CENTRALBANKOFSEYCHELLES Celebrating 25 Years ANNUALREPORT2003
CENTRAL BANK OF SEYCHELLES ANNUAL REPORT 2003
CONTENTS Letter of Transmittal Board of Directors List of Tables Section One Highlights of the Seychelles Economy 1 Section Two Financial Survey 7 Section Three Government Finance 23 Section Four The External Sector 40 Section Five The Real Sector: Production, Employment and Prices 59 Section Six Operations and Administration of the Central Bank 82 Annex I Annual Accounts and Auditor s Report 102 Annex II Officers of the Central Bank of Seychelles
CENTRAL BANK OF SEYCHELLES Board of Directors (as at 31 December 2003) Francis Chang Leng, Governor - Chairman Errol Dias - Member Francis Chang-Sam - Member Ronny Govinden - Member Vivianne Fock-Tave - Member Secretary to the Board Jean-Claude D Offay
List of Charts and Tables Chart No. Title Page Financial Survey 2.1 Central Bank advances to Commercial Banks; 1997-2003 9 2.2 Net Foreign and Domestic Assets; 1997-2003 10 2.3 Money Supply; 1997-2003 11 2.4 Total Domestic Credit; 1997-2003 13 2.5 Central Bank Credit; 1997-2003 14 2.6 Commercial Banks Credit; 1997-2003 15 2.7 Commercial Banks Loans and Advances to Non-Government Sector; 1997-2003 16 2.8 Commercial Banks Loans and Advances to Non-Government Sector percentage share; 2003 17 2.9 Loans by Development Bank by Economic Sectors; 1998-2003 18 2.10 Credit and Deposits of Commercial Banks; 1997-2003 19 2.11 Credit/Deposit Ratio of Commercial Banks; 1997-2003 20 2.12 Interest Rates; 1997-2003 21 Government Finance 3.1 Government finance outcomes for 1998-2003 26 3.2 Major revenue flows in current receipts in 2002-2003 29 3.3 Government expenditure by main headings; 1998-2003 32 3.4 Government s capital expenditure; 2003 36 The External Sector 4.1 The overall balance, current account and capital & financial account of the BOP; 1997-2003 41 4.2 Trade in Goods; 1997-2003 44 4.3 Exports; 2003 45 4.4 Imports (f.o.b); 2003 47 The Real Sector: Production, Employment and Prices 5.1 Share of nominal GDP by broad sectors for 2002 and 2003 62 5.2 Visitor arrivals 63 5.3 Tourism income 64 5.4 Prawns Production Indicators 73
Chart No. Title Page 5.5 Average Monthly Earnings for 2003 76 5.6 Yearly Inflation Rate 77 5.7 Inflation Rates over 2003 78 Operations and Administration of the Central Bank 6.1 Central Bank Advances (end-of-period); 1997-2003 84 6.2 Notes and Coins in circulation; 1997-2003 85 6.3 Total stock of outstanding Treasury Bills; 1997-2003 89 6.4 Total stock of outstanding Treasury Bonds; 1997-2003 91 6.5 Total stock of outstanding Government Stocks; 1997-2003 92 6.6 Minimum Reserve Requirement; 1997-2003 94 6.7 Minimum Local Assets; 1997-2003 95 6.8 Central Bank advances to commercial banks; 1997-2003 96 6.9 Advances and repayments of Government Concessionary Re-finance Scheme; 1997-2003 97
Table No. Title Page Financial Survey 2.1 Monetary Survey; 1999-2003 12 2.2 Credit; 1999-2003 14 2.3 Commercial Banks Loans and Advances to Non-Government Sector by Economic Sectors; 1999-2003 16 2.4 Loans by Development Bank by Economic Sectors; 1999-2003 18 2.5 Liquidity Indicators of Commercial Banks; 1999-2003 20 2.6 Interest Rates; 1999-2003 21 Government Finance 3.1 Government Budget; Summary 2001-2004 28 3.2 Government Budget; Revenue 2001-2004 30 3.3 Government Budget; Expenditure 2001-2004 34 3.4 Public Sector Capital Project Expenditure; 1999-2003 39 The External Sector 4.1 Balance of Payments; 1998-2003 43 4.2 Domestic Exports; 1998-2003 46 4.3 Imports (cif) by HS Sections; 1998-2003 48 4.4 Goods procured in ports; 1998-2003 49 4.5 Services 1998-2003 51 4.6 External Reserves; 1998-2003 57 4.7 Exchange Rates; 1998-2003 58 The Real Sector: Production, Employment and Prices 5.1 Gross Domestic Product by Broad Productive Sectors at current market prices 60 5.2 Gross Domestic Product by Broad Productive Sectors at current market prices 62 5.3 Tourism 64 5.4 Crops 67
Table No. Title Page 5.5 Livestock (slaughters) 68 5.6 Estimates of Fish Landed 71 5.7 Employment 75 5.8 Average Monthly Earnings 75 5.9 Composition of Retail Price Index 79 5.10 Inflation rate of the components of the other food and Non food for 2003 80 5.11 Year-on-year inflation in 2003 81 Operations and Administration of the Central Bank 6.1 CBS Advances to government; 1998-2003 84 6.2 Circulation of Notes and Coins; 1998-2003 85 6.3 Bankers Clearing House Activities; 1998-2003 86 6.4 Treasury Bills; 1998-2003 88 6.5 Treasury Bills Yields; 1998-2003 89 6.6 Treasury Bonds; 1998-2003 90 6.7 Government Stocks; 1998-2003 92 6.8 Capital Fund Ratios of Commercial Banks; 1998-2003 93 6.9 Minimum Reserves and Local Assets Ratio; 1998-2003 94 6.10 Temporary Advances against Government Securities; 1998-2003 95 6.11 Government of Seychelles Re-finance Scheme; 1998-2003 96 6.12 Commercial Bank Advances to Non-Seychellois; 2001-2003 97 6.13 Commercial Bank Advances to Parastatals; 2001-2003 98 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 CBS = Central Bank of Seychelles n.a = Figure not available.. = Negligible -/0 = Nil
SECTION ONE Highlights of the Seychelles Economy Overview The Seychelles is a small open economy like most of the small island states. Since independence in 1976, the government has set an overriding objective of achieving and providing a good welfare state. In its endeavour to realise this goal, it has strived to provide a high level of education and health, a housing programme for all, social benefits, infrastructure development to name a few. This has meant that it had to invest heavily, particularly in infrastructure and consequently a significant amount of finance was needed over the years in an environment of limited revenue. In order to provide for this, government used fiscal policy as the prime tool such that fiscal dominance became the driving economic policies. In view of the limited revenue, the resulting effect has been that the government ran yearly budget deficits, which has averaged between 12-15 per cent of GDP over the years. As it continued to pursue its social development, monetary policy during that time period thus became secondary and most of the time was accommodative of fiscal policy. A portion of the revenue shortfalls was monetised and thus result ing in a rise in the level of liquidity in the economy. The increase in liquidity had filtered through the other sectors, particularly the external sector where severe pressures have been exerted on the country s Balance of Payments in the latter years. Nevertheless, despite these negative repercussions of the develo pment process, the country has managed to eradicate poverty over a short time period such that on social indicators, Seychelles has been commended for its achievements and is ranked highly in the world. In 2003, it was ranked 1 st in Africa and 36 th in the world on its social indicators in the UNDP Human Development Report. In view that the government wants to maintain this high level of socio-economic development, it embark on a reform programme, through the Macroeconomic Reform Package (MERP) which was announced in June 2003. Within the package the government introduced a strong fiscal policy which turned a deficit into a surplus for - 1 -
fiscal year 2003. This was achieved through an increase in revenue while expenditure was markedly reduced. On the revenue side, emphasis was placed on the introduction of a new tax - Goods and Services Tax (GST) on most goods and services and on spending, the government planned cuts in the recurrent budget of ministries and departments, subventions to parastatals, capital spending and net lending. The combined effects resulted into a surplus which helped reduce the liquidity in the system. Moreover, the Central Bank had greater role to play, particularly on having a more active monetary policy. Over the years, with the government budget ended in deficits, the Central Bank had been a major creditor and this was done mostly by monetisation, which have resulted in the current monetary overhang. It is expected that with the new fiscal policy, the government would be moving away from this form of financing. The Bank will have to rationalise its monetary policy regime to conform to the new fiscal stance and the target will be to reduce liquidity in the short-term. The first step in that direction will be the reintroduction of the tender system for Treasury bills which will begin at the start of 2004. This will be the first stage to a more liberalised system for interest rates determination and will provide room for the commercial banks to react on their interest rate setting and provide a fair degree of competition between them. Nevertheless, in the short-term, the government might suffer on its debt interest Highlights of the Seychelles Economy payments. Being the main borrower in the economy at the moment, accounting for about 80 per cent of total domestic debt of the banking system, a tender system for government securities might mean an increase in interest rates in the very short-term. Developments in the year 2003 The year 2003 was an eventful year for the economy, which came both from the external sector as well as domestic. At the beginning of the year, the government appointed a team of technicians to re-look at the economic situation and to propose solutions that would put the country back to sustainable growth and at the same time preserve its social commitments. The reform package was announced late June and implementation started July 1 (for full details of the reform package, see Quarterly Review, Q3, 2003). With this background, the year itself was split into two halves, pre-reform period and the other post-reform. In the first half of the year, the economy continued to experience rapid growth in liquidity, the government budget performance was in deficit and there was still pressure on the external sector due to the foreign exchange shortage. The reform programme came in the second half of the year. With an emphasis on fiscal consolidation, there was a significant turnaround in the fiscal outcome for the whole year. By June, the budget stood at a deficit of R131 million and with the introduction of the new fiscal measures, the budget turn into a surplus by year end standing at R270 million, which was 7.1 per cent of the estimated GDP, - 2 -
a slight improvement on the target that the government had set in the reform package. This change in the fiscal outcome brought about positive changes, particularly in the monetary sector, namely on liquidity growth and credit expansion. These two monetary indicators, which were closely watched by the Central Bank showed signs of decline. Liquidity as measured by the broadest money aggregate M2(p) grew by only 0.4 per cent compared to 13 per cent in 2002, whilst domestic credit increased by 1.3 per cent compared to 16 per cent a year earlier. There was also an improvement on the current account of the Balance of Payments even though it remained in deficit. The only setback was in the real sector where the prime industry, tourism, showed a slowdown through reduced visitor arrivals but nevertheless, income remained relatively high. Monetary Developments As highlighted above, the rate of growth in the two main indicators in the monetary sector abated in the year under review compared to previous years. These changes were anticipated in view of the new fiscal policy implemented in the second half of the year. The monetary aggregate M2(p), which measures liquidity in its broadest sense, rose by 0.4 per cent down from 13 per cent in 2002. This was seen as a significant change as it would reduce the pressure on demand and thus a relief on the current account. One of the influential factors that underlined the movement in liquidity in the current year was domestic credit. The latter grew by 1.3 per cent compared to 16 per cent in the previous Highlights of the Seychelles Economy year. The slowdown in credit growth was attributable to the government sector as it moved from a deficit to a surplus, which enabled it to repay a portion of its debt, namely with the Central Bank. This was a very promising change in government debt, with deficits, the government relied on the Central Bank for financing. A continued consolidation of the fiscal position will enable the government to repay its debt with the Central Bank to make it reach a sustainable level. Further developments in the monetary sector were directly related to the reforms of July. With the decline in overall liquidity in the economy, there was also a direct impact on the liquidity of commercial banks as of the third quarter. The liquidity indicator, credit/deposit ratio, rose from 98.3 as end 2002 to 106.8 at the end of 2003. This was related to the implementation of the Goods and Services Tax (GST) and the issuance of new government debt. The introduction of the tax affected to a large extent the importers in the economy. As they had to pay for the tax upfront, it meant that they had to draw on their deposits to effect the payments as of July and this put some pressure on the banks. In view that all banks were in the same situation, there was not much inter-bank lending such that they had to resort to the Central Bank for temporary liquidity relief. Commercial banks borrowing from the Central Bank increased from R83 million in the previous year to R380 million in 2003 and most of borrowing in the year under review took place in the period July December. - 3 -
Interest rates were also affected in the reform process. With the government issuing new debt at lower interest rates, the Central Bank reduced the minimum savings rate which it controls by 50 basis points to 2.5 per cent. Other rates, which are market determined, namely rates on time deposits, followed a similar downward trend. On average, time deposit rates declined between 39 basis points to 94 basis points relative to 2002. The average lending rate remained somewhat constant relative to the previous year. Government Budget Outcome The fiscal position of 2003 was mainly influenced by the reforms of July, which called for a major turnaround, from deficit to surplus. The new policy stance was based on an improvement in revenue and cuts in expenditure. Furthermore, the financing of the budget was done on a prudent manner, particularly moving away from Central Bank financing. The government started the year with an original budget which had a forecasted fiscal deficit of R180 million. With the announcement of the reform package in June, this was revised due to the new elements which was added in the budget to bring the outcome to a surplus of R250 million. For the first six months of the year, the cumulative outcome was a deficit of R131 million and with the extra discipline of the new fiscal policy, the government had to realise a surplus of at least R381 million in the second half of the year to be able to meant the new target of a surplus of R250 million. Highlights of the Seychelles Economy For the year, the government realised a surplus of R270 million, which was in excess of the forecast by R20 million and this overall outcome was equivalent to 7.1 per cent of the estimated GDP for the year. The budget performance was due to both receipts and payments though outlays were more instrumental as revenue fell slightly short of expectations. Total revenue amounted to R1,868 million compared to a budgeted inflow of R1,898 million, whilst spending stood at R1,597 million, R51 million below its planned limit. Balance of Payments As mentioned earlier, the foreign exchange shortage remained a constraint in 2003 such that economic agents could not effectively settle the anticipated transactions or make payments on past commitments. The latter was reflected in the growth in the stock of arrears accumulated. Provisional estimates of the position of the economy vis-à-vis the rest of the world showed an overall deficit of R129 million. This outcome was attributable to both main accounts, namely the current and capital accounts. Nevertheless, it should be noted that 2003 saw an improvement in the current account relative to 2002. Despite remaining in deficit, there was a significant narrowing of the gap. The shortfall on the current account amounted to R30 million, which was lower than in 2002 by R467 million. As a percentage of GDP, the outcome represented a deficit of 0.8 per cent. The reduction in net current payments was mainly due to the increase in export receipts of - 4 -
both goods and services and also a decline in imports. The fall in imports was underlined by two main factors: (i) the introduction of the reform package in the second half of the year, and (ii) the shortage of foreign exchange. The impact of the reforms, especially the newly introduced Goods and Services Tax (GST) and the cut in government expenditure was to dampen overall domestic demand, whilst the foreign exchange problem was affecting mostly the productive sectors, which are heavily dependent on imports. Nevertheless, capital transfers into the domestic economy amounted to R40 million, showing an increase of R13 million relative to the previous year. The financial account, which is where most of the country s financial flows are registered, namely in terms of foreign direct investment (FDI) and loans ended in deficit for the first time since 1993. For the year under review, there was a net outflow of R167 million. The country received a net inflow of R272 million in FDI mainly in the tourism sector and which included R85 million from sales of government assets. A net outflow was recorded on the heading other investment due to higher loan repayments as opposed to receipts. In comparison with the fiscal year 2002 when there was a large foreign loan receipt, namely through the US$150 million, in 2003, the expectation was that the inflow was going to be much lower, whilst the country clears its commitments due. It should be noted that the movements in the transaction flows between Seychelles and the Highlights of the Seychelles Economy rest of the world in 2003 were influenced to a large extent, particularly from July, by the implementation of the reforms. The effects of the fiscal adjustments were effectively on domestic consumption both on government and the private sector, which thus resulted in a contraction on the current account relative to 2002. However, while this was a welcoming development, the economy is not endowed in many resources such that it had to import for both consumption and production purposes. Another important element in the year under review was the movement in the exchange rate of the domestic currency vis-à-vis the world s major currencies, particularly to the US dollar and the Euro. The exchange rate regime, a basket peg of six currencies, remained the same as the previous year but with a slight modification. With the introduction of the reforms on July 1, the government announced an appreciation limit on the Seychelles rupee/us dollar rate at 5.50 in a bid to stabilise the exchange rate. With the continued weakness of the US dollar on the world market and the reverse for the Euro, the changes in these two currencies had a significant impact on transactions effected as both currencies had a heavy weight in the basket. Most imports are denominated in US dollars, and thus it became cheaper in local currency terms to make payments. On the other hand, the tourism industry benefited from the strong Euro as most of the tourists came from the euro-zone, namely from France, Germany and Italy. - 5 -
The Real Economy In the year 2003, the real economy underperformed. Even though there were investments in some sectors, namely in tourism, telecoms and real estate development, overall output remained below potential due to the foreign exchange shortage which continued to hamper investment and also the strong fiscal adjustment undertaken in the second half of the year. With government playing a major role in economic activity, any major cut back in its consumption and investment would have a multiplier effect on the rest of the economy. This was evident for the construction industry whereby a portion of their work was dependent on demands of the government. In line with the reduction in government expenditure, private sector consumption was also reduced due to the introduction of GST and there was a decline in tourism activity through a fall in tourism arrivals even though, income that was generated remained relative high. Nevertheless, investment in that sector remained strong, thus suggesting that it has potential for growth. Highlights of the Seychelles Economy and these grew by 4.0 per cent. The surge in prices meant that with no major increases in income during the year, the purchasing power of consumers was considerably reduced. It is expected that price increases are also anticipated in the coming year as the effect of the tax is fully transmitted. The downturn in the economy was also affected by the surge in general prices. For the year ended December 2003, the underlying inflation rate stood at 3.3 per cent with the year-on-year increase amounting to 6.7 per cent. The rise in prices in the year under review was mostly influenced by the introduction of the new tax on most imported goods and services, effective in the second half of the year. In 2003, import prices grew by 2.2 per cent which filtered into local prices - 6 -
SECTION TWO Financial Survey 1. Overview The year 2003 saw a turn of events in terms of developments related to the monetary sector, namely the movements in the two key monetary indicators liquidity growth and domestic credit. Over the years, the domestic economy has been influenced by a strong fiscal policy for which economic growth was fuelled by budget deficits. This situation affected the monetary sector negatively. On the one hand, the economy observed an expansion in credit to the government sector, which crowded out to some extent other sectors. On the other hand, the increase in credit to government resulted in a significant growth in liquidity as part of that credit was in the form of advances from the Central Bank. This liquidity growth has over the same period created an increasing demand pressure resulting in a rise in the Balance of Payments shortfalls, namely in the current account. The government has noted the development of the country, whereby significant progress has been achieved over the years. This progress is duly recognised at international level, especially through the United Nations Human Development Index which place Seychelles first in Africa and 36 th in the world for 2003. At the rapid pace of development, the government is of the view that it should take a different approach in its economic policies through its reform programme that was announced in June. There should be a shift in its fiscal management, whereby a strong fiscal adjustment should be the prime objective, in yielding surpluses in the process. This should go a long way in creating stability in the key monetary indicators. With the government recording a significant movement in its fiscal balance, turning a deficit of 18 per cent of GDP in 2002 to a surplus of 7.1 per cent of GDP in 2003, this has helped to dampen to a considerable extent the liquidity growth and domestic credit expansion. Liquidity, as measured by the broadest money aggregate M2(p), rose by a mere 0.4 per cent down from 13 per cent a year earlier. The driving factor in this decline was domestic credit where the later increased by only 1.3 per cent from 16 per cent in 2002. Both these changes should help in reducing the pressure on the external sector. The slowdown - 7 -
Financial Survey in liquidity was observed in all its components and in some cases it actually fell, namely; time deposits, which declined by 7.0 per cent. The others saw a reduction in their growth pace and the movements were all in single digits. With the slowdown in deposits compared to credit growth, there was a decline in commercial banks overall liquidity position by the end of the year. The credit/deposit ratio increased from 98.3 in 2002 to 106.8 and this forced the banks to resort to the Central Bank for short-term advances to smooth their cash flows. With the change in policies, this development also affected interest rates, particularly on government debt, which had an impact on other rates. With the issues of government paper in July, which showed a reduction in the yields, the Central Bank reduced the minimum savings rate by 50 basis points to 2.5 per cent. This was the first revision in the savings rate since September 1998. 2. Monetary Policy Instruments Over the years, monetary policy has been second to fiscal policy. In this environment therefore, there was not a wide range of monetary policy tools that the Bank had at its disposal. With the government moving towards a significant fiscal adjustment through a reform programme which took effect in July, there is room for monetary policy to become - 8 - an important element. During the year, the Central Bank had the following instruments at its disposal: Minimum reserve requirement Local asset ratio Advances to commercial banks 2.1 Minimum Reserve Requirement 1 For the year, the Central Bank closely monitored the developments at commercial banks, particularly the effects of the fiscal policy. In monitoring the changes at the banks, the Bank decided to keep this requirement unchanged at 2.5 per cent for the year. All banks managed to comply with the requirement and on average it stood at 5.5 per cent for the year. 2.2 Local Asset Ratio 2 This requirement set the amount of government debt in term of securities that a commercial bank has to hold. Over the years, this statutory requirement has remained stable. The last time it was revised was in November 2001, when it was reduced from 70 per cent to 50 per cent. In 2003, it remained at that level and all commercial banks remained within the band of 50 per cent with the exception of one bank, for only a short period of time. It was observed that all banks held much more than the stipulated level. For the year, all banks together held on average an amount of 79 per 1 The minimum reserve requirement is a minimum ratio of cash reserves to eligible deposits that commercial banks are required to hold at the Central Bank. The higher is this ratio, the lower is the money multiplier, thus the monetary impact of new injections of liquidity. The minimum reserve requirement was set at 20 per cent on 16 November 1992. As from 15 September 1998, this ratio was lowered to 2.5 per cent cent. 2 With effect from 15 September 1998, the local assets ratio was raised from 50 per cent to 70 per cent. This ratio was lowered to 50 per cent in November 2001.
2.3 Central Bank Advances to Commercial Banks 3 During 2003, the Bank was active in its role as lender of last resort, especially in the second half of the year. The Bank has a facility that gives liquidity relief to banks for which the advances are repayable within fourteen days of disbursements. This short-term facility helps the banks to smooth out their cash flows. In 2003, total advances made to banks amounted to R380 million, an increase of R297 million or 360 per cent relative to the previous year (Chart 2.1). Out of this total Financial Survey amount disbursed, 95 per cent was repaid. The rise in short-term borrowing by the banks reflected to some extent the fiscal policy effects on the banking sector, particularly the initial shock of the implementation of the new Goods and Services Tax (GST). In view that payment of the tax stipulates an upfront payment mainly by importers, there was an increase in the withdrawal of funds from the banks for such payments. With all banks experiencing the same shocks, they were not able to borrow in the inter-bank market such that they had to use the facility at the Central Bank. Chart 2.1: Central Bank advances to Commercial Banks (1997 2003) 500 450 400 350 R Million 300 250 200 150 100 50 0 1997 1998 1999 2000 2001 2002 2003 Years Advances Repayments 3. Net Foreign and Domestic Assets In the year under review, there was an improvement in the net foreign asset position of the banking sector (Central Bank and commercial banks) but it remained in a negative balance. The change amounted to an increase of R78 million or 20 per cent relative to the position of 2002 (Chart 2.2). This year s movement came principally from Central Bank which saw its position recover by R126 million or 28 per cent relative to the previous year. The improvement in the Central Bank net position was both on its asset and liabilities where there was an increase in the former and a decline in the latter. By contrast that of commercial banks declined but compared to the Central Bank, their positions remained positive. 3 This is the sole standing facility offered by the Central Bank of Seychelles. Since September 1993, the rate on advances has been set at 50 basis points above the average of the last tender rate, rounded to 1/8 of 1 per cent. - 9 -
Financial Survey Chart 2.2: Net Foreign and Domestic Assets (1997 2003) R Million 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 - -500 1997 1998 1999 2000 2001 2002 2003 Years Net Foreign Assets Domestic Assets % Change in Total Assets 55 50 45 40 35 30 25 20 % 15 10 5 0-5 -10 On the domestic assets there was a sharp contrast in the change compared to previous years. While in the last few years domestic assets have been growing at a significant pace, particularly being driven by claims on the government sector, in 2003 there was a turnaround of events. With the government taking a more stringent fiscal policy in the second half of 2003, much of the growth in claims on the government was reduced. Claims on the government sector net actually declined for the year, falling by R184 million or 4.4 per cent as compared to an increase of R580 million or 16 per cent a year earlier. 4. Money Supply It must be noted that one of the key indicators in the monetary sector is liquidity growth. Over the years up to 2002, liquidity as measured by the broad money indicator M2(p), has shown significant volatility in its movement and also its pace of growth remained on a upward trend with the exception of the year 2000, when the money supply growth slowed down somewhat (see Chart 2.3). One of the underlying factors in the upsurge in liquidity growth has been credit creation, which was attributable mainly from the government sector. - 10 -
Financial Survey Chart 2.3: Money Supply (1997 2003) R Million 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1997 1998 1999 2000 2001 2002 2003 Years Currency with public Demand Deposits Time Deposits Savings Deposits Pipeline Deposits (p) % Change Money Supply, M2(p) 20 18 16 14 12 10 8 6 4 2 0 % In recognising that the liquidity overhang is also affecting the external sector through the high demand in the economy, one of the aims of the reforms through MERP was to reduce liquidity. This was done in line with other macro-economic fundamentals. One of the fiscal policy strategies was to achieve a budget surplus with a view to mop up the extra cash from the banking system. The other element which helped in reducing the liquidity growth was the source of government financing under the new fiscal approach, namely the movement away from Central Bank advances. With the reforms taking place in the second half of the year, there were positive results that came out and this helped the overall position for the year. At the end of 2003, the growth of the broad money aggregate M2(p), which consists of M2 and pipeline deposits (p), slowed down considerably from double digit in the previous two years to single digit. This can be observed in Chart 2.3, where M2(p) grew by a mere 0.4 per cent compared to13 per cent a year earlier. This was an important development as it helped to reduce the pressure on the external sector. At the end of December 2003, total liquidity as measured by M2(p) stood at R4,184 million compared to R4,165 million as at end of 2002 (Table 2.1). What is important also to note is the movement in the liquidity level between end December 2002 and June 2003 and between end June 2003 and end December 2003. In the previous period, there was a growth of 5.5 per cent, whilst in the following six months; there was a decline of 4.8 per cent, which thus help to dampen the overall yearly growth. In focusing the attention to the disaggregation of the liquidity, it was observed that most of the components of M2(p) showed a decline or a reduction in the pace of growth compared to the previous year. The most significant - 11 -
movement was in the less liquid component quasi-money, which fell by 2.4 per cent, namely on account of a decline of 7.0 per cent in time deposits, which outweighed the increase in savings deposits. The more liquid component M1 showed a sharp decline in its growth compared to the previous year. In Financial Survey 2003, it grew by only 5.0 per cent down from 22 per cent in 2002. This movement was attributable to a slowdown of both currency with the public (1.6 per cent) and demand deposits (5.9 per cent) compared to 21 per cent and 26 per cent a year earlier respectively. Table 2.1 Monetary Survey; 1 1999-2003 1999 2000 2001 2002 2003 (R million) Net Foreign Assets 2-68.9-194.6-190.5-394.1-316.4 Central Bank (net) -51.0-132.3-162.6-450.3-324.2 Commercial banks -17.9-62.3-27.8 56.2 7.7 Domestic Assets 3442.7 3864.3 4280.9 4965.1 5046.0 Claims on private sector 503.5 565.6 643.5 753.5 944.4 Claims on parastatals 42.6 20.2 10.8 5.4 79.0 Claims on government (net) 2896.7 3278.5 3626.6 4206.3 4022.6 Total Assets 3373.8 3669.7 4090.4 4571.0 4729.6 Money Supply, M2(p) 3056.9 3306.5 3682.5 4165.4 4183.9 Money Supply, M2 2908.9 3174.2 3554.8 4062.1 4081.8 Money, M1 1071.2 1137.5 1290.6 1576.9 1656.4 Currency with public 247.9 264.4 279.9 301.0 305.9 Demand deposits 823.3 873.1 1010.7 1275.9 1350.5 (of which parastatals) 174.4 182.7 232.7 354.7 478.0 Quasi-money 1837.7 2036.7 2264.2 2485.2 2425.4 Time deposits 1253.6 1394.6 1540.0 1693.8 1576.0 (of which parastatals) 126.5 177.5 183.9 223.3 227.5 Savings deposits 584.1 642.7 724.2 791.4 849.4 Pipeline deposits 148.0 132.3 127.7 103.3 102.1 Other items, net 316.9 363.2 407.9 405.6 545.7 Figures do not necessarily add up due to rounding. 1 End-of-period data. 2 Excludes government balances abroad. Given the results of 2003 and the continued strong commitment on the fiscal policy for the year 2004, it is expected that there should be a further reduction in the money supply. If this strategy is achieved it will further dampened the demand pressure and thus achieve an improvement on the current account. This should go a long way to put the economy on a more sustainable path of economic recovery. - 12 -
5. Domestic Credit 5.1 Central Bank and Commercial Bank Credit In the Seychelles economy, one of the factors that have fuelled liquidity growth has been credit creation, particular that emanating from government spending. Similarly, liquidity and credit were the monetary indicators that were Financial Survey targeted in the reforms measures in July 2003. This was done in line with the government s policy to stabilise the growth path of its debt. The aim in 2003 was to reduce, and/or, to keep the level of government debt stable compared to the previous year. The bulk of government debt was with the banking sector (Central Bank and commercial banks). Chart 2.4 : Total Domestic Credit (1997 2003) R Million 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500-1997 1998 1999 2000 2001 2002 2003 Years Commercial Banks Credit Central Bank Credit % Change in Total Domestic Credit 30 25 20 15 10 5 0 % As at end 2003, total domestic credit in the banking sector amounted to R5,303 million compared to R5,234 million in 2002. This change represented a slight increase of R69 million or 1.3 per cent relative to 2002. It is a marked reduction in the pace of growth as compared to 2002 when credit rose by 16 per cent (Table 2.2 & Chart 2.4). As can be observed from the Chart, most claims on the economy are being held by the commercial banks for which their share stood at 81 per cent at the end of the year. For the year, the decline in the growth in domestic credit came principally from the Central Bank compared to 2002. Claims of the Central Bank, which were solely on the government, fell by R282 million or 22 per cent relative to the previous year. This helped to outweigh the credit creation of commercial banks, which rose by 8.9 per cent. - 13 -
Financial Survey Table 2.2 Credit; 1/2 1999-2003 1999 2000 2001 2002 2003 (R million) Total Credit 3712.8 4090.3 4529.9 5234.5 5303.3 Commercial banks 3072.7 3391.5 3755.9 3941.2 4291.6 Claims on private sector 503.5 565.6 643.5 753.5 944.4 Claims on parastatals 42.6 20.2 10.8 5.4 79.0 Claims on government 2526.6 2805.7 3101.6 3182.4 3268.2 Of which: Dev. Fund Stocks (96.2) (100.7) (139.7) (139.7) (140.0) Treasury bonds (770.6) (903.6) (940.4) (794.3) (1156.9) Treasury bills (1621.6) (1777.1) (1771.0) (1784.4) (1003.9) Central Bank 640.1 698.8 773.9 1293.2 1011.7 Claims on government 640.1 698.8 773.9 1293.2 1011.7 Of which: Advances (623.9) (395.8) (472.4) (1092.0) (811.0) Treasury bonds (0.05) (300.7) (300.7) (200.0) (200.0) Treasury bills (16.2) (2.3) (1.0) (1.2) (0.7) Figures do not necessarily add up due to rounding. 1 End-of period data. 2 All figures for stocks, bonds and bills are at cost value. Chart 2.5: Central Bank Credit (1997 2003) R Million 1,400 1,300 1,200 1,100 1,000 900 800 700 600 500 400 300 200 100-1997 1998 1999 2000 2001 2002 2003 Years Advances Treasury Bonds Treasury Bills % Change in Central Bank Credit 70 60 50 40 30 20 10 0-10 -20-30 -40-50 % - 14 -
Financial Survey The fall in Central Bank credit was attributable to two components; namely advances and the holdings of treasury bills, which declined by 26 per cent and 46 per cent respectively, relative to 2002 (Chart 2.5). The rise in commercial bank loan portfolio was influenced mainly by the parastatals and private sector, whilst that on the government showed a similar growth as in the previous year (Chart 2.6). Chart 2.6: Commercial Banks Credit (1997 2003) R Million 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 70 60 50 40 % 30 20 10-1997 1998 1999 2000 2001 2002 2003 Years Claims on private sector Claims on government Claims on parastatals % Change in Commercial Banks Credit 0 5.2 Sectoral Development of Credit to Private Sector and Parastatals In the preceding analysis of the banking sector credit, it was observed that there was an increase in the other two main borrowers loan portfolio with the commercial banks, namely the private sector and parastatals for which the latter showed a much greater increase. At the end of 2003, a total of R1,023 million worth of credit was outstanding to the non-government sector, which represented a rise of R265 million or 35 per cent relative to the previous year. At this rate of increase, it was almost twice as high as the rate of growth in 2002 and it was mostly on account of the parastatals. The private sector also showed a much higher growth in credit demand in the year under review rising by 25 per cent compared to 17 per cent in the previous year (Chart 2.6, above). An analysis of the broad economic sectors that have benefited through the rise in credit at commercial banks, showed that there were increases in all sectors despite some sectors showing decline in their rate of growth, namely for the manufacturing, construction, tourism and wholesale and retail trade (Chart 2.7 & Table 2.3). These slowdowns were responsible to a fall in economic activity - 15 -
during the year, especially associated with the foreign exchange shortage affecting imported inputs and a fall in government consumption and investment which affected some segments of activity in the private sector. The construction sector was particularly influenced by the reduced demand from the government Financial Survey as the amount of capital projects in the year under review was significantly curtailed as part of the reforms programme. Despite this outcome, there were areas which noticeably performed better, namely in the fishing and agricultural sector, transportation, other businesses and the demand for mortgage loans. Table 2.3 Commercial Banks Loans and Advances To Non-Government Sector by Economic Sectors; 1 1999-2003 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 (R million) (per cent) Total Advances 546.0 585.8 654.1 758.8 1023.4 100.0 100.0 100.0 100.0 100.0 Agriculture & fishing 26.6 11.6 13.9 13.4 13.8 4.9 2.0 2.1 1.8 1.4 Of which: Refinance scheme 18.8 3.1 1.5 1.5 2.0 3.4 0.5 0.2 0.2 0.2 Manufacturing 3.4 4.8 6.1 9.0 9.8 0.6 0.8 0.9 1.2 1.0 Construction 20.6 29.8 30.3 38.2 42.9 4.4 3.8 4.6 5.0 4.2 Transportation 4.8 4.7 4.5 3.5 7.0 0.9 0.8 0.7 0.5 0.7 Tourist facilities 87.4 107.7 140.8 207.0 294.9 16.0 18.4 21.5 27.3 28.8 Wholesale & Retail trade 51.3 38.7 37.7 53.3 62.5 9.4 6.6 5.8 7.0 6.1 Other businesses 104.6 99.5 102.7 85.8 243.2 19.2 17.0 15.7 11.3 23.8 Private households & Non-profit organisations 247.3 288.9 318.0 348.7 349.3 45.3 49.3 48.6 45.9 34.1 Of which Mortgage loans 114.2 156.6 177.4 184.1 197.6 20.9 26.7 27.1 24.3 19.3 Figures do not necessarily add up due to rounding. 1 End-of-period data. Chart 2.7 : Commercial Banks Loans and Advances to the Non-Government Sector (1997 2003) R Millions 1050 950 850 750 650 550 450 350 250 150 50-50 1997 1998 1999 Years 2000 2001 2002 2003 Agriculture & Fishing Manufacturing Construction Transportation Tourist Facilities Wholesale & Retail Trade Other Businesses Private Households and Non-Profit Organisations - 16 -
Chart 2.8 below illustrates the distribution of commercial banks loans and advances to the non-government sector in 2003. The share of credit remained relatively the same as in the previous year with the private households and non-profit organisations holding the largest Financial Survey share, standing at 34 per cent even though this represented a decline of 12 per cent relative to the previous year. The tourism sector is the second main borrower followed by the other businesses segment, holding 29 per cent and 24 per cent share of credit respectively. Chart 2.8: Commercial Banks Loans and Advances to the Non- Government Sector percentage share (2003) Agriculture & fishing 6.1 23.8 Manufacturing Construction Transportation Tourist Facilities 28.8 0.7 4.2 1.0 1.3 34.1 Wholesale & Retail Trade Other Businesses Private households & Non- Profit Organisations 5.3 Development Bank s Credit 4 The Development Bank of Seychelles (DBS) provides credit to the small to medium sized enterprises which would not necessarily qualify for a commercial bank loan. Most of the loans that are financed by this institution are in the areas of agriculture, fishing, small scale industries, tourism and other service related businesses. Compared to previous years, there was a slowdown in the growth of credit expansion at DBS. As illustrated by Chart 2.9 and Table 2.4, loans increased by only R7.5 million or 2.9 per cent in 2003 compared to R29 million or 13 per cent a year earlier. One of the underlying reasons for this slowdown was the foreign exchange shortage, which hampered 4 From 17 January 1994, the Development Bank of Seychelles provided credit to Seychellois investors at concessionary rate of 12 per cent per annum. To qualify as Seychellois, Seychellois nationals must own at least 50 per cent of the investment. The minimum contribution for the investor was raised to 25 per cent from 15 per cent at the same occasion. The Development Bank does not provide credit for purposes of working capital. Previously it had lend at 12 per cent per annum for loans in excess of R50,000, rates varied between 9 per cent and 11 per cent depending on economic sector. This rule had been implemented on 17 July 1991. - 17 -
the growth of small to medium sized businesses especially those that are heavily dependent on imported inputs. Nevertheless, it is worth noting the increase in loans to the agricultural and industrial sectors compared to the results of 2002. The rise in credit to these two sectors was of the magnitude of 32 per cent to agriculture and 2.1 per cent for Financial Survey industry. The other sector that benefited from the financing was other services, which showed an increased of 11 per cent in its credit relative to the previous year. The sectors that experienced declines were fishing and tourism, which fell by 1.3 per cent and 9.1 per cent respectively. Table 2.4 Loans by Development Bank by Economic Sectors;* 1999-2003 1999 2000 2001 2002 2003 1999 2000 2001 2002 2003 (R million) (per cent) Total Advances 205.3 223.3 230.8 260.2 267.7 100.0 100.0 100.0 100.0 100.0 Agriculture 6.8 6.2 5.1 6.1 8.1 3.3 2.8 2.2 2.4 3.0 Fishing 9.5 21.2 18.8 22.2 21.9 4.6 9.5 8.1 8.5 8.2 Industry 20.5 18.2 15.6 13.5 13.8 10.0 8.1 6.7 5.2 5.2 Tourism 98.0 89.9 103.8 93.6 85.0 47.7 40.3 45.0 36.0 31.8 Other services 70.5 87.8 87.6 124.8 138.9 34.4 39.3 37.9 48.0 51.9 Figures do not necessarily add up due to rounding. * End-of-period data. Source: Development Bank of Seychelles Chart 2.9: Loans by Development Bank by Economic Sectors (1998 2003) R Million 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 1998 1999 2000 2001 2002 2003 Years Agriculture Fishing Industry Tourism Other services - 18 -
6. Liquidity of Commercial Banks The liquidity position of banks was somewhat constrained during the year, particularly in the second half. This coincided with the government reforms that were implemented in July. One of the aims was to focus on the Financial Survey monetary sector through a reduction in the liquidity level in the economy. As most of the liquidity in the economy is held in bank deposits, the immediate effect was thus felt in the deposit base of commercial banks (Chart 2.10). Chart 2.10: Credit and Deposits of Commercial Banks (1997 2003) 4,500 4,000 3,500 3,000 R Million 2,500 2,000 1,500 1,000 500-1997 1998 1999 2000 2001 2002 2003 Years Credit Deposits The shock on the deposits came in two-folds; first, the GST effect as the tax had to be paid upfront such that bank deposits were being used for this purpose and secondly with the issue of new government papers in July of the amount of R2.0 billion, a portion of deposits was used for investing in government debt. With these two major developments, deposits at commercial banks fell between end June and end December by 4.8 per cent. With these developments in the second half of the year, the year as a whole showed an overall decline in the liquidity position of the commercial banks as reflected in the credit/deposit ratio which rose from 98.3 in 2002 to 106.8 in 2003 (Table 2.5 & Chart 2.11). Total credit at banks increased by 8.9 per cent whilst deposits rose by only 0.2 per cent, which thus gave a growth of 8.5 per cent in the liquidity ratio. With the decline in their liquidity position, the banks had to resort to the Central Bank for short-term cash relief through the Bank facility (more details of borrowing of the commercial banks, see section six). - 19 -
Financial Survey Table 2.5 Liquidity Indicators of Commercial Banks; 1 1999-2003 1999 2000 2001 2002 2003 (R million) Credit 3072.7 3391.5 3755.9 3941.2 4291.6 Deposits 2864.5 3114.3 3505.1 4008.0 4017.0 (per cent) Credit-deposit ratio 107.3 108.9 107.2 98.3 106.8 Figures do not necessarily add up due to rounding. 1 End-of-period data. Chart 2.11: Credit/Deposit Ratio of Commercial Banks (1997 2003) 115 110 105 100 % 95 90 85 80 75 1997 1998 1999 2000 2001 2002 2003 Years Credit/Deposit Ratio 7. Interest rates In Seychelles, changes in interest rates have been influenced to a large extent by fiscal policy. With the government being a key player in the economy over the years, economic growth was fuelled through budget deficits. In that environment, the government sector has thus been a price setter in its demand for financial resources in the market. Nevertheless, there have been periods when the government was affected by marketdetermined interest rates and this affected the budget in an adverse manner when consideration is given to its debt stock, particularly in the banking sector where on average it accounted for about 80 per cent of credit. Movements in interest rates in 2003 continued on the downward path that started since 1998-20 -
(Table 2.6 & Chart 2.12). The changes were influenced by the implementation of the policy package in the second half of the year, whereby the underlying factor of the reforms was a significant fiscal adjustment. As the government remained the main borrower in Financial Survey the economy during the year its borrowings cost, particularly related to the issue of government paper remained low and fell relative to 2002. This caused sizeable decline in most rates in both deposits and lending. Volume-weighted average deposit rates: Table 2.6 Interest Rates; 1/2 1999-2003 1999 2000 2001 2002 2003 (per cent) Savings rate 3.00 3.02 3.03 3.03 2.85 Time deposits 7 days 2.93 2.79 2.89 2.78 2.39 > 7 days < 3 months 5.13 4.77 4.92 4.93 3.99 > 3 months < 6 months 4.71 4.76 4.98 4.98 4.22 > 6 months < 12 months 5.05 4.29 4.31 4.34 3.98 > 12 months 5.13 6.33 4.80 4.26 3.75 Volume-weighted Average lending rate 12.01 11.45 11.14 11.09 11.08 91-day treasury bill rate 3 4.50 4.50 4.50 4.50 4.50 91-day treasury bill rate 4 - - - - 2.02 1 Averages of quarterly data, compiled on an end-of-period basis, whereas that of the 91-day bill rate is the average of monthly data, compiled on an end-of-period basis. 2 With effect from September 15, 1998, new issues of 91-day bills were issued on tap. 3 With effect from July 15, 2003, new issues of 91-day bills were issued on tap, available to commercial banks only. Chart 2.12: Interest Rates (1997-2003) 16.00 14.00 12.00 10.00 % 8.00 6.00 4.00 2.00 0.00 1997 1998 1999 2000 2001 2002 2003 Years Savings deposits rate Time 7 days > 6 months < =12 months Average lending rate - 21 -