129 3,329,172 3,573,523 Interest due 712, , , ,095 Transfers 935,153 1,349,148 1,423,447 1,142,957 Capital expenditure 1,009,196 1,212,962 1,060,511 1,142,957 Net lending (388,642) 12,633 8,566 (8,490) Contingency ,000 Primary balance, Accrual basis (GFS) Including grants 1,005, , , ,259 In per cent of GDP 8.9% 4.5% 5.4% 4.7% Excluding grants 904, , , ,185 In per cent of GDP 8.0% 0.9% 3.2% 1.5% Overall balance, Accrual basis (GFS) 293, , , ,164 In per cent of GDP 2.6% 1.5% 2.4% 1.9% Change in Arrears (4,305) (8,312) 15,350 0 External Interest 87,810 26,026 - Budget (92,115) (8,312) (10,676) - Overall balance, cash basis (after grants) 289, ,347 96, ,164 Financing (289,067) (183,347) (96,803) (261,164) Foreign Financing (accrual basis, net) (23,055) 37,195 2,609 99,427 Domestic Financing, net (439,913) (220,096) (83,393) (457,171) Bank Financing (177,448) (198,087) (37,748) (411,461) Non-Bank Financing (262,464) (22,010) (45,645) (45,711) 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

46 4.5 Expenditure Total government expenditure and net lending amounted to R4,782 million, of which 78 per cent was allocated to current outlays. Despite the unexpected expenditures which had to be incurred during the year, actual government spending stood below the planned amount by 2.9 per cent or R142 million Current Outlays Current expenditure was R3,713 million compared to the budgeted R3,699 million. This was mainly as a result of transfers to the public sector of R702 million compared to the budgeted R623 million. These transfers were mostly allocated to the national airline for financial support. Conversely, less expenditure was incurred in the subcategory other Capital Outlays Total capital outlays stood at R1,061 million or 13 per cent below budget. The bulk of such spending went towards the financing of capital projects for the total value of R824 million. The amount spent under development grants was R232 million. The main beneficiary from the latter was the Public Utilities Company (R200 million), allocated for the financing of projects, principally relating to the improvement of water supply and distribution. Capital projects were largely funded from domestic sources (61 per cent of total financing). Chart 4.3: Government Capital Expenditure ( ) R million 4,000 3,500 3,000 2,500 2,000 1,500 1, , Years Source: Ministry of Finance Current outlays Capital outlays Net Lending

47 4.6 Public Sector Capital Project Expenditure Total spending on capital projects amounted to R824 million compared to the budgeted R957 million. The sum funded from grants was R236 million, whilst R81 million was financed through loans. Table 4.2 Public Sector Capital Expenditure ( ) (R thousand) Total 343, , , , ,853 Economic Sectors 4,382 3, ,758 21,806 20,939 Agriculture 2,882 1,240 2,491 2,813 1,585 Fisheries 1,500 2, ,267 18,994 19,354 Infrastructure and Utilities 22,185 12,870 30,595 21,812 51,520 Transport 16,422 8,005 10,330 19,581 34,980 Electricity, Water Supply & Sanitation ,075 Communications Land Reclamation ,022 Land Bank 5,439 4,656 19,496 1,869 4,442 Services 316, , , , ,395 Education 1, ,653 56,266 42,004 Health 13,043 13,898 23,480 31,852 57,182 Housing 156, ,039 66, , ,142 Social Development 34,624 18,330 57,823 92, ,494 Culture 3,524 4,847 1,305 12,043 1,283 Youth & Sports 11,388 8,209 12,559 36, Information & Media 17,866 7,673 1,877 2,654 18,640 Internal Affairs 2,666 2,924 1,221 15,999 20,874 Public Sector Management 68,808 59,840 29,907 29,656 37,700 Environment 7,010 6,487 41,187 38,793 76,636 Source: Ministry of Finance Economic Sectors The amount spent in the key economic sectors amounted to R21 million, of which the sole beneficiaries were agricultural and fisheries. The latter received R19 million which accounted for 92 per cent of the total allocation to these sectors

48 4.6.2 Infrastructure and Utilities Expenditure on infrastructure and utilities projects totalled R52 million. R35 million was allocated to the transport sub-sector, of which the bulk was used to finance road works. In general, all items under infrastructure and utilities received more funds in 2011 compared to the previous year. The most significant increase was recorded in the category electricity, water supply and sanitation, and this was from R0.4 million in 2010 to R4.1 million in 2011 which was used mainly to fund the new sewage treatment project Services Services remained the main beneficiary of capital funding with an allocation of R751 million. Housing received R263 million which represents the largest share compared to R213 million in the previous year. Most of these funds were allocated to the housing project at Ile Perseverance. The services projects to which their budget allocations was less than in the previous year were education, culture and youth and sports. Of note, youth and sports received relatively the smallest allocation and this went towards the maintenance costs of sports facilities in preparation for the Indian Ocean Games that were held in August. 4.7 Net Lending Net lending refers to short term credit to public sector entities, to be repaid in full by the end of the year. As at December 2011, the actual net lending stood at R8.6 million compared to the projected R13 million which implies higher-than-anticipated repayments. 4.8 Financing For the year 2011, the government budgeted an overall net financing of negative R183 million. The actual outcome was negative R97 million. Financing transactions were domestic and foreign in nature Treasury Bills Treasury bills were the main source of domestic financing during On the basis of the increase in issuance of 91-day and 182-day Treasury bills, compared to the reduction in that of 365-day maturity during 2011 relative to 2010, there is an indication of more preference for shorter maturities in

49 Commercial banks remained the key subscribers of government securities although their holdings fell relative to previous years. By contrast, the participation of non-banks increased significantly, with an increase from R42 million in 2010 to R202 million in 2011 observed in their holdings. An increase in yields was observed in the first half of 2011 across all maturities. However, interest rates remained relatively constant during the second half. As at the end of the year, the rates on the 91-day, 182-day and 365-day Treasury bills stood at 4.97 per cent, 5.59 per cent and 6.79 per cent, respectively. Table 4.3 Treasury Bills 1 ( ) R million Stock outstanding 2 1, , , , , day bills (tender issue) 1, , day bills (tender issue) day bills (tender issue) Stock outstanding 3 1, , , , , day bills (tender issue) 1, , day bills (tender issue) day bills (tender issue) held by commercial banks 1, , , , ,153.9 other financial institutions others End of period data. 2 At cost value. 3 At face value. Source: CBS Treasury Bonds No new government bond was issued in the course of However, there was an attempt in February to issue new bonds through an auction but it was unsuccessful on the grounds that the yields were seen to be too high, given market conditions at the time of the issue. As at the end of year, the outstanding stock of treasury bonds stood at R394 million. This represents a reduction of 33 per cent compared to that of January 2011, due to maturity of the instrument

50 Table 4.4 Treasury Bonds 1 ( ) (R million) Stock outstanding 1, , %, 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 : Commercial banks 1, Other financial institutions Others CBS End of period data Note: With effect from June 2005 there was the issue of a new Esmeralda II bond yielding 8.25% compounded. 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 interest on Government Treasury Bond has been doubled. Effective January 01, 2010 interests on all Government Treasury Bonds have been revised. Source: CBS Government Stocks Given no new maturities or issuances, the outstanding government stocks amounted to R100 million, similar to the previous year s level

51 Table 4.5 Government Stocks 1/ 2/ ( ) (R million) Stock outstanding %, %, 2005/ %, %, Held by Commercial banks Others / End of period data At cost value Source: Ministry of Finance and CBS

52 SECTION FIVE External Sector 5.0 Overview Seychelles openness and high dependency on the rest of the world signifies the importance of the external environment to the overall performance of the domestic economy. The year 2011 observed an increase in the country s dependency on the rest of the world depicted by a widening of the current account deficit. Additionally, the domestic currency depreciated against the major world currencies, especially during the second half of the year. The depreciation of the domestic currency was partly explained by strong demand for foreign exchange relative to supply, whilst the uncertainty surrounding the Euro/USD cross rates was another contributing factor. Nonetheless, the Central Bank continued to accumulate international reserves. As at the end of the year, gross international reserves stood at US$279 million, equivalent to 2.6 months of imports of goods and services. Net International Reserves (NIR) finished the year at US$217 million, US$18 million above the end-december-2011 target. The tourism industry, the mainstay of the Seychelles economy maintained a positive performance in A total of 194,476 tourists visited the country, which was an increase of 11 per cent from last year s level. Despite growing uncertainties from the European economies, the latter continued to be the main source markets (74 per cent of total tourists) for Seychelles. Correspondingly, the increase in visitor arrivals led to a rise in tourism earnings to US$291 million compared to US$274 million the year before. Seychelles remained committed to its debt reduction strategy, which is a key component of the current macroeconomic reform programme. At the end of 2011, external debt stock stood at 50 per cent of GDP. 5.1 Current account The provisional current account outcome for the year 2011 showed a deficit of US$224 million or 22 per cent of GDP. This was a widening of the deficit compared to 2010 s level of US$193 million (20 per cent of GDP), a development explained by an expansion in the trade deficit on account of an increase in the value of imported goods. The latter reflected growth in the demand for imported commodities and to some extent higher international prices such as that of food and oil. However, of note was the decline in FDI-related imports associated with a reduction in FDI inflows in 2011 compared to

53 Chart 5.1: Overall balance, current account and capital & financial account of the Balance of Payments (BOP) ( ) R million 7,000 6,000 5,000 4,000 3,000 2,000 1, ,000 2,000 3,000 4,000 Source: CBS Years Current Account Capital and Financial Account Overall Balance Trade in goods The country is inherently a net importer, and as such, its trade balance is inevitably in deficit. In 2011, the trade deficit grew to US$399 million, a rise of 20 per cent relative to the preceding year. The driving factor was a rise of US$144 million in the value of imports whilst export earnings rose by only US$46 million. Chart 5.2: Trade in Goods ( ) 15,000 10,000 5,000 R million 0 5,000 10,000 15, Years Merchandise exports (f.o.b.) Merchandise imports (f.o.b.) Merchandise, Net Source: NBS & CBS

54 Table 5.1 Seychelles Balance of Payments 1 (2007 to 2011) 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: CBS

55 5.1.2 Merchandise exports The provisional value of exported merchandise stood at US$265 million, an increase of 21 per cent compared to The fisheries sector in particular canned tuna was the main source of export earnings with a share of 92 per cent of total merchandise exports. For the year 2011, exports of canned tuna are estimated at US$242 million which is an increase of 15 per cent compared to Merchandise imports As highlighted earlier, the country is highly dependent on imports and this is to meet both the consumption and investment needs. Preliminary data shows total value of merchandise imports (f.o.b.) amounting to US$836 million compared to US$692 million in 2010, due to growth in import payments under most categories. The main component of imports was the category mineral fuels with a share of 25 per cent. The total value of imported mineral fuels increased by 20 per cent compared to the previous year. Table 5.2 Imports (c.i.f.)- by HS 1 Sections ( ) (US$ million) Description Total Imports , ,050.0 Food, live animals & vegetable oils Beverages and tobacco Mineral fuels Chemicals Manufactured goods & misc. manufactured articles Machinery and transport equipment* Other commodities Notes: 1 Harmonised System Source: NBS & CBS

56 Mineral fuels 24.8% Beverages and tobacco 1.5% Chart 5.3: Imports (f.o.b.) 2011 Chemicals 4.8% Manufactured goods & misc. manufactured articles 20.3% Food, live animals & vegetable oils 22.4% Source: NBS Other commodities 1.7% Machinery and transport equipment 24.5% 5.2 Services In line with trends in recent years, the services accountt showed a surplus. At US$203 million, Seychelles net export of services to the rest of the world grew by US$29 million over the 2010 level. The growth is importantly explained by an increase in tourism and related earnings. For the year under review, tourism earnings are estimated at US$291 million representing a growth of 6.1 per cent relative to last year. This increase is consistent with the rise off 11 per cent in visitor arrivals recorded during Notable is that the repositioning of the national airline by scaling down its operation in Europe and Asia to service only the region is likely to reduce the contribution of tourism and related inflows to the services account in the coming year. However, this will also reduce certain categories of outflow such as transportation services associated with a reduction in overseass payments by the domestic airline. 5.3 Income The income account remained in deficit, estimated at US$51 million. However, whilst in previous years the deficit was on account of interest accrued to external creditors, with the majority representing public external debt, in 2011, payments of dividends exceeded interest payments. Of note is that the successful outcome of the debt reschedule exercise was the main reason behind the reduction in net interest payments

57 5.4 Transfers Though on the decline, Seychelles remained a net recipient of transfers from the rest of the world. Government continues to be the main recipient. For the year 2011, total net inward transfer is estimated at US$35 million, of which US$28 million represent official transfers. 5.5 Capital and financial accounts For the year 2011, provisional figures show a surplus under the capital and financial accounts. However, there was a marked reduction in the surplus relative to the previous year. The reduction is from US$498 million in 2010 to US$178 million in 2011 due to a contraction in both of the main accounts as explained below Capital account The account mainly consists of official capital transfers. In 2011, this amounted to US$27 million which was a significant reduction compared to US$275 million in However, in 2010, capital transfers principally included debt forgiveness received by the Seychelles government following successful negotiations between Seychelles and its external creditors, such as the Paris Club members Financial account The financial account recorded a surplus or net financial inflow of US$151 million according to preliminary data. This was a reduction compared to US$223 million in the previous year. Direct investment remained the major component of the financial account. For the year 2011, total estimated FDI inflows into the Seychelles economy is US$136 million. However, this is a reduction compared to US$165 million in The majority of these investments represents tourism projects thus an increase in capacity of that sector. 5.6 External reserves The country continued to build foreign international reserves throughout At year-end, total gross international reserves stood at US$279 million, equivalent to 2.6 months of imports of goods and services. This was an increase in reserve level compared to US$255 million end As regards to the NIR, this ended the year 2011 at US$217 million and above the target set out under the macroeconomic reform programme by US$18 million

58 Table 5.3 External Reserves 1 ( ) (US$ Million) Gross official reserves Central Bank Government Central Bank's external liabilities Net official Reserves (includes blocked deposits) Net official reserves (excludes blocked deposits) End of period data Source: CBS 5.7 Exchange rates The year 2011 observed a general depreciation of the domestic currency compared to the previous year, principally on account of stronger demand relative to supply in the second half of the year. In consideration of the three major currencies that are traded in the country, namely the USD, GBP and EUR, the rupee depreciation was more significant against the EUR. This was by 7.3 per cent from an average exchange rate of R per EUR in 2010 to R in The rupee depreciation relative to the USD was by 31 cents (2.6 per cent), from an average of R in 2010 to R per USD in As regards to the average traded value of the rupee per GBP, this was from R in 2010 to R in 2011 which was a depreciation of 5.9 per cent. Table 5.4 Exchange Rates 1 ( ) (Seychelles Rupees per currency unit) Euro US Dollar Pound Sterling Japanese Yen South African Rand Singapore Dollar Period Averages Source: CBS

59 Rupees per currency Chart 5.4: Exchange rate movements of the three main currencies ( ) Years Euro US Dollar Pound Sterling Source: CBS 5.8 Offshore developments The conclusion of a model that is geared towards emerging markets in Asia and Africa, is that offshore activities have not been strongly affected by the European debt crisis but instead have maintained a growing trend in The Seychelles International Business Authority (SIBA) incorporated 16,485 International Business Companies (IBCs) during the year, translating into a growth of 12 per cent compared to the previous year. In 2011, SIBA invited proposals for the setting up of a Securities Exchange in the Seychelles which is expected to become operational by mid It is anticipated that the Securities Exchange will provide a platform to create new products and spur more growth in the financial industry. Out of revenue collected from its services, SIBA paid R26 million in dividend to the government. 5.9 International Relations The successful implementation of its macroeconomic reform programme and the furtherance of the country s economic diplomacy abroad continued to define Seychelles interactions with international partners in Though the IMF remains one of the key economic partners of the country, other multilateral and bilateral counterparts, namely the African Development Bank (AfDB) and the EU were both instrumental in the financing of key infrastructural projects

60 In terms of bilateral relations, the country continued to maintain cordial relations with its sovereign counterparts. The latter extended their support in various ways through capital, financial, as well as technical assistance. The year witnessed the signing of a number of co-operation agreements geared towards strengthening the economic ties between states. In the context of regional integration, Seychelles maintained its commitment to the economic and financial integration programmes of both the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA) within which the country remained active members Multilateral Institutions On the multilateral level, 2011 saw a strengthening of economic ties epitomised by the implementation of a number of important developmental projects International Monetary Fund (IMF) The IMF completed its Fourth Review and Financing Assurances Review under the Extended Fund Facility (EFF) which was approved by the IMF Executive Board on December 18, Seychelles remained on track in its implementation of the IMF supported macroeconomic reform programme. All QPCs and indicative targets were met with margins whilst the monetary and fiscal situation remains positive World Bank The World Bank 2011 Doing Business report shows that the Seychelles slipped to a rank of 95 out of 183 countries in 2011 in the ease of doing business index, compared to a ranking of 92 in With the assistance of the World Bank, the relevant local authorities have started work with the objective to improve this rating. During 2011, the country did not benefit from any new financing or technical assistance from the World Bank African Development Bank The AfDB continues to be an important development partner of the Seychelles. In April 2011, the AfDB s Board of Directors approved a US$12 million senior private sector loan to finance Seychelles Submarine Cable Project, SEAS. The project is designed to connect Seychelles to global internet exchange centers using high bandwidth link at relatively lower costs. The SEAS project is being cofinanced by the European Investment Bank, and equity contributions split between the three shareholders

61 of the Seychelles Cable Systems Company Limited namely: Seychelles government, Cable and Wireless Seychelles and Airtel. The project is expected to be completed and the cable fully operational by the end of the third quarter of In addition, AfDB approved a Middle Income Countries (MICs) grant of UA 5 490,600 equivalent to US$782,743 under the Technical Assitance Fund for MICs for statistical capacity building. The grant aims at strengthening statistical capacity in the country through statistical training and institutions building and improving poverty monitoring, economic and social policy evaluation and decision making through the enhancement of data collection, processing and dissemination at the national and sub-regional levels. In December 2011, the AfDB approved another grant under the Technical Assistance Fund for MICs amounting to UA600,000 or US$957,288 for the La Gogue Water Supply Study. The grant is to support the feasibility study and detailed designs for increasing the storage capacity of the La Gogue dam and improving the La Gogue water distribution system Bilateral Relations Relations between Seychelles and its bilateral partners moved to new heights in As has been the case over the years, the country continues to benefit from the support of its sovereign counterparts. Countries like China, India and the United Arab Emirates (UAE) remain key donors and play a vital role in the socio-economic development of the country. During the year, Seychelles opened its first embassy in the Middle East, in the UAE capital, Abu Dhabi, on November 25. The Abu Dhabi-based airline Etihad Airways began flights to the Seychelles on November 2. Furthermore, in an effort to solve Victoria s traffic congestion problems, the Abu Dhabi Fund for Development and the Abu Dhabi Urban Planning Council are helping the Government of Seychelles with the redesigning of the capital. To note, negotiations for visa-free access to the UAE for Seychelles nationals have also started. The Chinese government accounted for more than half (55 per cent) of the total benefits in-kind received in These include two airplanes, the Judiciary building, equipment for the Indian Ocean Island Games and the reconstruction of the Glacis School for a total cost of SR127 million. 5 AfDB s Unit of Accounts (UA)

62 India remains one of Seychelles most important partners and over the years has been pivotal in supporting the country s socio-economic development. In 2011 Seychelles and India signed a US$10 million line of credit aimed at increasing trade between the two countries. In addition, India has agreed to base a Dornier anti-piracy aircraft in Seychelles European Union Budget Support During the year, the EU maintained its support for the macroeconomic reform programme. As part of a total envelope of 17 million allocated by the EU for general budget support programme in December 2011, a sum of 2.4 million was disbursed. The third and last disbursement is expected in 2012 on the condition that the agreed performance indicators are met. Seychelles/EU Fisheries Partnership Agreement Under the Seychelles/EU Fisheries Partnership Agreement, in 2011, the EU paid a total sum of 5.6 million. This is the first of three payments under the existing three-year Fisheries Partnership Agreement between the EU and the Seychelles. The EU financial contribution comprises of the access right to fish in Seychelles waters amounting to 3.4 million and a sum of 2.2 million which is used to support the implementation of the Seychelles sectoral fisheries and maritime policies. Double Taxation Avoidance Agreements (DTAA) The Seychelles authorities signed two new double taxation avoidance agreements (DTAA) in 2011, namely with Lesotho and Sri Lanka. This brought the total DTAA signed to 21 compared to 19 in the preceding year. To note however, a handful of those DTAAs are awaiting notification or ratification. Committed to adhering to international standards on tax transparency, financial regulation and financial crime as promoted by the Organisation for Economic Co-operation and Development (OECD), Seychelles signed a number of Tax Information Exchange Agreements (TIEAs) in In total, 8 TIEAs were signed with the Nordic Alliance (7) and Guernsey Debt Restructuring Resolved in implementing its debt reduction strategy, the country undertook a number of debt restructuring negotiations in These were concluded with a number of countries and entities, namely, the Chinese government, Germany, the Abu Dhabi Fund and Southern Sun. The process of debt restructuring is close to completion with only a handful of creditors outstanding

63 5.13 Regional Integration The goal to establish a more economically integrated African continent under the auspices of the African Union (AU) took a stride forward in The Head of States of more than 26 countries agreed on the modalities of how to harmonise the various integration programmes across the continent in order to eventually create the African Economic Community (AEC). At the second COMESA-EAC 6 -SADC Tripartite Summit held on June 12, 2011 in South Africa, Seychelles was one of those countries which signed a declaration launching the negotiations for the establishment of the COMESA-EAC-SADC Tripartite Free Trade Area (FTA). The summit adopted the Roadmap for establishing the Tripartite FTA, the negotiating Principles, Processes and Institutional Framework. Seychelles maintains its commitment towards regional integration and continues to participate actively in the process. Despite its limited resources, as a member of the AU, SADC and COMESA, Seychelles has been involved in the bulk of activities organised by the three institutions namely conferences and workshops. SADC Harmonisation Programme In 2011, Seychelles started negotiations to join the SADC FTA. This is part of the country s active trade policy aimed at increasing potential import and export markets and encouraging investment (regionally and globally). During 2011, Seychelles also became the newest member of Regional Tourism Organisation of Southern Africa (RETOSA); a SADC body responsible for the development of tourism through marketing and promotion of sustainable regional tourism in member countries. It is expected that membership to the RETOSA will help boost the country s marketing capacity, hence attracting more tourists. In terms of monetary integration, SADC s macroeconomic convergence programmes aimed at harmonising the region s economies and ultimately establishing a monetary union remains on track. In 2011, the Central Bank of Seychelles successfully hosted three meetings as approved by the SADC Committee of Governors at their annual meeting in 2010, namely the Information Technology Forum in February, Training and Development Forum in July and a technical working group meeting in November. 6 East African Community

64 COMESA Integration Programme The year 2011 observed a strengthening of the cordial relationship between Seychelles and COMESA which was typified by the visit of the Secretary General of COMESA, H.E. Mr. Sindiso Ngwenya. COMESA, in collaboration with United Nations Conference for Trade and Development (UNCTAD) has signed a tripartite agreement with the government for the financing of a modern customs data IT system, the Automated Systems for Customs Data (ASYCUDA) World system. COMESA is financing US$450,000 for this modern system. The ASYCUDA is used in Seychelles but will be updated by the new ASYCUDA World web-based system

65 SECTION SIX Central Bank Operations 6.1 Research and Statistics Division The Research and Statistics Division (RSD) is the new name of the Policy, Market Operations and Statistics Division as of May 1, The RSD is the division which supports the Bank at achieving its objective of promoting price stability. The name change of the division came following the removal of the Market Operations Section from the division. RSD is divided into two sections; the Policy and Research Section (PRS) which has as main responsibilities economic analysis, research and policy formulation and the Statistics Section which is responsible for data collection and dissemination. One other responsibility of the division is to maintain or strengthen the Bank s relations with external partners, namely the IMF, EU, SADC, AfDB and COMESA, through networking and exchange of information. As such, staff of the division participated in various meetings and conferences held by these organisations/institutions which should assist in promoting and preserving the interest of the Bank. Moreover, RSD also organised one of the SADC Working Group meeting held in November Capacity Building and development During the year under review, staff attended several trainings and workshops held both domestically and overseas by several organisations such as the IMF, SADC, COMESA and ECB. These mainly related to monetary and exchange rate policies, monetary and external statistics, financial programming, financial sector stability as well as macroeconomic policy and management. Moreover, the division continued to be highly involved with meetings and other analytical works through the IMF Technical Assistance missions made during the year. These presented good opportunities for the staff not only to increase their knowledge on several key areas but also to gain some additional essential skills Policy and Research During the year, the PRS carried on with undertaking economic research, formulating policy and making recommendations in several areas within the scope of the Bank s operations

66 On the monetary policy front, the PRS continued to update the Monetary Policy Framework Operational Guidelines. Amendments were made to the existing guidelines for the Emergency Lending Facility and Foreign Exchange Swap. Moreover, a new set of guidelines namely that for the Use of Monetary Policy Instruments was introduced in February. In addition to these, the section also worked on the guidelines for the conduct of market operations and the terms of reference for the setting up of a monetary operations working group. The rational for this working group is to support the recommendations made by the Financial Markets Division (FMD) to the Monetary Operations Committee (MOC). Moreover, in conjunction with the Financial Services Supervision Division (FSSD), work started to establish a Financial Stability Committee, of which the terms of reference were drafted. With regards to research work, staff produced several short papers during the year such as The Purpose and Effectiveness of Lender of Last Resort and Measures to address Liquidity Surplus. Even though no major economic research paper was produced, a study to identify the channel(s) through which monetary policy is most effective in the Seychelles as well as determining an appropriate demand for money function started during the year. As one of its main tasks, the PRS prepared several periodical releases, namely weekly economic updates and monthly reports, both for internal consumption. Additionally, a half year economic review was published on the Bank s website. PRS staff made presentations to both the Investment Committee (IC) and the MOC with the objective to ensure the Committee members benefit from a wider information set. Staff members also gave presentations to external groups such as the A level Economics and Business Studies students of the School of Advanced Level Studies. These were part of the Bank s programme to promote economic awareness. The staff also contributed six economic articles that were published in local newspapers. In addition, PRS was involved with the analytical and forecasting work of the Macroeconomic Framework Working Group of the Macroeconomic Framework Steering Committee based at the Ministry of Finance

67 6.1.3 Statistics Section The Statistics Section is responsible for the compilation of data that is used for analytical purposes. One other task of the section is to provide and disseminate data to both internal and external recipients. In addition, it responds to enquiries and requests for statistics. The primary responsibility of the statistics section is the collection, processing and dissemination of monetary and financial sector as well as external sector statistics. During the year, the section started to work on a monthly Statistical Bulletin, of which the first release is scheduled for early Monetary and financial statistics Monetary and financial data is compiled in accordance with the IMF s Monetary and Financial Statistics Manual In 2011, the financial survey was widened to include other financial institutions namely the Bank Muscat International (BMI) (an offshore bank), the DBS and the Seychelles Credit Union (SCU). Data requests were also sent to the Housing Finance Company (HFC). However, the financial survey which includes these entities has not yet been published External sector statistics To further enhance external sector statistics, new staff were recruited to the statistics section towards the end of In terms of BOP statistics, the frequency of surveys continued to be on a quarterly basis with monthly breakdown. Stock data was also collected to enable the compilation of the International Investment Position (IIP) 7 data. IIP data were successfully collected for the Central Bank, commercial banks and the government. However, this has not yet been done for the private companies, both onshore and offshore. The BOP survey and the Coordinated Direct Investment Survey (CDIS) were re-launched in the year, so as to improve on the performance of The CDIS is a global statistical data collection effort led by the IMF designed to improve the availability and quality of data on FDI, both overall and by immediate counterpart economy and was launched in CDIS data for 2009 and 2010 were compiled and 7 International investment position (IIP) is a financial statement setting out the value and composition of the country s external financial assets and liabilities

68 disseminated to the IMF through the Integrated Correspondence System (ICS). Similar to the previous year, responses remained unsatisfactory but estimates were done by using the UNCTAD country mirror data. 6.2 Financial Services Supervision The supervisory portfolio Through its various functions, the FSSD promotes the soundness of the financial system which is one of Central Bank s objectives. The division is organised into two sections, namely the Banking and Foreign Exchange Section and the Insurance Supervision Section. The former supervises banks, bureaux de change, DBS, HFC and SCU. As for the Insurance Supervision Section, it is responsible for supervising insurance companies and intermediaries. The Financial Institutions Act (FIA) 2004 provides the regulatory framework for supervision of banks and bureaux de change. Of the 7 commercial banks, 5 were banking business licensees 8, one conducted solely offshore banking business 9 and one held both an offshore and a banking business licence. The FIA was amended late in 2011, to amongst other things, introduce a single licensing regime, which eliminates the requirement for separate licences to conduct solely offshore banking. Part provides more details on single licensing. As for bureaux de change, there were 25 in 2011 compared to 24 in the previous year. To this end, 4 new licences were issued whilst that of three operators ceased to be valid. Of the licensed bureaux de change, 22 were operational by the end of the year. As regards to the insurance sector, which is governed by the Insurance Act, 2008, there were 7 insurance companies in operation of which 4 operated domestically 10 whilst 3 were non-domestic insurance companies 11. The number of insurance intermediaries comprising of 10 brokers, 1 agent, 39 sub-agents and 1 Principal Insurance Representative, increased to 51 in view of the registration of 9 new sub-agents. 8 A banking business licensee can conduct business with residents and non-residents in local as well as foreign currencies. 9 An offshore banking business licensee conducts business only with non-residents and in foreign currencies. 10 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. 11 Non-domestic insurance business means insurance business which is restricted by a licence issued under the Act and subject to such other restrictions or limitations as may be prescribed, to only non-seychelles policies, and includes captive insurance business

69 6.2.2 Regulation and Supervision of institutions within Central Bank s supervisory portfolio In its endeavour to ensure a sound financial system, FSSD carries out three primary functions, notably licensing, offsite supervision and onsite supervision with a risk-focused, forward looking approach Licensing Licensing is an important part of the supervisory process as it ensures that entry is allowed only to applicants that will not be detrimental to the financial system. The licensing procedures entail due diligence which is carried out on administrators and shareholders of the applicant as well as analysis of applicants business plans. Whilst no formal application was received for banking licences during the year under review, FSSD received expression of interest from a number of investors. As for bureaux de change, 4 new licenses were issued in 2011, the same number as in the previous year. On the insurance side, in January 2011, formal authorisation was given for Mauritius Union Assurance (Seychelles) Co. Ltd (MUA) 12 to operate in Seychelles. Additionally, 9 sub-agents were registered during the year, of which 6 solicit general insurance business, 1 solicits life insurance business and 2 solicit composite 13 insurance business Offsite supervision Offsite supervision involves the analysis and monitoring of institutions financial performance and position on the basis of submitted periodic returns. This allows for problems to be identified in a timely manner and for prompt corrective measures to be implemented accordingly. As such, offsite surveillance allows on-going assessment of institutions. Analysis of institutions is primarily done on a micro-prudential basis whereby the soundness of individual institutions is assessed. Whilst industry s analysis is also conducted, the division plans to further develop macroprudential supervision in 2012, the importance of which was highlighted by the recent global financial crises. 12 Acquired wholly La Prudence Mauritienne Assurance, a company licensed by Central Bank in Composite insurance business refers to both life and general insurance business

70 Stress testing is also used as an offsite tool to identify weaknesses in the financial condition of banks and other institutions under the supervision of Central Bank at an early stage. It is also used to test the ability of the system to withstand major adverse developments. An important development in the area of offsite supervision during the year was work that started on a Statistical and Supervisory Application (SSA) project which was contracted out to a software developer. The SSA which is expected to go live in 2012 will increase efficiency by further automating the process of offsite supervision through online submission of returns and embedded analytical tools. In this regard, the SSA will eliminate some of the manual process of validating data contained in reports submitted by reporting institutions. Of note is that the SSA will also be used by other divisions of Central Bank which receive periodic returns from supervised institutions Onsite Supervision Onsite supervision involves inspections at institutions premises which allows for the assessment of aspects such as internal control, corporate governance and management oversight of the institution. The examinations also involve verification of the accuracy of returns which are used for offsite analysis. Examination reports are issued by exception highlighting areas where limitations, non-compliance and scope for improvement were observed. Onsite inspections of bureaux de change principally assess their adherence with regulations and guidelines whilst that of SCU adopts the PEARLS approach looking at the institution s Protection, Effective financial structure, Asset quality, Rates of return, Liquidity, and Signs of growth. As regards to banks, DBS and SCU, onsite inspections are carried out in line with the CAMELS rating system, adopting a risk-focused approach to the assessment of institutions Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market risk. In 2011, FSSD conducted full scope examinations on two banks and two insurance brokers. Two limited scope examinations of banks were also carried out focusing on irregularities which had been identified offsite. Based on findings, in one case the external auditor was requested to further check the bank s internal control. Onsite examinations of DBS and HFC were also conducted during the year under review Developments in the banking sector In 2011, banks started reporting in line with new Regulations on Capital Adequacy for which the main changes included maintaining capital charge for operational risk using the Basic Indicator Approach and

71 the inclusion of unaudited profits as part of tier 2 capital. Similar to previous years, the banking system remained well capitalised throughout 2011 whereby the risk weighted capital ratio stood at 24 per cent as at the end of the year compared to the minimum level of 12 per cent. Moreover, the net tangible capital ratio 14, for which a level of 1.5 per cent or less may result in revocation of a bank s licence, stood at 9.1 per cent at the end of Banks also remained highly liquid throughout the year whereby the ratio of liquid assets to total liabilities remained above 47 per cent thereby exceeding the minimum requirement of 20 per cent as prescribed by the Liquidity Risk Management Regulations. As regards to asset quality, the ratio of non-performing loans to gross loans stood at 8.1 per cent as at the end of the year compared to 5.5 per cent in the previous year. Amongst other things, the change in this ratio was due to banks reassessment of their portfolio to ensure adherence to the new Credit Classification and Provisioning Regulations. As regards to the profitability of banks in Seychelles, in 2011, the Return on Equity stood at 40 per cent compared to 35 per cent in This was mainly driven by profit on foreign exchange dealings Actions to improve competition in the banking sector FSSD prepared a paper in 2011 on options to improve competition in the banking sector, where amongst other things, the industry s return on equity and return on assets were considered high and comparable to Sub-Saharan Africa where there is overall low level of competition. Other indications of lack of competition in the banking sector include the large spread between lending and savings rates and certain terms and conditions which Central Bank considers could be more reasonable in a competitive environment. In this regard, an action plan was prepared which included deliverables aimed at improving competition in the banking sector on which work started during the year. This includes the issue of a circular on disclosure guidelines in October 2011, the aim of which is to ensure that clients are informed of the terms and conditions of banks products and services. In this regard, the availability of information in a clear manner is expected to allow clients to better understand products and their associated fees and also motivate banks to provide more competitive terms and conditions. As part of the Central Bank s Communications Strategy, in 2011, FSSD took part in the financial literacy programme. This included an open day organised by Central Bank, and the publication of various articles 14 Equity Capital /Net Assets

72 in local newspapers aimed at educating customers on bank related topics. The Communications Strategy will be continuously updated to ensure its effectiveness and relevance. As part of the deliverables, the Central Bank also started work on the establishment of a Credit Information System (CIS) which is discussed under Of note is that the Ministry of Finance was also involved in achieving deliverables of the action plan. Notably, a reduction in registration fees of securities against which loans are taken was effected in the interest of facilitating switching of banks by clients which is important in a competitive environment. The Ministry of Finance is also expected to work on reform at the Registrar to address delays in registering securities given that banks are reluctant to lend when their interest is not protected Amendments to the Financial Institutions Act 2004 Further amendments to the FIA were promulgated in December Of note is that this is a continuing exercise in order to ensure that the legislation is in line with international best practices and remains relevant to the current environment. In 2008 amendments were made to facilitate the licensing of bureaux de change in view of the liberalisation of the foreign exchange regime in that year. As for revisions which were effected in 2009, these were to strengthen the supervisory framework and remove inconsistencies that existed. In addition to this, the 2011 revisions introduce new and improve existing practices consistent with the Central Bank s pursuit to improve competition in the banking sector. The main revisions were as follows: Single Licensing Regime With the introduction of single licensing, the need for separate licences to conduct solely offshore banking business has been eliminated. Banks operations will be segmented into two categories mainly for taxation purposes and banks will be required to maintain separate records for activities in each segment. Essentially, the income generated from and funded by non-residents or entities incorporated or registered in Seychelles which have personal or economic relations or place of effective management outside Seychelles, will benefit from a 3 per cent tax rate in contrast to other transactions 15. In this regard, Central Bank worked in close collaboration with Ministry of Finance and Seychelles Revenue Commission in view of the tax implications of this regime. 15 The existing rates will apply; banks are taxed at 25 per cent on the first R1.0 million of taxable income and 33 per cent on the remainder

73 Single licensing is expected to promote competition in the banking sector by allowing offshore banks to operate in the domestic market therefore offering the public with more choice. Furthermore, the regime is aimed at levelling the playing field in view that income from offshore transactions carried out by banking business licensees was being taxed at the normal rate whilst offshore banks were exempted from tax Credit Information System One amendment of the FIA was to provide for the establishment of the CIS. The revision allows banks to disseminate information to the CIS and for the information to be shared amongst participating institutions. A CIS is important in the development of a financial sector as it allows for identification of risk and the efficient allocation of credit. Based on clients history, more prudent lending decisions can be made thus serving as an incentive for clients to honour commitments with credit granting institutions. Such a centralised database builds a credit track record and therefore allows for a client to avail to terms and conditions consistent with their credit history. This has competition implications as it may make it easier for a client to change bank or other credit granting institution. The CIS is expected to be operational in Regulation of fees and charges Fees and charges is one of the main areas on which the Central Bank receives complaints from banks clients. A provision has been included in the FIA to regulate fees and charges and it is expected that Central Bank will intervene when these are unreasonable Timeframe for submission and publication of audited financial accounts The requirement for submission of draft audited accounts to the Central Bank one month before the final statements are lodged has been formalised in the FIA. This allows FSSD to review the statements for any material misrepresentation which may need to be corrected prior to publication. In addition, as of 2012, banks and bureaux de change will be required to submit and publish their annual audited accounts in April compared to May as is the case in many countries internationally. This will allow for more timeliness in analysis of the financial statements which are also submitted to international organisations such as the IMF and for timely completion of reports Penalty Additional specific offences which were hitherto not subject to a penalty have been included in the FIA with corresponding penalties as a means of enforcing adherence to the regulatory framework. Moreover,

74 the clause on compounding of offences for which the minimum fine was fixed at one third of the penalty fee was amended to provide for more appropriate penalties taking into account the gravity of offences and these are to be prescribed by Regulations Penalty for non-payment of licence fees A penalty was introduced for financial institutions which are not timely in their payment of annual fees. It also provides for a due process upon non-payment of annual fees, which was not clear prior to the amendment; notably revocation of licence when the annual fee remains unpaid for 14 days. This amendment is especially relevant for bureaux de change, some of which had in the past failed to pay their annual fees on time Payment of dividend Central Bank s approval will need to be sought before financial institutions pay dividends or transfer profits abroad and additional conditions have been included on the basis of which the approval will be granted or not. Essentially, this will ensure that the payment of dividend or transfer of profit will not cause financial institutions to breach prudential requirements Licensing With a view to strengthening the licensing process, additional criteria for evaluation of a banking licence have been included in the FIA. This includes consideration of any risks and corporate activities which may affect the reputation of Seychelles. Central Bank will also be able to consider any other criteria as it may deem appropriate in view that each licence application is different and may require assessment of criteria unique to its specificities Financial Stability Central Bank recognises the importance of financial stability against the backdrop of recent financial crises. Although the Bank does not have a separate financial stability unit, RSD and FSSD have, as a first step, discussed the setting up of a Financial Stability Committee and prepared a first draft of its Terms of Reference. The Committee will have the mandate to safeguard financial stability by making macroprudential policies aimed at limiting the risk of financial distress with significant losses for the economy as a whole. Moreover, the country s crisis binder which was initiated in 2010 was drafted during the year under review. The binder is the deliverable of a workshop on crisis preparedness in the fourth quarter of

75 facilitated by Toronto Centre 16. The binder essentially contains all information that will be needed in the event of a financial crisis including communication lines, co-operation and co-ordination amongst different authorities and resolution options. The exercise involved the identification of gaps which can reduce the effectiveness of crisis preparedness and the development of an action plan in order to address these gaps for which the deliverables were closely monitored during the year. As at December 2011, deliverables which had been achieved included the setting up of Central Bank s CORE (Centralised Online Real-time Exchange) Banking system which provides a centralised point for information needs; in the context of crisis preparedness it provides automatic alerts for instance when banks accounts are overdrawn. In addition, the need to set up a crisis communication group was identified for which members were nominated, responsible for making decisions and communicating with different stakeholders in the event of a crisis. Discussions were also initiated with the Chief Justice to establish a Commercial Court which will assist with the speeding up of resolution options, such as reorganisation or liquidation of a bank. A first draft of Guidelines on Corporate Governance was also prepared and is expected to be finalised in In pre-crisis planning corporate governance is important in order to prevent inadequate management of risk, collapse of internal control and avoid focus on short term profit at the expense of the long term strategies of financial institutions Developments in the insurance sector The effective supervision of the insurance market remains a crucial aspect of the economic reform programme due to its importance in the financial services industry. As such, in 2011, the Central Bank continued its effort to strengthen its Insurance Supervision Section to keep up with the changes in the commercial front. In April 2011, the supervisory capacity of the Insurance Supervision Section was reinforced through staff participation in a 4-day regional workshop which was held in Seychelles. The training was hosted by the Central Bank in collaboration with the Commonwealth Secretariat and the Malta International Training 16 The Toronto Centre is an organisation with the mission of enhancing the capacity of financial regulators 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

76 Centre. Following the workshop, the level of conformity with the Insurance Core Principles 17 assessed and an immediate action plan was set up to work on the identified deficiencies. was Moreover, in line with technical assistance obtained from FIRST Initiative 18, two consultants conducted their first mission in May 2011, thus, initiating the first of the three stages 19 of the project. This will be followed by a discussion paper which is expected to be issued in the first quarter of 2012, describing the existing insurance market and issues for the adoption of a more risk-based regulatory regime. The consultants have targeted full completion of the project by Furthermore, following consultations with the insurance market and the government, the CBS recommended that insurance of risks relating to assets situated in Seychelles be insured locally with the aim of promoting confidence and ensuring orderly growth in the insurance industry. This will help to ensure that significant premium remain in the country, hence increasing the industry s profitability which will generate additional fiscal revenue for the government in terms of taxes. It is expected that the new set of regulations restricting insurance of local assets to local insurers will be issued early In the year under review, work started with regards to the issuing of the insurance complaint handling regulations which is expected to be released in the second quarter of This will allow for a mechanism to be in place to deal with complaints and for statistics to be obtained on complaints made. Looking ahead, there is prospect for further growth in 2012, especially in view of the compulsory insurance of risks in relation to local assets with the domestic insurers. 6.3 Financial Markets Division In view of the changing economic landscape of the Seychelles, the FMD was established in May 2011 with the aim of ensuring the development of an efficient financial system, through a well-functioning money and foreign exchange market. In addition, this was also done to provide proper segmentation of processes of financial nature, namely in accommodating for a front office, middle office and back office configuration that served to further reduce the risk involved in financial transactions. 17 These principles were set by the International Association of Insurance Supervisors in 2003 but these have been replaced in the second half of 2011 by a set of new standards. 18 FIRST Initiative is a multi-donor grant facility based in Canada providing technical assistance to promote financial sector strengthening. The World Bank manages FIRST Initiative on behalf of the donors. 19 Stage 1 being the discussion stage, stage 2 proposed structure for risk-based solvency regime and stage 3 proposed details of the risk-based regime

77 FMD is organised into two sections, namely the Front office and the Middle office. The Front Office comprises of the Market Operations Unit and the Market Analysis Unit. The former is sub- divided into three units: the Reserve Management Unit which is responsible for handling the day-to-day management of Central Bank s reserves, whilst the Money Market Unit oversees the day-to-day operations in both local and foreign currencies. The third unit is the Securities Unit which monitors the primary transactions of government securities. This unit also manages the issuance of government securities such as Treasury bills. The Market Analysis Unit is divided into two sub-units, namely the Liquidity Forecasting Unit and the Market Intelligence and Analysis Unit. The former co-ordinates the forecasting of liquidity management framework which is used for comparison against the actual whilst the latter is responsible for undertaking market studies by liaising with commercial banks and government on a regular basis to monitor their activities in the market Open Market Operations The Money Market Unit conducts open market operations (OMO), which refer to transactions in the primary market by the Central Bank, undertaken to influence banks liquidity and signal monetary policy objectives. The instruments used for this process are mainly DAA auctions, RRA auctions and FEA auctions. In addition, the Central Bank made use of different tools in 2011 to monitor the financial system, most notably through monthly Market Intelligence exercises conducted on the domestic commercial banks. These exercises relates to reserves, currency, loans and investments provided the Bank with not only up to date financial information, but foreshadowed potentially disruptive fluctuations in the economy, enabling preventative action. In 2011, approximately ten market intelligence exercises were conducted by the Money Market Unit with satisfactory bank participation Management of External Reserves The foreign exchange reserves held by the Central Bank of Seychelles are a major national asset and a primary tool of monetary and exchange rate policy. The level of Gross Foreign Reserves held by the Central Bank has grown substantially in the recent years. Through effective deployment of the external reserves, the Central Bank s income increased significantly over the first three quarters of the year However, the trend was slightly distorted in the wake of the global financial crisis resulting in depreciation of major holding currencies. The implication of such resulted in temporarily shelving of

78 major investment vehicles such as the Reserve Advisory and Management Program with the World Bank and investment with Banque De France. A key target of reserve management is the maintenance of the NIR. The NIR is measured by deducting the blocked deposits and other foreign liabilities from the Gross International Reserves. The Central Bank performed well in meeting the programmed NIR target set in consultation with the IMF. The NIR for December 2011 was US$217 million against the target of US$199 million Management of Domestic Debt Treasury Bills During 2011, Treasury Bill auctions continued to be held on a weekly basis, offering bids for 91, 182 and 365 days maturities. Commercial banks were most active in these auctions. Table 6.1 Treasury bills Interest Rates 1 ( ) days 0.48% 4.97% 182 days 1.23% 5.59% 365 days 2.38% 6.79% 1 End of period data In October 2011, the Ministry of Finance revised the application procedure, whereby applicants had to bid through price mechanisms only rather than having the option to choose between interest rate and price as was the previous practice. To assist members of the public in completing application forms, a conversion table (showing conversions from interest rate to price) and access to an electronic calculator used to convert interest rate into price and vice versa are currently available on the CBS website Treasury Bonds The government did not issue any new bonds in However, an attempt was made in February to issue new bonds through an auction. This was not successful as considering the market condition at the time, the interest rates were judged to be too high. In that same month, DBS issued a bond of R50 million, the third in its series of bonds, whilst in August 2011, it issued another two bonds with an issue limit of R25 million each. Private individuals were the most active participants in these bonds. The Central Bank administered the issue of the DBS bonds which were guaranteed by the government and which have been fully subscribed

79 CBS Holdings of Government Treasury Bills CBS continued to rollover the treasury bills upon maturities as agreed in the Memorandum of Understanding dated July 30, The table below gives the amount of CBS Holdings as at December 31, Table 6.2 CBS Holdings of Government Securities as at December 31, 2011 Treasury bills Type SCR (Discount Value) 91 Days 250,000, Days 63,000, Days 63,000, Days 250,000, Days 247,052, Days 250,000, Days 62,000, Compliance and Risk Function The Compliance and Risk Unit has oversight over the operations of the front office of the FMD and the back office of the Banking Services Division (BSD). The unit is accountable to the Deputy Governor with regards to its day-to-day functions but reports to the Head of FMD administratively. The unit is responsible to oversee the development and implementation of risk models and other related tools for strategic and tactical asset allocation, risk allocation and budgeting, and benchmark identification and selection in the management of international foreign exchange reserves. Moreover, it monitors and analyses international developments, namely the exchange rates, interest rates and commodity prices on the international market. The remaining duties of the unit is to coordinate periodic review of operational guidelines, policies and procedures in order to ensure that the FMD treasury operations are in conformity with best practices and approved policies. Additionally, it is required to monitor front and back office activities to ensure that transactions are certified, authorised and settled correctly according to set policies and benchmarks. Lastly, the unit has to prepare report of financial risk management for presentation to IC on a monthly basis, for the Board of Directors on a quarterly basis and for disclosures in the Bank s financial statement on an annual basis

80 6.4 Banking Services Division BSD comprises of the Banking and Financial Reporting Section, Currency and Numismatic Section and the Payment Systems Sections Banking and Financial Reporting Section The section is primarily responsible to perform the role of banker to government and the banking system. It provides various banking services and maintains accounting records pertaining to foreign exchange and domestic currency transactions of its customers. In addition to maintaining the records of the Bank s internal accounting transactions, the section also provides back office services to the FMD for open market operations transactions, reserves management activities and the issuance and redemption of securities. The quarterly income and expenditure report to the Board in relation to the budget and the monthly and annual preparation of financial reports also forms part of the responsibilities of the section. Financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) to be in line with international best practices Currency and Numismatic Section The bank maintained its responsibility to issue currency to the banking system and continued to pursue the development of its numismatic functions in Issue of new and improved banknotes With increasing number of counterfeit banknotes in circulation and with a view to improve and modernise the security features on the higher denomination banknotes, the Bank issued three new and improved banknotes in June The new 50, 100 and 500 Seychelles Rupees banknotes issued have enhanced security features, more distinct colours and other design upgrades Banknote destruction In performing its duty of ensuring that only fit notes and coins are re-issued in circulation, the process to destroy banknotes that were deemed unfit started in In an effort to increase the transparency, efficiency and accuracy of the process, the Bank invested in a heavy duty specialised banknote sorting and shredding machine. This enabled highly accurate sorting and authentication of banknotes as well as a faster destruction process that is 100 per cent accurate

81 Commemorative gold and silver coins In June 2011, the bank issued three new commemorative gold and silver coins for sale on the local and international markets. The first, a ½ gram gold coin which is also one of the world s smallest and finest gold coins commemorating the Royal Wedding of Prince William and Catherine Middleton on 29 th of April The coin has a face value of ten rupees and depicts two gold wedding rings on the reverse whilst the obverse features the effigy of Queen Elizabeth and the Coat of Arms of the Republic of Seychelles and the year The second, a 1¼ gram gold coin with face value of twenty five rupees was to commemorate the 35 th Anniversary of Seychelles Independence on 29 th of June This gold coin depicts a Tropical Seychelles Island, the Coco-de-Mer, the Clock Tower and the Aldabra Giant Tortoise on the reverse. The obverse depicts the Coat of Arms of the Republic of Seychelles and the year The third, a 28¼ gram silver coin with face value of twenty five rupees was to commemorate the 35 th Anniversary of Seychelles Independence on 29 th of June This silver coin has the same features as the gold version Payment Systems Section As per section 30 of CBS Act, the Bank is mandated to assist commercial banks in establishing facilities for the clearing and settlement of payments, including payments by cheques and other payment instruments. The Bank pursued its on-going process to modernise the National Payment Systems during the year A major innovative step taken was the release of the Tender documents for the Truncated Image Automated Clearing House (TIACH) project. The TIACH comes at a very opportune juncture where it is anticipated that the industry moves away from the manual and heavily paper-based cheque clearing process to that of an automated and electronic one. The project is also viewed as a medium, whereby the vast majority of risks associated with clearing of cheques, including but not limited to bounced cheques and closed accounts, can be minimised using modern fraud screening and collection tools. This makes it possible to get real time verification to determine whether the cheques are valid and that funds are available in the payer account. ProgressSoft Corporation has been awarded the contract for this project,

82 for which their solution has the capabilities to provide same day clearing of cheques. The project is planned for completion in the third quarter of Cheques Standardisation Project In conjunction with the upcoming introduction of the TIACH and more specifically the Electronic Cheque Clearing system, a project to introduce standardised and Magnetic Ink Character Recognition (MICR) Code Line compliant cheques was also initiated during the start of the year. The latter is critical to the establishment of a critical mass of compliant cheques that will allow for the smooth implementation of the TIACH in These cheques will comply with international best practices and minimum required standards. Upon completion of this project, all cheques currently circulating in Seychelles will be replaced by standardised and MICR Code Line compliant cheques Cheque Clearing House With the reforms and modernisation of the National Payment Systems, the trend in the use of payment instruments in Seychelles has gradually evolved. There has been a slight shift from paper-based payment instruments, such as cash and cheques, to electronic-based instruments such as debit cards and telegraphic transfers. Nonetheless, cheques remain a prime payment instrument in the country. Chart 6.1: Number of Cheques presented at the Clearing House ( ) Number of Cheques 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Months Source: CBS During the year of 2011, the total value of cheque transactions decreased by 21 per cent when compared to the previous year. An average of 3,223 cheques with a total value of about R54 million were cleared

83 daily. Volume-wise, the total number of cheques cleared increased by 4.3 per cent from 2010 to This trend is mainly due to the improvements in the CBS Immediate Transfer Service (CBSITS), which is the main channel for high value payments in the country. Chart 6.2: Value of Cheques presented at the Clearing House ( ) Value of cheques (R million) 1,600 1,400 1,200 1, Jan Feb Mar Apr May Jun Jul Aug Sep oct Nov Dec Months Source: CBS The value of cheque transactions in the country remains high and the growing trend in volumes is expected to continue at the same rate during the course of This therefore increases the settlement risk associated with the clearing of cheques and as such, in line with its objectives to promote a sound financial infrastructure with efficient payment and settlement system, the Central Bank s initiative to embark on the TIACH project is key to minimising such risks Central Bank of Seychelles Immediate Transfer Service In terms of the Immediate Transfer Service for mainly high value payments in 2011, there was an increase of 251 per cent in the number of transactions and an increase of 5.7 per cent in value of transactions processed when compared to A total of 34,400 transactions were processed for a total value of R10,960 million during 2011 compared to 9,808 transactions for a total value of R10,370 million in

84 Chart 6.3: Number of SWIFT instruction messages sent to the participants of the CBSITS ( ) Number of SWIFT Instructions 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Months Source: CBS Chart 6.4: Value of SWIFT instruction messages sent to the participants of the CBSITS ( ) Value of SWIFT Instructions (R million) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Months Source: CBS The significant increase in the volume of transactions has been largely due to the rise in transactions effected by the Treasury Department of the Ministry of Finance after the introduction of an electronic portal that facilitates commercial payments. This facility ensures that payments are effected on a Straight Through Processing basis facilitated by the all-important and recently implemented CORE Banking

85 System. Essentially, with this new development, the Treasury Department is now making direct electronic payments to its suppliers and customers bank accounts through the CBSITS. The service has been perceived to be resilient and efficient to all stakeholders with further improvements anticipated in Technical Services Division (TSD) 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. During the year 2011, the main focus of the division was to address the issues raised by Information Systems Audit (ISA) that was carried out in TSD covered most of the operational risks that had been highlighted during the year under review. However, the completion and documentation of the remaining policies and processes will be done in Staff of the division also attended intensive training in order to be able to support the new technologies being implemented at the Bank IT projects The successful implementation of the second phase of the CORE Banking Project, the CBS Portal for Treasury uploads of government payment, Human Resources Information System (HRIS) consisting of Payroll and HR modules and the completion of the Guy Morel Training room have been the highlights of the Division during Key targets for 2012 are first of all the deployment of the Credit Information System which will provide the platform for consolidation of information on credit of clients of participating financial institutions. Secondly, there will be the implementation of a Statistical and Supervisory Application which has the objective of enhancing the efficiency in the delivery of information from the Bank s stakeholders. Another important project for the forthcoming year is the Truncated Images Automated Clearing House. This project is part of the on-going modernisation programme of the Bank for the payment system, whereby it will reduce the amount of time it currently takes to clear a cheque. 6.6 Project Management Unit (PMU) CBS PMU came into operation in June The unit has the overall responsibility for managing and executing projects as approved by the Board. The unit follows best practice guidelines for achieving the target through the use of processes such as initiating, planning, executing, controlling and closing. In

86 addition, the unit manages the work of the projects, which typically involves competing demand for scope, time, costs, risk and quality. Since it became operational, the unit has been engaged in many projects, some of which that ran simultaneously. Some were completed during the year whilst the completion date of others will be in 2012 as shown in Table below. Table 6.3 Project Undertaken (2011) Projects Date Started Date Completed Tentative Date CORE Banking Phase II 01/04/11 01/06/12 Training Room 10/02/11 23/12/11 HRIS 01/04/11 01/07/11 CIS 01/06/11 31/03/12 SSA 20/06/10 31/03/12 TIACH 30/06/11 01/09/12 Disaster Recovery 10/06/10 01/12/ Administration Division On April 19, 2011, the Board of Directors approved the splitting up of the Administration and Human Resources Division in view of the increase in responsibilities. This restructuring was driven by the desire to improve efficiency, strengthen accountability and create better transparency in the Central Bank s operations. The Administration Division is the responsibility of a Director. The Division itself was also re-structured, bearing in mind that since CBS was incepted in 1982, its labour force has more than doubled. In a nutshell, the rationale for the re-structuring was to enhance effectiveness in dealing with the increased demand for administrative support at the Bank and the increased direct supervision of the various units. The Administration division is now responsible for the following support services to the other Divisions of the Bank: a) Transportation b) Cleaning of the premises c) Upkeep of the building d) Upkeep of CBS assets

87 e) Management of Stores f) Uniforms g) Procurement h) Old Records i) Security 6.8 Human Resources (HR) In terms of human resources development for the year, a total of 18 new staff joined the Bank, representing a 15 per cent increase whilst only four staff left the Bank. The total number of employees as at December 31, 2011 was Training With the aim of improving the overall performance of staff, the HR Division held several in-house training sessions during the first half of the year. Training included business letter writing skills, presentation skills, Business Etiquette and the use of the recently launched HRIS. As the health of the staff is also a priority, a talk on Smoking and its Cessation was organised in collaboration with the Ministry of Health, after which staff underwent a health screening. Staff were explained the risks of alcohol and cancer, cardiovascular disease risk factors and diet. The Bank also hosted the SADC Training and Development Forum in July at the Meridien Barbarons Hotel and this provided an opportunity for member states to voice out their concerns and priorities for training needs during the coming years for member central banks. The forum was held during three days and topics for discussion included regional integration of training and the proposed Institute for Monetary Studies, amongst others. In August, the Bank held a short presentation to students from the Police and Military Young Leaders as well as those from the School of Advanced Level Studies. The students were explained the role of the CBS and the functions of various divisions. Staff were given the opportunity to attend the The Setting up of a Stock Exchange in Seychelles: Institutional, Operational and Regulatory Framework, the Currency and National Payment Systems and the Basle Core Principles and Basle Framework talks which were held locally. Staff also attended short courses abroad on Macroeconomic Management and Financial Sector Issues, Balance of Payments Statistics, Financial Markets Analysis and SWIFT training course amongst many others

88 6.8.2 Staff Satisfaction Survey and staff retreat The Staff Satisfaction Survey was conducted over 2 weeks in November. The purpose of the survey is to improve morale and productivity by giving staff the opportunity to rate their work and their working environment anonymously. The survey which was done online covered 16 areas and the response rate was very high. The results of the survey were planned to be communicated to the staff in the staff retreat to be held early January Human Resources Information System - Adrenalin The HR Division made a technological leap with the implementation of a HRIS. The system had been in use by the HR staff since the end of 2010, but was only formally introduced to other staff starting from July In view that the HRIS is integrated with the CORE Banking System, it greatly improved the HR functions in terms of loans and payroll processing. The use of the system significantly reduces the amount of time and paper work that would otherwise be required for the processing of requests given that it facilitates the retrieval of data which therefore makes work processes more efficient. By capturing a wealth of information, the HRIS has become an indispensable tool, helping the HR division to better serve the staff of the Bank Long service award In December 2011, a total of 6 staff who completed between 15 to 30 years of service were awarded a token of appreciation for their long years of service with the Bank. 6.9 Internal Audit Division (IAD) During the year 2011, IAD continued with its oversight function whereby it had as mandates the audit as well as the risk management function. This consolidation of functions was done given the synergies of the risk-based approach adopted by IAD. In addition, it was seen necessary at the time given the size of the Central Bank as well as in the maturity of the said functions. The Division carried out 22 audits and presented 40 recommendations in Of these, 70 per cent were implemented during the year under review. The remainder are to be executed in These recommendations were aimed at enhancing accuracy of reporting whilst strengthening internal controls without impeding process flows. Given the increased oversight compared to previous years, the Audit

89 and Risk Committee of the Board, to which IAD reports, also met on a more regular basis; from once every quarter to once a month. This increased the governance of the Bank and the productivity of IAD through more guidance and surveillance. Furthermore, following the second Safeguards Assessment conducted in 2010, the Bank also adopted an External Audit Quality Policy aimed at ensuring that External Auditors are safeguarded from threats that may arise by providing non-audit services. This was approved by the Board in October As regards to Risk Management, it became more active early in the year following the approval by the Board of the Risk Policy and the setup of Investment and Risk Implementation Committee for which the latter was the merger of the Risk Implementation Committee to the already existing IC. This combined Committee was entrusted with the mandate to manage both financial and operational risks as well the oversight function for the Business Continuity Management System. With both investment activity and risk management gaining increased momentum in the months that followed the merger, a decision was taken in May to have separate committees; an IC to have oversight on External Reserve Management which is inclusive of financial risks and a Risk Implementation Committee to handle operational risks. This change has provided for more flexibility in delivery of assigned tasks and the oversight functions. As the year progressed, it was seen that the risk management function should also be a stand-alone role in the Bank s administrative structure. Such a move was necessary in view that the risk management function will be subjected to audit by the IAD and this meant that they cannot be under the same umbrella as this poses conflict of interest. Having consensus at Management on this change, a proposal was put before the Board in November for which approval was given Board of Directors With the economic reform programme well underway for which the Bank is a participant as well as the continued modernisation of the Bank itself, the Board was very active during the year under review with 12 ordinary and 4 extraordinary meetings. The main subjects on the Board s agendas were the implementation of new monetary policy tools, policies vis-à-vis risk management and business continuity to name a few

90 The Board also discussed the amendments to the CBS Act, 2004 to reflect the recommendations that had been put forth in the IMF Safeguards Assessment of The amendments became law in December after the National Assembly approved the proposals. The Board of Directors was also very dynamic through its 2 sub-committees. These are namely the Audit and Risk Committee and the HR Committee where specific issues are discussed in the smaller group of non-executive directors, after which recommendations are brought before the Board HR committee The Terms of Reference of the HR committee was approved by the Board of Directors on May 18, The Committee comprises of one non-executive Board member and the Deputy Governor. The Committee is mandated to discuss and make recommendations to the Board on such issues including succession planning, organisational structures and remuneration packages. The issues are brought before the Committee for discussion by the Head of the HR Division. Meetings are held every quarter and all meetings are minuted and circulated to the other members 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 development of the domestic economy. On this note, the Board and Management look forward to another successful year ahead

91 CENTRAL BANK OF SEYCHELLES FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011

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93 CENTRAL BANK OF SEYCHELLES Page 1 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 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 11-60

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99 CENTRAL BANK OF SEYCHELLES Page 7 STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2011 Notes SCR 000 SCR 000 Interest income 23 84,202 81,249 Interest expense 24 (39,153) (37,295) Net interest income 45,049 43,954 Fees and commission income 25 36,303 48,383 Gains/(losses) arising from dealings in foreign currency transactions 26 1,078 (2,818) Gains arising from revaluation of foreign currency monetary assets and liabilities , ,939 Other income 2,069 1,864 Staff costs 27 (37,430) (33,030) Currency expenses 28 (6,230) (2,684) Depreciation 11 (2,610) (2,137) Amortisation charge 12 (3,333) (264) Professional charges 29 (2,218) (6,003) Other operating expenses (27,668) (20,413) Net profit and total comprehensive income for the year 254, ,791 ======= ======= The notes on pages 11 to 60 form an integral part of these financial statements.

100 CENTRAL BANK OF SEYCHELLES Page 8 STATEMENT OF DISTRIBUTION FOR THE YEAR ENDED 31 DECEMBER SCR 000 SCR 000 Net profit and total comprehensive income for the year 254, ,791 Adjusted as follows Unrealised gains transferred to revaluation reserve (249,016) (146,939) Distributable earnings 5,010 26,852 ======= ======= Distributable as specified by the CBS Act Transfer to authorised capital 2,505 12,186 Transfer to general reserve - 1, Transfer to Government Consolidated Fund 2,505 13,426 ======= ======= 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 60 form an integral part of these financial statements.

101 CENTRAL BANK OF SEYCHELLES Page 9 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2011 Authorised General Revaluation Retained Total capital reserve reserve earnings equity SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 At 1 January ,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 Net profit and total comprehensive income for the year , ,026 Transfer to revaluation reserve ,016 (249,016) - Transfer to authorised capital 2, (2,505) - Transfer to Government Consolidated Fund (Note 19) (2,505) (2,505) At 31 December , , , ,803 ======== ======== ======== ======== ======== The notes on pages 11 to 60 form an integral part of these financial statements.

102 CENTRAL BANK OF SEYCHELLES Page 10 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2011 Notes SCR 000 SCR 000 Cash flows from operating activities Cash flows from income and expenses 221, ,021 Cash flows from changes in operating assets and liabilities 249, , Net cash generated from operations , , Cash flows from investing activities Payments of currency replacement costs 10 (14,963) (10,279) Payments for acquisition of property, plant and equipment 11 (3,972) (3,852) Payments for acquisition of intangible assets 12 (4,477) (11,234) Proceeds from disposal of property, plant and equipment Interest received 87, ,775 Proceeds from redemption of Government securities - 1, Net cash generated from investing activities 64, , Cash flows from financing activities Increase in currency in circulation 53,907 98,854 Long term borrowings from IMF 137, ,847 Paid to Government Consolidated Fund (13,426) (19,210) Net cash from financing activities 177, , Increase in cash and cash equivalents 712, ,041 Cash and cash equivalents at start of the year 3,087,247 2,094, Cash and cash equivalents at end of the year 3,800,138 3,087,247 ========= ========= The notes on pages 11 to 60 form an integral part of these financial statements.

103 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 the Republic of Seychelles. The address of its registered office is P. O. Box 701, Independence Avenue, Victoria, Mahé. The Bank is established by statute under Section 3 of the Central Bank of Seychelles Act, 2004 as amended, 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 2011 have been approved for issue by the Board of Directors on 25 March Neither the Bank nor the Goverment has the power to amend the financial statements after issue. The primary objective of the Bank is to promote domestic price stability. The other objectives of the Bank are: to advise 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 32. The financial 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.

104 CENTRAL BANK OF SEYCHELLES Page 12 NOTES TO THE FINANCIAL STATEMENTS - 31 DECEMBER 2011 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Changes in accounting policy and disclosures (a) New and amended standards adopted by the Bank The amendments to existing standards below are relevant to the Bank s operations: Standard Title Applicable for financial year beginning on/after IAS 1 Presentation of financial statements 1 January 2011 IAS 24 Related party disclosures 1 January 2011 IFRS 7 Financial Instruments: Disclosures 1 January 2011 The amendment to IAS 1, Presentation of financial statements is part of the 2010 Annual Improvements and clarifies that an entity shall present an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes to the financial statements. The application of this amendment does not have any impact as the Bank does not have items falling under other comprehensive income. 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 has resulted in more simplified disclosures in respect of related parties in the financial statements. The amendments to IFRS 7, Financial Instruments - Disclosures are part of the 2010 Annual Improvements and emphasises the interaction between quantitative and qualitative disclosures about the nature and extent of risks associated with financial instruments. The application of the above amendment simplified financial risk disclosures made by the Bank. Other amendments and interpretations to standards became mandatory for the year beginning 01 January 2011 but had no significant effect on the Bank s financial statements. (b) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Bank Numerous new standards, amendments and interpretations to existing standards have been issued but are not yet effective. Below is the list of new standards that are likely to be relevant to the Bank. However, the directors are yet to assess the impact on the Bank s operations. Standard Title Applicable for financial years beginning on/after IAS 1 Presentation of financial statements 1 July 2012 IAS 19 Employee benefits 1 January 2013 IFRS 9 Financial instruments 1 January 2015 IFRS 13 Fair value measurement 1 January 2013

105 CENTRAL BANK OF SEYCHELLES Page 13 NOTES TO THE FINANCIAL STATEMENTS - 31 DECEMBER 2011 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Changes in accounting policy and disclosures (Continued) (a) New and amended standards adopted by the Bank (Continued) IAS 1, Presentation of financial statements The amendment changes the disclosure of items presented in other comprehensive income ( OCI ) in the statement of comprehensive income. Entities will be required to separate items presented in other comprehensive income ( OCI ) into two groups, based on whether or not they may be recycled to profit or loss in the future. Items that will not be recycled will be presented separately from items that may be recycled in the future. Entities that choose to present OCI items before tax will be required to show the amount of tax related to the two groups separately. The title used by IAS 1 for the statement of comprehensive income has changed to statement of profit or loss and other comprehensive income, though IAS 1 still permits entities to use other titles. IAS 19, Employee benefits The amendment to IAS 19, Employee benefits makes significant changes to the recognition and measurement of defined benefit pension expense and termination benefits and to the disclosures for all employee benefits. Key features are as follows: Actuarial gains and losses are renamed remeasurements and can only be recognised in other comprehensive income without any recycling through profit or loss in subsequent periods. Past service costs will be recognised in the period of a plan amendment and curtailment occurs only when an entity reduces significantly the number of employees. The amendment clarifies the definition of termination benefits. Any benefit that has a future service obligation is not a termination benefit. Annual benefit expense for a funded benefit plan will include net interest expense or income, calculated by applying the discount rate to the net defined benefit asset or liability. 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-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment.

106 CENTRAL BANK OF SEYCHELLES Page 14 NOTES TO THE FINANCIAL STATEMENTS - 31 DECEMBER 2011 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Changes in accounting policy and disclosures (Continued) (b) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Bank (Continued) While adoption of IFRS 9 is mandatory from 01 January 2015, 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. 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. IFRS 13, Fair value measurement IFRS 13 explains how to measure fair value and aims to enhance fair value disclosures; it does not say when to measure fair value or require additional fair value measurements. A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market for the asset or liability. The principal market is the market with the greatest volume and level of activity for the asset or liability that can be accessed by the entity. The guidance includes enhanced disclosure requirements that could result in significantly more work for the Bank. The requirements are similar to IFRS 7, Financial instruments: Disclosures but apply to all assets and liabilities measured at fair value, not just financial ones

107 CENTRAL BANK OF SEYCHELLES Page 15 NOTES TO THE FINANCIAL STATEMENTS - 31 DECEMBER 2011 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.2 Foreign currency translation (a) Functional and presentation currency Items included in the Bank s 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. (b) Transactions and balances Transactions denominated in foreign currencies are translated into SCR and recorded at the rates of exchange prevailing at the dates of the transactions. 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 except for the XDR rate which applies the international maket rate. The following rates of exchange were applied as follows: 31 December December 2010 IMF Special Drawing Rights XDR 1 = SCR XDR 1 = SCR United States Dollars USD 1 = SCR USD 1 = SCR British Pound Sterling GBP 1 = SCR GBP 1 = SCR Euros EUR 1 = SCR EUR 1 = SCR Australian Dollars AUD 1 = SCR 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, British Pound Sterling and United States Dollar). For accounting purposes, XDR is treated as a foreign currency.

108 CENTRAL BANK OF SEYCHELLES Page 16 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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, 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 liabilities. (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 costs, 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.

109 CENTRAL BANK OF SEYCHELLES Page 17 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 part of the 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. 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, British Pound Sterling and United States 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 0.11 percent as at 31 December 2011 ( 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.

110 CENTRAL BANK OF SEYCHELLES Page 18 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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.

111 CENTRAL BANK OF SEYCHELLES Page 19 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (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 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.

112 CENTRAL BANK OF SEYCHELLES Page 20 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (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 2011 (2010 NIL). Gains and losses on disposals are determined by comparing proceeds with carrying amount and 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 amortised 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.

113 CENTRAL BANK OF SEYCHELLES Page 21 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (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. 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 Deposits Deposits held by the Bank, whether SCR or foreign currency deposits are initially measured at fair value and carried at amortised cost in the statement of financial position. As at the reporting date Government deposits and commercial banks demand deposits were earning no interest (see Notes 14 and 15). 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 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 worked after the last payment date. 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 reporting date 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 estimated 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.

114 CENTRAL BANK OF SEYCHELLES Page 22 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (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 legal or constructive obligations to pay further contributions if the fund does not hold sufficient amount to pay all employees the benefits relating to employee service in the current and prior period. The Bank contributes to two defined contribution plan. Firstly, the Bank contributes to the Seychelles Pension Fund ( SPF ) in accordance with the Seychelles Pension Fund Act. Secondly, the Bank contributes to the SwissLife Pension. Payments to both SPF and SwissLife are charged as an expense as they fall due. Prepaid contributions are recognised as an asset to the extent that a cash refund or reduction in the future payments is available Provisions Provisions for restructuring costs and 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 not recognised for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation 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 revaluation 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.

115 CENTRAL BANK OF SEYCHELLES Page 23 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 2.18 Interest income and expense (Continued) 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 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 results 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. The following estimates were made by management: 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.

116 CENTRAL BANK OF SEYCHELLES Page 24 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued) Other key assumptions for the employee benefits obligations are based on current market conditions. The carrying amount of the defined benefit obligations at 31 December 2011 is SCR 2,040,000 (2010 SCR 1,553,000). Details of the defined benefit obligation is disclosed in Note 19. 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 13,426 19, ,426 19,210 Paid to Government Consolidated Fund (13,426) (19,210) Transfer from retained earnings 2,505 13, At 31 December (Note 19) 2,505 13,426 ======= ======= Central Bank of Seychelles Act, 2004 as amended. Section 16 of the Central Bank of Seychelles Act, 2004 as amended, 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; and b) by adding to the amount remaining after applying paragraph (a), the total amount of unrealised gains in respect of assets, the total amount of unrealised gains,if those unrealised gains, included in the net profit of a previous year, are realised; and c) by the retention of the unrealised revaluation losses to the extent that they exceed any balance in the relevant Revaluation Reserve Account. 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 until; a) authorised capital reaches 3.33 percent of monetary liabilites; and b) the General Reserve reaches 6.67 percent of monetary liabilities. Provided that any residual distributable earnings remaining after a distribution in paragraphs (a) and (b) shall be transferred to the Consolidated Fund. Where the distributable earnings of the Bank is less than zero, they shall be offset against the General Reserve.

117 CENTRAL BANK OF SEYCHELLES Page 25 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 5 STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2010 Foreign currency Local currency 2010 SCR 000 SCR 000 SCR 000 ASSETS Cash and cash equivalents 3,087,247-3,087,247 Investment securities - 1,207,270 1,207,270 Loans and advances - 24,682 24,682 Other assets - 22,738 22,738 Currency replacement costs - 12,143 12,143 Property, plant and equipment - 54,386 54,386 Intangible assets - 11,003 11, Total assets 3,087,247 1,332,222 4,419,469 ========== ========== ========== LIABILITIES Currency in circulation - 653, ,864 Deposits from Government 13, , ,665 Deposits from banks 192, ,884 1,132,581 Deposits from other financial institutions - 44,641 44,641 Other deposits - 18,225 18,225 Open Market Operations - 1,095,000 1,095,000 Other liabilities - 27,267 27,267 International Monetary Fund obligations 533, , Total liabilities 739,754 3,262,433 4,002, EQUITY Capital and Reserves Authorised capital - 97,746 97,746 General reserve - 172, ,597 Revaluation reserve - 146, ,939 Retained earnings Total equity - 417, , Total Equity and Liabilities 739,754 3,679,715 4,419,469 ========== ========== ==========

118 Page 26 CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 6 CASH AND CASH EQUIVALENTS SCR 000 SCR 000 Balances held abroad and foreign currency notes 3,647,378 2,944,542 Holdings of Special Drawing Rights 141, ,643 Reserve tranche with IMF 11, ,800,138 3,087,247 ========= ========= Current 3,800,138 3,087,247 ========= ========= Included in cash and cash equivalents are pledged and encumbered balances held abroad equivalent to SCR 336,234,523 and SCR 5,207,277 respectively ( pledged SCR 206,634,279 and encumbered SCR 13,876). 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. The Reserve tranche with IMF is held on behalf of the Government and is not available for use by the Bank (see Note 14). 7 INVESTMENT SECURITIES SCR 000 SCR 000 Investment in Government treasury bills 1,202,625 1,207, ,202,625 1,207,270 ========= ========= Current 1,202,625 1,207,270 ========= ========= During the year under review, the Bank s holding of Government treasury bills carry interest rates as follows: 5.00 percent to 5.62 percent per annum for 91 days; 6.42 percent per annum for 182 days and 2.88 percent to 6.43 percent per annum for 365 days. Securities pledged as collateral. As at the reporting date, the repurchase agreements amounted to SCR million (2010 Nil) and as such the total Government treasury bills pledged as collateral amounted to SCR 379 million (2010 NIL).

119 Page 27 CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 8 LOANS AND ADVANCES SCR 000 SCR 000 Staff loans 36,676 24,682 ========= ========= Current 4,867 3,574 Non-current 31,809 21, ,676 24,682 ========= ========= 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. 9 OTHER ASSETS SCR 000 SCR 000 Cheques held for clearing 8,873 19,329 Items due and not received 441 1,896 Others 7,672 1, ,986 22,738 ========= ========= Current 12,754 22,738 Non- Current 4, ,986 22,738 ========= ========= Others includes SCR 4.3 million representing prepayments for the lease of a plot of land at Bel Eau on Mahé for a period of 99 years at an annual rental value of SCR 1.

120 CENTRAL BANK OF SEYCHELLES Page 28 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 10 CURRENCY REPLACEMENT COSTS SCR 000 At 1 January 2010 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 ========= At 31 December 2010 Acquisition cost 20,957 Accumulated amortisation (8,814) Net book value 12, Year ended 31 December 2011 Opening net book value 12,143 Additions 14,963 Amortisation charge (5,593) Closing net book value 21,513 ========= At 31 December 2011 Acquisition cost 35,920 Accumulated amortisation (14,407) Net book value 21,513 =========

121 CENTRAL BANK OF SEYCHELLES Page 29 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 11 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 2010 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, At 31 December 2010 Acquisition cost 2,200 58,494 3,931 7,122 1,754 73,501 Accumulated depreciation - (10,658) (2,564) (5,226) (667) (19,115) Net book value 2,200 47,836 1,367 1,896 1,087 54, Year ended 31 December 2011 Opening net book value 2,200 47,836 1,367 1,896 1,087 54,386 Additions , ,972 Disposals - - (7) - - (7) Depreciation charge - (1,176) (461) (780) (193) (2,610) ========= ========= ========= ========= ========= ========= Closing net book value 2,200 47,270 3,490 1, ,741 ========= ========= ========= ========= ========= ========= At 31 December 2011 Acquisition cost 2,200 59,104 6,515 7,871 1,776 77,466 Accumulated depreciation - (11,834) (3,025) (6,006) (860) (21,725) Net book value 2,200 47,270 3,490 1, ,741 ========= ========= ========= ========= ========= =========

122 CENTRAL BANK OF SEYCHELLES Page 30 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 12 INTANGIBLE ASSETS Computer software SCR 000 At 1 January 2010 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 ======= At 31 December 2010 Acquisition cost 11,353 Accumulated amortisation (350) Net book value 11, Year ended 31 December 2011 Opening net book value 11,003 Additions 4,477 Amortisation charge (3,333) Closing net book value 12,147 ======= At 31 December 2011 Acquisition cost 15,830 Accumulated amortisation (3,683) Net book value 12,

123 CENTRAL BANK OF SEYCHELLES Page 31 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 13 CURRENCY IN CIRCULATION Notes and coins in circulation are shown at face value, net of the notes and coins held in the vault at the Bank SCR 000 SCR 000 Notes issued 673, ,667 Coins issued 33,861 31, Total notes and coins issued 707, ,864 ========== ========== Current 707, ,864 ========== ========== 14 DEPOSITS FROM GOVERNMENT Government Foreign Exchange Deposits (Project Accounts) SCR 000 SCR 000 Government rupee deposits 438, ,990 Government foreign exchange deposits (project accounts) 18,353 13,613 Government deposits with IMF (Note 6) 11, Central Bank of Seychelles blocked foreign deposits , ,665 ========== ========== Current 468, ,665 ========== ========== These represent amounts deposited by the Government at the Bank and have been earmarked for specific local projects to be undertaken by the Government. These deposits are denominated in foreign currencies and are non-interest bearing.

124 CENTRAL BANK OF SEYCHELLES Page 32 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 15 DEPOSITS FROM BANKS SCR 000 SCR 000 Banks demand deposits 668, ,611 Foreign currency minimum reserve requirement 322, ,697 Deposit facility from a local bank - 40, ,912 1,132,581 ========== ========== Current 990,912 1,132,581 ========== ========== (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 statutory reserve amount which is adjusted on the basis of the monetary policy stance as approved by the Board of Directors. In 2010, the remuneration on the minimum statutory reserves requirement of 10 percent on their customers deposits (Rupee deposits held as demand, savings and time deposits and the equivalent in SCR of foreign currency deposits held by residents excluding inter-bank and foreign currency deposits held by non-residents) 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. In April 2011, the minimum statutory reserves requirement was increased to 13 percent of Rupee deposits whilst for foreign currency deposit this was increased by 1 percent monthly from April to July to settle at 13 percent. However, no remuneration was paid on the portion of reserves above the 10 percent threshold. In July 2011, the policy was revised to set the remuneration on the total minimum statutory reserves to zero percent. (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 facility of SCR 40,273,000 from a local bank at 31 December 2010 was renewed on the same date for a three months period. Interest was payable monthly in SCR at the market rate of the 91 day treasury bills at 0.48 percent annually. The deposit facility was not renewed.

125 CENTRAL BANK OF SEYCHELLES Page 33 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 16 DEPOSITS FROM OTHER FINANCIAL INSTITUTIONS SCR 000 SCR 000 Demand deposit 84,751 44,641 ========== ========== Current 84,751 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. 17 OTHER DEPOSITS SCR 000 SCR 000 Special deposits Abandoned property account - Local currency 10,966 9,254 - Foreign currency Policy Owner s Protection Fund 9,589 7,053 Others 2,054 1, ,473 18,225 ========== ========== Current 23,473 18,225 ========== ========== (a) Abandoned Property Account As per the Financial Institutions Act 2004, as amended, 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 Accounts are non interest bearing and refundable to the clients on demand. In 2011, funds from abandoned/dormant foreign currency accounts were also transferred to the Bank and deposited into the foreign currency abandoned property account.

126 CENTRAL BANK OF SEYCHELLES Page 34 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 17 OTHER DEPOSITS (Continued) (b) Policy Owner s Protection Fund ( POPF ) In accordance with section 88 (1) (a) and (b) 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, subject to certain conditions. In compliance with section 89 of the Act a general business levy and a life business levy of 1% of gross premiums income is imposed and paid annually to this account by every domestic licensed insurers. 18 OPEN MARKET OPERATIONS SCR 000 SCR 000 Reverse Repurchase Agreement 377,999 - Deposit Auction Arrangement 1,137,653 1,095, ,515,652 1,095,000 ========= ========= Current 1,515,652 1,095,000 ========= ========= 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, the amount SCR 378 million was held by the Bank and carried interest rates ranging from 4.40 percent to 8.50 percent. (2010 Nil).

127 CENTRAL BANK OF SEYCHELLES Page 35 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 18 OPEN MARKET OPERATIONS (Continued) (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 Operations 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. At the reporting date, an amount of SCR 1,138 million was held by the Bank and had a maturity periods of 7, 14, 21, 63 and 91 days. In 2010, the corresponding figure stood at SCR 1,095 million with maturity periods of 7, 14 and 28 days. 19 OTHER LIABILITIES SCR 000 SCR 000 Payable to Government Consolidated Fund (Note 4) - Transfer from retained earnings 2,505 13,426 Provision for staff gratuities contractual 1,614 1,362 Provision for staff gratuities continuous (Note 19(a)) Provision for staff compensation (Note 19(a)) 1,681 1,232 Items due and not yet paid 3,849 4,855 Others 4,067 6, ,075 27,267 ========= ========= Current 14,075 27,267 ========= =========

128 CENTRAL BANK OF SEYCHELLES Page 36 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 19 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 3,546 2,880 3,187 2, Unrecognised actuarial loss (1,506) (1,327) (1,506) (1,327) Liability recognised in the statement of financial position at the end of the year 2,040 1,553 1,681 1, ========= ========= ========= ========= ========= ========= Current service cost Interest cost Actuarial loss recognised (17) Total included in staff costs ========= ========= ========= ========= ========= ========= Movements in liability recognised At 01 January 1,553 1,287 1,232 1, Total expenses as above Contributions and benefits paid (201) (336) (78) (178) (123) (158) At 31 December 2,040 1,553 1,681 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% - -

129 CENTRAL BANK OF SEYCHELLES Page 37 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 19 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 2,880 2,008 2,559 1, Current service cost Interest cost Benefits paid (201) (336) (78) (178) (123) (158) Liability gain (17) ,546 2,880 3,187 2, ========= ========= ========= ========= ========= ========= Fair value of plan assets: Employer contributions Benefits Paid (201) (336) (78) (178) (123) (158) At 31 December ========= ========= ========= ========= ========= ========= Fair value of plan assets Present value of defined obligation (3546) (2,880) (3,187) (2,559) (359) (321) Deficit (3546) (2,880) (3,187) (2,559) (359) (321) Asset experience gain/(loss) Liability experience gain/(loss) (199) (690) (216) (626) 17 (64) 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.

130 CENTRAL BANK OF SEYCHELLES Page 38 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 20 INTERNATIONAL MONETARY FUND OBLIGATIONS SCR 000 SCR 000 Purchases outstanding - Stand By Arrangement and Extended Fund Facility 497, ,541 Allocation of Special Drawing Rights 173, ,904 IMF no. 1 account IMF no. 2 account , ,944 ========= ========= Current 245, ,403 Non-current 426, , , ,944 ========= ========= 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 May 23, 2011 brought the quota subscription to XDR 10,900,000 (2010 XDR 8,800,00). 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 660,462,943 as at the reporting date (2010 SCR 515,384,317). SDR Allocations are subject to charges while SDR holdings earn interest on a quarterly basis. 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 ( SBA ). Under the EFF an amount of XDR 19.8 million (equivalent to 225 percent of quota) was granted. The total disbursement for 2011 amounting to XDR 6.6 million was disbursed as follows: XDR 3.52 million in June 2011 and XDR 3.08 million in January 2012 (2010 XDR 8.36 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.

131 CENTRAL BANK OF SEYCHELLES Page 39 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 20 INTERNATIONAL MONETARY FUND OBLIGATIONS (Continued) The repayment terms for the purchases outstanding are as follows: XDR 000 SCR 000 XDR 000 SCR years 11, ,208 8, ,640 Over 3 years 12, ,238 11, , Total 23, ,446 20, ,541 ========= ========= ========= ========= 21 STATUTORY CAPITAL SCR 000 SCR 000 Authorised capital 100,251 97,746 General reserve 172, , , ,343 ========= ========= As per section 14 of the Central Bank of Seychelles Act, 2004 as amended, 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 2011, due to a substantial increase in monetary liabilities, authorised capital decreased to 3.03 percent of monetary liabilities as compared to 2010 when it stood at the set limit of 3.33 percent as per the CBS Act. An amount of SCR 2.5 million representing 50 percent of distributable profit was transfered to authorised capital as at the reporting date as per the CBS Act.

132 CENTRAL BANK OF SEYCHELLES Page 40 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 21 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. Transfer to the general reserve shall be made from distributable earnings until it reaches 6.67 percent of monetary liabilities. In 2011, following an increase in monetary liabilities coupled with no transfer to general reserve, this resulted in a decrease in general reserve to 5.22 percent vis-a-vis 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 transferring marketable securities to the ownership of the Bank to restore the general reserve to zero. 22 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. 23 INTEREST INCOME SCR 000 SCR 000 Interest on investment securities 40,271 54,564 Interest on deposits with banks 42,961 26,336 Interest on advances to staff and local banks ,202 81,249 ========= =========

133 CENTRAL BANK OF SEYCHELLES Page 41 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 24 INTEREST EXPENSE SCR 000 SCR 000 Interest on Minimum Reserve Requirement 1,617 5,996 Interest on Deposit Auction Arrangement 28,593 8,622 Interest on fixed deposit with local banks 48 3,222 Interest on Reverse Repurchase Agreements 8,882 19,385 Other interests ,153 37,295 ========= ========= 25 FEES AND COMMISSION INCOME SCR 000 SCR 000 Commission 30,691 43,517 Licence fees - Financial institutions 4,943 3,949 Licence fees Insurance companies Deficiency fees - Minimum Reserve Requirement ,303 48,383 ========= ========= 26 GAINS/(LOSSES) ARISING FROM DEALINGS IN FOREIGN CURRENCIES SCR 000 SCR 000 Foreign currency transactions (realised) 1,078 (2,818) Revaluation of foreign currency monetary assets and liabilities (unrealised) 249, , , ,121 ========= =========

134 CENTRAL BANK OF SEYCHELLES Page 42 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 27 STAFF COSTS SCR 000 SCR 000 Salaries and allowances 23,739 19,697 Staff training 10,671 9,766 Gratuity costs Compensation costs Other staff costs 2,332 2, ,430 33,030 ========= ========= 28 CURRENCY EXPENSES SCR 000 SCR 000 Notes and coins expense Amortisation of currency replacement cost (Note 10) 5,593 2, ,230 2,684 ========= ========= 29 PROFESSIONAL CHARGES SCR 000 SCR 000 Fees payable to auditor: - Statutory audit Others Consultancy fees 816 1,347 Legal fees Directors fees and allowances Others 443 3, ,218 6,003 ========= =========

135 CENTRAL BANK OF SEYCHELLES Page 43 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 30 RECONCILIATION OF NET PROFIT TO NET CASH FLOWS FROM OPERATIONS SCR 000 SCR 000 Net profit for the year 254, ,791 Adjustments for: Provisions for employee benefits Interest receivable (84,202) (81,249) Interest payable 39,153 37,295 Depreciation and amortisation charges 5,943 2,401 Amortisation of currency replacement costs 5,593 2,517 Loss on disposal of property, plant and equipment Operating cash flows from income and expenses 221, , (Decrease)/increase in deposits (123,982) 519,495 Increase/(decrease) in Open Market Operations 417,000 (130,821) Decrease in other liabilities (2,758) (3) Decrease in placements with banks - 112,499 Increase in loans and advances (11,994) (13,376) Decrease/(increase) in other assets 6,820 (15,658) Interest paid (35,603) (41,155) Operating cash flows from changes in operating assets and liabilities 249, , Net cash generated from operations 470, ,002 ========== ==========

136 CENTRAL BANK OF SEYCHELLES Page 44 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 31 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 837,246 1,158,928 Sale of foreign currency 1,092, ,428 ========== ========== Investment in Government Securities 1,202,625 1,207,270 ========== ========== 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 626, , day treasury-bills 247, , day treasury-bills 312, , Total 1,185,053 1,185,053 ========= =========

137 CENTRAL BANK OF SEYCHELLES Page 45 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 31 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 2,739 3,413 Car benefits Short-term benefits Others Total 3,463 3,769 ======== ======== Movements in loans to key management personnel are as follows: SCR 000 Balance as at 01 January ,833 Total loans granted 929 Total repayments (654) Balance as at 31 December ,108 Total loans granted 1,187 Total repayments (391) Balance as at 31 December ,904 ========

138 CENTRAL BANK OF SEYCHELLES Page 46 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT The Bank s risks are principally attributed to its functional obligations. The Bank is exposed to a variety of financial risks: market risk, credit risk and liquidity risk. (i) Market risk Market risk is defined as 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 three types of risk: interest rate risk, currency risk and other price risk. The Bank s exposure to market risk comes in the form of general and specific market fluctuations which affects the investments in interest bearing and foreign currency denominated financial instruments. Further to that, the exposure to market risk is generated from both trading and asset/liability management activities. The measures taken by the Bank to manage such risk is by making investments in mature markets. (a) Interest rate risk Interest rate is defined as 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 and Investment 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 arises from domestic market operations which are of short term nature, such as standing deposit and credit facilities, deposit and credit auctions, short term repurchase and reverse repurchase agreements to banks and investment in Government treasury bills. The Bank cannot eliminate interest rate risk as it is a function of its monetary policy.

139 CENTRAL BANK OF SEYCHELLES Page 47 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 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: 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 2011 Financial assets Cash and cash equivalents 3,774, ,181 3,800,138 Investment securities 763, ,054 62, ,202,625 Loans and advances ,156 17,326 14, ,676 Other assets ,711 12, Total financial assets 4,538, ,777 65,332 17,326 14,619 38,380 5,052, Financial liabilities Currency in circulation , ,771 Deposits from Government 468, ,994 Deposits from banks 990, ,912 Deposits from other financial institutions ,751 84,751 Other deposits ,473 23,473 Open Market Operations 1,172, , ,515,652 Other liabilities ,035 12,035 International Monetary Fund obligations ,121 55, , , , Total financial liabilities 2,164, ,177 55, , ,212 1,297,024 4,474, Net financial position 2,374,664 18,600 10,060 (275,920) (291,593) (1,258,644) 577,167 ========== ========== ========== ========== ========== ========== ==========

140 CENTRAL BANK OF SEYCHELLES Page 48 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 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 2010 Financial assets 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 ========== ========== ========== ========== ========== ========== ==========

141 CENTRAL BANK OF SEYCHELLES Page 49 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 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 A decrease of 100 basis point in the domestic market interest rates (193) (272) An increase of 100 basis point in the market interest rates for foreign currencies 7 4 A decrease of 100 basis point in the market interest rates for foreign currencies (7) (4) The Bank s exposure to interest rate risk is minimal on both its local and foreign financial assets and liabilities due to its conservative approach guided by its Reserve Management and Investment Guidelines and its monetary policy. (b) Currency risk Currency risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Bank s foreign reserve management function requires it to operate internationally and assume material exposures to changes in prices of one currency against another, notably on its financial position and cash flows primarily with respect to the United States Dollar, the Euro, British Pound Sterling, Australian Dollar and IMF Special Drawing Rights. Hedging against currency risk is not permitted under the Bank s current functional responsibilities. 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.

142 CENTRAL BANK OF SEYCHELLES Page 50 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 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 Total As at 31 December 2011 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 SCR 000 Financial assets Cash and cash equivalents 494,038 3,003, , ,760-2,212 3,800,138 Investment securities ,202,625-1,202,625 Loans and advances ,676-36,676 Other assets ,601-12, Total financial assets 494,059 3,003, , ,760 1,251,902 2,212 5,052, Financial liabilities Currency in circulation , ,771 Deposits from Government 9,981 9,236-11, , ,994 Deposits from banks 136, , , ,912 Deposits from other financial institutions ,751-84,751 Other deposits ,104-23,473 Open Market Operations ,515,652-1,515,652 Other liabilities ,035-12,035 International Monetary Fund obligations , , Total financial liabilities 146, , ,912 3,451,260-4,474, Net financial position 347,082 2,809, ,362 (529,152) (2,199,358) 2, ,167 ========== ========== ========== ========== ========== ========== ==========

143 CENTRAL BANK OF SEYCHELLES Page 51 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (i) (b) Market risk (Continued) Currency risk (Continued) Euro US $ GBP XDR SCR AUD Total As at 31 December 2010 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 ,207,270-1,207,270 Loans and advances ,682-24,682 Other assets ,738-22, 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, , ,884-1,132,581 Deposits from other financial institutions ,641-44,641 Other deposits ,225-18,225 Open Market Operations ,095,000-1,095,000 Other liabilities ,714-25,714 International Monetary Fund obligations , , Total financial liabilities 88, , ,444 3,260,880-4,000, Net financial position 687,507 1,237, ,406 (390,739) (2,006,190) 707, ,303 ========== ========== ========== ========== ========== ========== ==========

144 CENTRAL BANK OF SEYCHELLES Page 52 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (i) (b) Market risk (Continued) Currency risk (Continued) Sensitivity to 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. (139,405) (117,415) A depreciation of 5% in the value of the Seychelles Rupees against all other currencies. 139, ,415 Adherence to the current Reserve Management and Investment Guidelines implies that the Bank will continue to be exposed to currency risk. The Bank s exposure to currency risk is on its investment in cash and cash equivalents and deposits from bank, deposits from Government and IMF obligation which are of short term nature. (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.

145 CENTRAL BANK OF SEYCHELLES Page 53 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 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 its financial assets on the statement of financial position. The Bank s investments in short term deposit instruments coupled with institutions of high credit worthiness allows it to manage its credit risk effectively. As such, the Bank is not exposed to significant credit risk, which is the risk that its counterparts 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. In 2011, the Bank took the necessary step to close the accounts that were being held with an institution not meeting the minimum credit rating criteria to be in line with the current Guidelines. To limit credit risk, no more than 15 per cent of reserves are invested in claims on international commercial banks. To diversify exposure to international commercial banks, no more than 2 per cent of the foreign 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 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 being 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 exchange swap will be treated as low risk as such transactions are secured. The following table presents the Bank s financial assets based on Standard and Poor s, Fitch and Moody s credit rating of the issuer. AAA is the rating used for identification of highly reliable international financial institutions. This rating indicates that 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 an adequate 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 any of the above mentioned rating agencies.

146 CENTRAL BANK OF SEYCHELLES Page 54 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (ii) (a) Credit risk (Continued) Credit risk measurement (Continued) Credit Rating % of % of Amount Financial Amount Financial SCR 000 Assets SCR 000 Assets Financial assets Cash and cash equivalents - Demand deposits AAA 22, % 57, % AA+ 48, % - - A , % BBB N/R 3,551, % 2,847, % - SDR holdings AAA 152, % 142, % - Foreign currency cash No risk 25, % 24, % Investment in Government Securities B+ 1,202, % 1,207, % Loans and advances N/R 36, % 24, % Other assets N/R 12, % 22, % ,052, % 4,341, % ========== ========== ========== ========== As at the reporting date, the Bank held SCR 30,039,301 (2010 SCR 19,425,954) 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 on the country of domicile of its counterparties.

147 CENTRAL BANK OF SEYCHELLES Page 55 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 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 2011 Financial Assets Cash and cash equivalents 3,574, ,822 25,182-3,800,138 Investment securities - - 1,202,625-1,202,625 Loans and advances ,676-36,676 Other assets ,711-12, Total financial assets 3,574, ,822 1,277,194-5,052,150 ========== ========== ========== ========== ========== 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 ========== ========== ========== ========== ========== 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.

148 CENTRAL BANK OF SEYCHELLES Page 56 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (iii) Liquidity risk Liquidity risk is the risk that an entity 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. As the Bank is the sole issuer of the national currency, its exposure to liquidity risk is limited to its foreign currency positions. On that basis, 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 and Investment Guidelines, to reduce liquidity risk of the total reserve portfolio, a minimum of US dollar 20 million equivalent of reserves shall be invested in cash and overnight deposits with other central banks and eligible international commercial banks. To reduce liquidity of investment 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 is not significant.

149 CENTRAL BANK OF SEYCHELLES Page 57 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (iii) Liquidity risk (Continued) (a) 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 2011 Financial liabilities Currency in circulation 707, ,771 Deposits from Government 468, ,994 Deposits from banks 990, ,912 Deposits from Other Financial Institutions 84, ,751 Other deposits 23, ,473 Open Market Operations 1,174, , ,521,061 Other liabilities 12, ,036 International Monetary Fund obligations ,584 59, , , , Total financial liabilities 3,462, ,233 59, , ,144 4,503, Financial assets Cash and cash equivalents 3,800, ,800,138 Investment securities 765, ,682 65, ,211,721 Loans and advances ,042 21,159 17,652 44,254 Other assets 12, , Total financial assets 4,578, ,613 70,028 21,159 17,652 5,068, Net liquidity gap 1,115,479 17,380 10,852 (286,770) (291,492) 565,449 ========== ========== ========== ========== ========== ==========

150 CENTRAL BANK OF SEYCHELLES Page 58 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 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, ,076 62,773 (273,744) (99,937) 325,101 ========== ========== ========== ========== ========== ==========

151 CENTRAL BANK OF SEYCHELLES Page 59 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 32 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 are 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 1,202,625 1,200,603 1,207,270 1,209,302 ========== ========== ========== ========== The fair value of investment securities classified as loans and receivables is based on market prices of the Government treasury bills as at the reporting date. The fair value of Government treasury bills has been computed using the compounded interest method at interest rates of 4.95 percent, 6.02 percent and 7.45 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 until: (a) (b) authorised capital reaches 3.33 per cent of monetary liabilities; and the general reserve reaches 6.67 per cent of monetary liabilities. As at 31 December 2011 statutory capital stood at 8.25 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 direct or indirect loss as the result of inadequate control or failures in internal processes and systems. This also covers activities of employees and external events. The Bank s typical general risk areas include strategic, financial, compliance and operational risks. Whilst it is understood that such risks cannot be entirely eliminated and the cost for mitigating these risks may outweigh the potential benefits of the Bank, the Risk Implementation Committee ( RIC ) of the Bank is dedicated towards risk management, especially in mitigating these risks. As part of the implementation of the Bank s enterprise risk management framework, autonomous checks on the risk issues are carried out by the Risk Management Unit and discussed regularly at RIC meetings.

152 CENTRAL BANK OF SEYCHELLES Page 60 NOTES TO THE FINANCIAL STATEMENTS 31 DECEMBER 2011 (CONTINUED) 33 TAXATION The Bank is exempted from taxation under Section 49 of the CBS Act. 34 CURRENCY The financial statements are presented in Seychelles Rupees and figures are stated in thousands of Seychelles rupees.

153 Annex II OFFICERS OF THE CENTRAL BANK OF SEYCHELLES (as at December 31, 2011) Mr Pierre Laporte - Governor Ms Caroline Abel - First Deputy Governor Vacant - Second Deputy Governor Legal Unit Ms Martine Faure - Legal Officer Ms Shannon Jolicoeur - Legal Officer Internal Audit Division Ms Nathalie Houarau - Internal Auditor Ms Rachel Hoareau - Internal Auditor Administration Division Vacant - Head of Division Mr Kevin Samson - Director Administration Banking Services Division Mr Christophe Edmond - Head of Division Mr Mike Tirant - Director of Banking, Currency & Financial Reporting Mrs Noemie Gobine - Senior Banking Officer Ms Vanessa Bijoux - Senior Banking Officer Mrs Jeannette Payet - Banking Officer Mr Terry Adrienne - Payment System Officer Ms Liz Julienne - Payment System Officer Mrs Patricia Padayachy - Payment System Officer

154 Financial Markets Division Vacant - Head of Division Mrs Gina Rosette - Director Market Operations Mrs Danielle Michaud - Senior Market Operations Officer Ms Shirley Mendes - Market Operations Officer Mrs Geralda Adrienne - Market Operations Officer Ms Malshini Senaratne - Market Operations Officer Ms Vaithegi Naidu - Market Operations Officer Ms Ingrid Sinon - Compliance and Risk Officer Financial Services Supervision Division Ms Jenifer Sullivan - Head of Division Mr Naadir Hassan - Director Bank Supervision & Foreign Exchange Vacant - Director Insurance Supervision Mr Francis Payet - Financial Services Analyst Ms Joan Lespoir - Financial Services Analyst Mr Jean-Paul Barbier - Financial Services Analyst Mr James Jean - Financial Services Analyst Mrs Janine Henriette - Financial Services Analyst Ms Audrey Morel - Financial Services Analyst Mr Edouard Rose - Financial Services Analyst Mr Aaron Leong-Pon - Financial Services Analyst Mr Tyron Scholastique - Financial Services Analyst Mr Nicholas Cetoupe - Financial Services Analyst Ms Samanta Andimignon - Financial Services Analyst Ms Shirlee Agricole - Financial Services Analyst Ms Selma Valentin - Financial Services Analyst Ms Vivienne Volcere - Financial Services Analyst Mr Hubert Bouchereau - Financial Services Analyst

155 Human Resources Division Mrs Juliana AhThew-Rose - Head of Division Mrs Levina Francoise - Human Resources Officer Mr Brian Nicette - Human Resources Officer Ms Natasha Savy de St Maurice - Human Resources Officer Ms Tanya Berlouis - Human Resources Officer Research and Statistics Division Mr Brian Commettant - Head of Division Mrs Hilda Palconit - Director Ms Moyra Alexis - Economist Mr Lenny Palit - Economist Mr Davis Laporte - Economist Ms Nadine Boniface - Economist Mr Naddy Marie - Economist Ms Sarah Lloyd - Economist Ms Dorotha Michel - Statistician Technical Services Division Vacant - Head of Division Mr Jude Woodcock - Chief Information Security Officer Mr Darell Edmond - Network Systems Administrator Mr Elvis Serret - Business Applications Administrator (Banking) Mr Desire Larue - Business Applications Administrator (Others) Mr Russel Moustache - Project Manager Mr Jeremiah Mein - Project Officer

156