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CENTRAL BANK OF SEYCHELLES

ANNUAL REPORT

2006

CONTENTS

Page Letter of Transmittal Board of Directors List of Charts and Tables Section One Highlights of the Seychelles Economy 1 Section Two Financial Survey 10 Section Three Government Finance 26 Section Four The External Sector 37 Section Five The Real Sector: Production, Labour and Prices 53 Section Six Operations and Administration of the Central Bank 71 Annex I Annual Accounts and Auditor’s Report 86 Annex II Officers of the Central Bank of Seychelles


Board of Directors

(as at 31st December 2006)

Francis Chang Leng - Governor and Chairman

Jennifer Morel - Deputy Governor - Member

Errol Dias - Member

Francis Chang-Sam - Member

Jean Weeling-Lee - Member

Wilfred Jackson - Member

Secretary to the Board

Jean-Claude d’Offay

List of Charts and Tables

Chart No. Title Page Financial Survey 2.1 Net Foreign and Domestic Assets; 1998-2006 12

2.2 Money Supply; 1998-2006 15

2.3 Total Domestic Credit; 1998-2006 16

2.4 Central Bank Credit; 1998-2006 17

2.5 Commercial Banks’ Credit; 1998-2006 17

2.6 Commercial Banks’ Loans and Advances to Non-Government

Sector; 1998-2006 19

2.7 Commercial Banks Loans and Advances to Non-Government

Sector percentage share; 2006 20

2.8 Loans by Development Bank by Economic Sectors; 1998-2006 21

2.9 Central Bank advances to Commercial Banks; 1998-2006 22

2.10 Credit and Deposits of Commercial Banks; 1998-2006 22

2.11 Credit/Deposit Ratio of Commercial Banks; 1998-2006 23

2.12 Interest Rates; 1998-2006 25 Government Finance 3.1 Government Finance Outcome for 1998-2006 27

3.2 Major Revenue Flows in Current Receipts in 2006 30

3.3 Government Expenditure by Main Headings; 1998-2006 31

3.4 Government’s Capital Expenditure; 1998-2006 34 The External Sector

4.1 The Overall Balance, Current Account and Capital & Financial

Account of the BOP; 2000-2006 39

4.2 Trade in Goods; 1998-2006 41

4.3 Exports; 2006 43

4.4 Imports (f.o.b.); 2006 45

4.5 Exchange Rate Movements of the Three Main Currencies in the STTWB; 1998-2006 52

Chart No. Title Page The Real Sector: Production, Labour and Prices 5.1 Gross Domestic Product at Constant Market Prices; 2002-2006 55

5.2 Visitor Arrivals; 2002-2006 65

5.3 Price Movements; 2002-2006 69

Operations and Administration of the Central Bank 6.1 Notes and Coins in Circulation; 2001-2006 72

6.2 Minimum Reserve Requirement; 2001-2006 76

6.3 Minimum Local Asset Ratio; 2001-2006 76

6.4 Stock of Domestic Debt; 2006 79

6.5 Average Tender Rate of 91-day bill; 2006 79

6.6 Total Stock of Outstanding Treasury Bills; 2001-2006 80

6.7 Total Stock of Outstanding Treasury Bonds; 2001-2006 82

Table No. Title Page Financial Survey 2.1 Monetary Survey; 2001-2006 14 2.2 Credit; 2001-2006 16 2.3 Commercial Banks – Loans and Advances to Non-Government Sector by Economic Sectors; 2002-2006 18 2.4 Loans by Development Bank by Economic Sectors; 2002-2006 20 2.5 CBS Advances to Commercial Banks; 2001-2006 21 2.6 Liquidity Indicators of Commercial Banks; 2001-2006 23 2.7 Interest Rates; 2001-2006 24 Government Finance 3.1 Government Budget; Summary 2004-2007 29

3.2 Government Budget; Revenue 2004-2007 30

3.3 Government Budget; Expenditure 2004-2007 33

3.4 Public Sector Capital Project Expenditure; 2002-2006 35

The External Sector 4.1 Balance of Payments; 2001-2006 42

4.2 Domestic Exports; 2001-2006 44

4.3 Imports (c.i.f.) – by HS Sections; 2001-2006 45

4.4 Goods Procured in Ports; 2001-2006 46

4.5 Services; 2001-2006 47

4.6 External Reserves; 2001-2006 51

4.7 Exchange Rates; 2001-2006 52

The Real Sector: Production, Labour and Prices 5.1 Gross Domestic Product by Kind of Economic Activity; 2002-2006 54 5.2 Gross Domestic Product by Kind of Economic Activity; 2002-2006 56 5.3 Gross Domestic Product by Broad Productive Sectors; 2002-2006 57 5.3 Tourism; 2002-2006 63 5.4 Estimates of Fish Landed; 2002-2006 59

5.5 Production of Import of Crops and Livestock products; 2002-2006 61

5.6 Tourism; 2002-2006 64

Table No. Title Page 5.7 Employment and Unemployment Rate 67 5.8 Average Monthly Earnings 68 5.9 Annual Average Inflation Rates 70 Operations and Administration of the Central Bank 6.1 Circulation of Notes and Coins; 2001-2006 73

6.2 Bankers’ Clearing House Activities; 2001-2006 74

6.3 Minimum Reserves and Local Assets Ratio; 2001-2006 77

6.4 Treasury Bills; 2001-2006 81

6.5 Treasury Bonds; 2001-2006 82

6.6 Government Stocks; 2001-2006 83

Technical Note

Owing to rounding of figures, the sum of separate items may not always add up to the total shown. Abbreviations used in this Report are: R = Seychelles Rupee n.a = Figure not available .. = Negligible -/0 = Nil

CBS - Central Bank of Seychelles

DBS - Development Bank of Seychelles

HFC - Housing Finance Company

IBC - International Business Company

IOT - Indian Ocean Tuna Limited

ITZ - International Trade Zone

MERP - Macro Economic Reform Programme

SEPEC - Seychelles Petroleum Company

SFA - Seychelles Fishing Authority

SIM - Seychelles Institute of Management

SMB - Seychelles Marketing Board

SSF - Social Security Fund

STB - Seychelles Tourism Board

STTWB - Seychelles Trade and Tourism Weighted Basket

SECTION ONE

Highlights of the Seychelles Economy

Overview

In its 2005 Annual Report, the Central Bank

expressed the cautious opinion that the

domestic economy had bottomed out and was

on an incipient recovery phase. This

conjecture, which has since been vindicated by

official GDP data, was based on strong foreign

direct investment (FDI) inflows, heightened

tourism activity and certain key fiscal and

external indicators, which pointed to an

expansion in both the tax base and in

aggregate demand. At an estimated 1.2 per

cent, the growth in real GDP, though small,

was highly symbolic since it marked the end

of almost five years of economic stagnation

with a cumulative loss of some 10 percentage

points in real output during that period. The

turnaround was all the more remarkable as it

occurred in the immediate wake of the Asian

tsunami of late December 2004, which

affected the archipelago causing considerable

infrastructural damage and some disruptions to

productive activity, especially in the first half

of 2005.

Signs of economic recovery crystallised

further in 2006. According to the latest

estimates, the rate of economic growth

accelerated to 5.3 per cent in real terms, thus

materially reversing the recent GDP losses.

The main growth impulses came again from

tourism, reflecting increased revenue

generation from record bed-nights sold and

from construction activity, underpinned by

heavy FDI in the tourism sector and some

large-scale government funded housing

programmes.

Adverse developments such as the

Chikungunya epidemic in March temporarily

crippled the tourism sector, but timely

countermeasures by all stakeholders were

rewarded by a rapid return to normalcy,

leading to a record performance by the close of

the year. Even a major political event in July,

the 2006 Presidential Elections – which gave

President J A Michel a fresh 5-year mandate -

failed to disrupt the pace of the tourism

recovery. Compared with 2005, arrivals

improved by 9.3 per cent to 140,627 visitors

whilst estimated tourism income rose to R1.3

billion.

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Annual Report 2006 Highlights of the Seychelles Economy

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In the construction sector, actual realised

capital expenditure fell below planned levels,

mostly as a result of severe supply-side

constraints, notably in domestic-sourced

building supplies such as blocks, crusher dusts

and aggregates. Unlike other construction

inputs, including labour, the option of sourcing

such primary commodities directly overseas,

proved to be logistically complex besides

being uneconomic from an opportunity cost

perspective. In addition, various important

tourism projects, including the Ephelia Resort

& Spa at Port Launay, encountered critical

delays due to price and technical setbacks,

such as unanticipated inflation in building

costs and difficulties in identifying qualified

contractors on acceptable price and delivery

terms.

The improvements in growth fundamentals

and the strong gains in tourism earnings did

not however translate into any immediate

relief in the foreign exchange situation of the

banking system. Throughout much of the year

the situation remained tight as banks continued

to divert a significant share of current external

earnings to the discharge of past arrears or

current irrecoverable commercial

commitments such as LCs and Head-Office

loans. Consequently, current demand for

foreign exchange by many economic sectors –

for spare parts and raw materials – remained

somewhat unmet, resulting in another year of

production disruptions and therefore output

losses. Beyond this generalisation however,

certain enterprises, such as Seychelles

Breweries and the Seychelles Marketing Board

(SMB) managed to overcome their operational

difficulties to achieve record output levels in

certain lines, most notably in the beverages

and mineral water production.

Notwithstanding the prevailing stringency in

official banking external inflows, the supply of

non-FDI imported consumer goods into the

country improved significantly in 2006,

evidently funded mostly from parallel market

resources. Whilst symptomatic of the

underlying economic imbalances of the

country, this was nonetheless a positive

development for the fiscal outcome, as it

contributed to commendable trades tax and

GST performance despite reductions in the

effective overall taxable base. On the

downside however, intense pressure to raise

government service levels and precipitate

capital spending neutralised most of the

revenue gains, resulting in a lower overall

surplus outcome that could have prevailed.

Still, at R174 million, equivalent to 4.1 per

cent of GDP, the overall surplus was under the

circumstances, a commendable outcome.

Monetary developments during the first half of

the year remained on an upward trend, but in

defence, much of the driving force emanated

from improvements in net external assets. In

its quest to enhance confidence in the domestic

currency and moderate monetary expansion,

the Central Bank tightened monetary policy in

August, comprising of the reinstatement of an

interest rate floor, important changes in the

Local Asset Ratio and Mandatory Cash

Reserve mechanism, forcing overall an

effective increase in domestic interest rates at

year’s end. These were accompanied


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subsequently by the implementation of a

revised currency basket with a strong export

bias, and further liberalisation in the foreign

exchange regime supported by the country’s

successful foray into the international bond

market following the positive outcome of a

country rating exercise by Standard and

Poor’s.

The sovereign bond issue for a total amount of

US$200 million, which was managed by

Lehman Brothers and floated on the London

market in September 2006, was heavily

oversubscribed. The proceeds of the bond

were used primarily to discharge the balance

left on the Bank of Tokyo-Mitsubishi UFJ

collaterised syndicated loan (US$64 million),

restructure external public debt and clear

certain specific official arrears with the

leftover balance transferred to the Central

Bank to support the liberalisation process.

As a result of these initiatives, government

normalised relations with key creditors,

including the African Development Bank, the

World Bank and the European Investment

Bank, thus re-integrating Seychelles back

within the fold of the international

development finance community. The

implications of these events were of material

significance to money market developments.

At the end of the year, net claims on

government by the banking sector declined by

R370 million to R3,309 million, mostly thanks

to the impact of the rupee counterpart of the

balance of the external bond proceeds sold to

the Central Bank; however over the same

period, the country’s net external reserves

position swung from negative R274 million to

R539 million, thus thrusting the M2(p), the

broad money aggregate, to a record high of

R4,660 million.

Although, productive activity remained

hamstrung by foreign exchange shortages,

external indicators continued to strengthen in

2006. As in 2005, the financial account

posted exceptional results on the back of the

US$200 million sovereign bond issue and

some R804 million of FDI receipts. With

tourism earnings in excess of R1,251 million

and merchandise exports (representing mostly

canned tuna earnings) of R1,195 million, a

major narrowing in the current account deficit

could be anticipated but this did not fully

materialise due to the neutralising impact of

higher energy prices and a surge in FDI-

related capital imports and non-oil imports.

Overall however, the external accounts ended

2006 in R583 million surplus, of which some

R238 million went towards the discharge of

official external arrears.

For yet another year, labour market conditions

tightened, especially in fisheries, tourism,

constructions and professional services,

leaving critical vacancies unfilled. Export-

oriented enterprises with access to foreign

exchange could turn to imported labour as a

solution, but for others, this was not an option.

Employment levels nationwide rose to 41,132

employees by end-December as against 35,846

in January whilst the rate of unemployment is

estimated to have fallen from 3.6 per cent a

year ago to under 2.6 per cent.


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Within the statistical framework of the Retail

Price Index (RPI), the average annual inflation

rate nose dived from 0.9 per cent in 2005 to

negative 0.4 per cent. This outcome was in

sharp relief to expectations and was mainly

attributable to a decline in the domestic

component of the index as import prices

increased by 1.7 per cent. As the year closed,

price prospects were on balance, uncertain,

and dependent on developments in the world

economy, government tax/pricing policy and

currency movements.

Monetary Developments

With economic recovery in clear evidence and

monetary conditions easing in response to

external sector influences, the Central Bank

hardened its monetary policy stance within the

constraints imposed by the national

commitment to fast-track economic

liberalisation and stimulate private sector

activity. In August, various measures were

introduced to engineer a liquidity squeeze in

the banking sector, build confidence in the

domestic currency and introduce an

investment outlet within the Central Bank to

absorb excess banking sector liquidity at all

times. These included, re-imposing the

discipline of a minimum reference floor for

interest rates targeting the savings rate;

increasing the cash reserve ratio from 2.5 per

cent to 5.0 per cent of deposit liabilities;

remunerating any excess cash reserve balances

above the minimum 5.0 per cent at pseudo-

market rate; and raising the local asset ratio

from 50 per cent to 65 per cent; and the

reintroduction of the secondary market for

treasury bills.

. In line with usual practice, banks were given

an adjustment period to re-profile their

operations and achieve compliance with the

new regulations.

In a connected development, the Central Bank

took the decision to review the exchange rate

regime in order to eliminate the appreciating

tendency of the old currency basket and

exchange rate rule, which for some years, have

resulted in a R5.50/US$ de facto dollar peg.

With an eye on enhancing the domestic

currency’s international competitiveness and

ensure its convergence with other economic

fundamentals, the currency composition of the

Seychelles Tourism & Trade Weighted Basket

(STTWB) was rationalised to three currencies,

the Euro, US Dollar and Pound Sterling.

In late September, within its plan to normalise

relations with creditors, the country

successfully broke into the international bond

market with a US$200 million sovereign bond

launched on the London Stock Market. This

followed a country grading exercise by

Standard & Poor’s which resulted in a B stable

outlook rating, thus qualifying the country to

enter the bond market. It is of significance to

note that with this event, Seychelles

effectively ended an era where it could only

access the international financial market on

highly securitised borrowing terms, involving

complicated escrow arrangements and pledges

on future foreign exchange inflows.

In line with the Bond’s prospectus, the

resources raised were used to fully repay the


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outstanding balance on the Tokyo-Mitsubishi

Syndicated loan and cleared arrears with the

African Development Bank, the World Bank

and the European Investment Bank, thus

paving the way for a full normalisation of

relations with these development finance

creditors. Of the balance remaining, most

went towards external reserve building,

deemed critical to build confidence as well as

support certain concrete steps at foreign

exchange liberalisation, involving the

following:

• a reduction in the surrender

requirement of banks from 45 per cent

of eligible inflows to 15 per cent of

gross inflows;

• the abolition of specific controls on

the prioritisation and allocation of

foreign payments; and

• the freezing of the existing pipeline

scheme and a commitment to finance

out all bona fide pipeline requests with

supporting import documentations.

Under these arrangements, the commercial

banks whilst free to deal with clients’ external

requests within the constraint of their regular

inflows, were urged to follow certain national

guidelines to ensure that critical goods

continue to enter the country. In the case of

the resources surrendered to the Central Bank,

some two thirds were to be deployed to assist

with domestic energy payments and the

remaining third, reserved for priority

government payments.

Against the backdrop of such an eventful policy landscape, the year closed with the country’s net reserves at R539 million, a turnaround of some R812 million relative to a year ago. Consistent with this outcome, strong upward pressure was placed on money supply, which was only partly compensated by a contraction in net domestic assets, resulting in a surge in the broad money aggregate M2(p) from R4,442 million to R4,660 million. Downward pressure on the money supply is however anticipated with the planned drawdown on official reserves in the months ahead. Fiscal Developments For a fourth consecutive year, the government budget posted a surplus. At R174 million, the surplus fell short of target by R3.6 million, but was nevertheless an exceptional achievement given a difficult year. As in the recent past, this was achieved on the strength of buoyant revenue, notably goods and services tax (GST), trades tax and fees & fines. In 2006, GST collections rose to R723 million versus R673 million budgeted whilst despite a general reduction in the taxable base, trades tax amounted to R225 million, some R26 million ahead of expectations. Fees and fines, as a revenue centre, posted an exceptional R166 million, about R50 million more than budgeted. Overall, total receipts amounted to R2,476 million, a record level. From an expenditure perspective, the fiscal outcome was disappointing with marked overruns recorded under both current and


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capital outlays. Current outlays overshot budget by some R388 million to reach R1,901 million, of which R406 million represented interest payments. In the case of capital outlays, a total of R404 million was spent, about R167 million more than expected, and mostly in housing development (R117 million) and social projects (R99 million). Excluding interest payments, the primary surplus stood at R580 million, well ahead of the R357 million budgeted. In the absence of expenditure overruns, such a surplus would have risen to an unprecedented R904 million, almost 21 per cent of estimated GDP.

The below-the-line financing transactions of

the government budget were in 2006

dominated more by the impact of the proceeds

of the US$200 million sovereign bond issue

than the overall surplus. This is reflected in

net new draw downs of R878 million on

foreign loans permitting in the process, the

retirement of about R522 million of domestic

debt and a R531 million rise in cash balance

movements.

External Sector Developments

Favourable financial account developments in

2006 in large measure, dictated the overall

balance of payments account in the year under

review. An overall surplus of R583 million

was recorded, more than totally reversing the

cumulative deficit of the previous two years.

As is the norm for Seychelles, the current

account was in deficit in 2006, but compared

with the previous year, the deficit narrowed

from R1,075 million to R905 million. The

improvement can be traced wholly to the

services account, which posted a surplus of

R657 million as against a preceding one of

R620 million, reflecting a strong performance

by tourism. In contrast, the merchandise trade

account deteriorated from an overall deficit of

R2,270 million to R2,446 million, a

development associated with increases in

energy payments, consumer goods and FDI-

related imports.

Current transfers totalled R264 million,

improving further on the high R172 million

posted in the preceding year. For the most

part, the increase was due to a net credit

balance of R144 million under “Other

sectors”, explained by imputed private

transfers as contra to imports not recorded by

the banking sector.

On the financial side, foreign direct investment

flows amounted to some R759 million whilst

portfolio investment rose from a negligible

base to R1,105 million, an outcome associated

with the sovereign bond issue of the US$200

million.

The year closed with reserve assets rising by

some R345 million with the balance of the

overall R583 million surplus being deployed

towards the clearance of official arrears.

Real Sector Developments

Provisional GDP data, based on available

production indicators, point to a real output

growth of 5.3 per cent, which if confirmed,

would place the country on a strong recovery

path.


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In 2006, economic activity was visibly

buoyant, especially in the tourism sector and

the construction industry. Tourism arrivals

rose to a national record of 140,627 visitors

and earnings peaked at R1,252 million. In

construction, hectic activity prevailed in

connection with various tourism projects,

infrastructure repairs following the tsunami

event and the government’s housing and social

capital programme, causing serious shortages

in the supply of basic building materials.

Although, foreign exchange difficulties

continued to disrupt manufacturing output, a

general increase in production levels seemed

to have occurred in 2006. This was most

noticeable in the output figures for soft drinks

(9,225 Kltrs), beer & stout (6,737 Kltrs) and

mineral water (6,027 Kltrs), all of which

achieved record performance. In the case of

smoked fish, production virtually doubled to

25,205 kgs.

On the downside, the Seychelles Marketing

Board (SMB) reported significant declines in

the production of milk, jams, sauces and

yoghurt whilst prawn output fell to 638 tonnes

from 772 tonnes last year. Animal feed output

was however maintained at the previous year’s

level.

In the agricultural and livestock sectors, results

were mixed with a welcome growth in chicken

slaughters but production declines in both

cattle and pig slaughters. Green tea

production recovered from the drop of last

year to reach 189 tonnes whilst both copra and

cinnamon (exports) output more than doubled

to 253 tonnes and 111 tonnes respectively.

Data on vegetable production for 2006 was

better compared with 2005 when inclement

weather conditions (mostly floods) – and

damage to coastal farms by the 2004 tsunami -

resulted in loss of harvests.

Further confirmation of an ongoing recovery,

presents itself in the form of employment and

energy data. At end-December 2006, some

41,132 persons were gainfully employed in the

economy, representing an increase of over 15

per cent compared with end-January. In

consequence, the rate of unemployment

declined from 3.6 per cent to 2.6 per cent.

Reflecting the increase in economic activity,

energy consumption rose by 8.7 per cent in

2006 to 251 million Kwh.

During the year, domestic inflation as

measured by the average Consumer Price

Index (CPI) moved from 0.9 per cent to

negative 0.4 per cent.

Outlook for 2007

Assessed from most economic fundamentals,

the country is on an encouraging adjustment

course. Although, money supply ended the

year at record heights, this was a transitory

outcome linked with an external borrowing

event and not internally instigated. Whilst

some lapses in financial control appeared to

have emerged in the fiscal domain, these were

significantly compensated by revenue gains

associated with the continued buoyancy of the

trades tax and GST base. However, the

overruns in capital spending, mostly in respect

of the housing programme, carry heavy risks


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for the ongoing strategy of rapid fiscal

retrenchment and public debt consolidation.

In addition, these have placed strains on the

domestic supply of basic building materials,

resulting in costly delays to ongoing tourism

projects and postponement of newly approved

ones.

Still, the combination of improved access to

international capital, a recovering economy,

renewed investor confidence and strong FDI

activity has arguably provided the country

with a rare opportunity to embrace reforms

and restore full external viability with

arguably minimal risks to social cohesion.

Time is however of the essence and actions on

various policy fronts need to be immediately

taken, most critically in support of external

competitiveness, relieving operational

constraints to investment activity, reducing

administrative bureaucracy, promoting

governance and downsizing the public sector.

As in the outgoing year, economic prospects in

2007 hinge critically on the continued

performance of the tourism sector, both in

respect of bed-nights sold and FDI-financed

investment activity in the industry.

Undoubtedly, the commitment to pursue a

more competitive exchange rate policy augers

well for the future viability of the export

sectors, tourism in particular. However,

doubts persist regarding the efficiency of the

“pass-through” effect of exchange rate

changes from domestic service-providers to

ultimate clients - and for this reason, most

analysts believe that visitor growth in the short

term will as in recent years, be product- and

marketing-led rather than price-led.

Moreover, despite a semblance of increased

capacity in airline seats to the country

following liberalisation of the country’s

airspace1, serious capacity constraints still

prevail during the peak holiday seasons in

terms of seat availability from key European

stations. Although locally-based destination

management companies (DMCs) and the

Seychelles Tourism Board (STB) are actively

seeking to diversify the geographical sources

of tourists, it would seem that until such time

the access transport problems and bed

shortages in the critical four-star market

segment are resolved, only limited success can

be expected. As the country enters another year of

promising prospects, there are legitimate

concerns that the fiscal burden posed by the

government’s comprehensive health,

education and social welfare programme,

could hamper the current recovery phase.

This said, such a programme has been the

driver behind Seychelles’ rise in the UN’s

Human Development Index (HDI) League to

the 47th rank in 2006, as well as contributing to

a peaceful and harmonious society upon which

the country’s tourism industry is solidly

anchored. Shifting the medium-term national

focus from wealth distribution to wealth

creation, will entail inevitable adjustment

costs, but these can be minimised, if national

consensus prevails on the strategy forward,

especially in regard to liberalisation,

__________________________________________

1 It is estimated that the current airline seat capacity of scheduled flights is about 555,000 a year, of which about 20,000 seats would be taken up by resident traffic.


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world/regional integration, fiscal and external

policies.

Today, despite recent significant gains in

macroeconomic stabilisation, the country

remains vulnerable to economic shocks,

notably in regard to sharp movements in

interest and exchange rates. From a balance

sheet perspective, both the public and private

sectors are at risk, depending on their

respective levels of external or internal

exposure. Against the backdrop of a more

market-oriented policy framework, such

exposure could crystallise into real financial

costs - exchange losses and/or higher interest

costs - that could in the short-term, unsettle

confidence, increase debt, destabilise

government finances and even temporarily

stifle economic activity. Clearly, the policy

challenge of 2007 and beyond is to minimise

such risks, whilst achieving a stable and

seamless transition from the current policy

framework to a new liberal economic order.

Besides this challenge is the critical task of

maintaining energy security at a time of

volatile and rising international oil prices. In

2007, the country’s domestic energy

requirements are estimated at US$50 million

on current consumption and price parameters;

this compares with only US$17.4 million in

2001 when profits from oil-re-exports would

almost fully cover this amount. To secure

supplies and by implication, the very existence

of the country, considerable diversion of

scarce foreign exchange resources out of the

financial system will be necessary to fund this

national requirement thus leaving an

equivalent less available for supporting the

economic recovery process. In a strategic

response to minimise reliance on banking

sector resources, the national oil company

SEPEC, has ventured offshore and diversified

in international tanker operations with a fleet

of five modern vessels, three of which are

currently in full service. Whilst profitable,

such a venture is still early in its economic

lifecycle with high financial gearing and is

anticipated only to contribute materially to the

national energy cause in a few years to come.

On the domestic price front, the outlook for

inflation is mostly contingent on world

commodity prices, exchange rate movements

and the government’s domestic pricing policy

for energy. On balance, further factoring in

expected macroeconomic trends, including

interest rate changes and tighter labour market

conditions, domestic prices are expected to

firm up significantly in 2007.

SECTION TWO

Financial Survey

2. Overview In late 2006, important policies were announced and implemented in the financial system with the objective of tightening monetary conditions, building confidence in the domestic currency, repaying external arrears and normalising relations with creditors, and generally promoting macroeconomic convergence. These initiatives were the start of a process of fundamental reforms, and included a tighter monetary policy regime; floatation of a US$200 million sovereign bond issue on the London market; a review of the exchange rate policy - moving from a six currency to a three currency basket - targeting competitiveness; and the beginning of the liberalisation process of the exchange control regime. Within the scope of the above initiatives, the government initiated proceedings to secure a country risk rating by the internationally-recognised firm, Standard & Poor’s, a process that ended with a favourable B stable outlook rating. This gave the country the necessary international credibility to enter the international bond market for the first time with a US$200 million bond issue in September, which was heavily oversubscribed. The proceeds from the bond were used to fully

liquidate the balance outstanding on the Tokyo-Mitsubishi loan, clear certain multilateral arrears, settle specific non-debt government obligations and shore up Central Bank reserves. Against the above backdrop, a stronger economic environment emerged; by year’s end a firming of fundamentals, most notably in the external sector, the real economy, and government finances, was clearly visible relative to the previous year. During the year, movements in money aggregates, namely the broad aggregate of M2(p), showed an increase of 4.9 per cent, representing an 88 basis point rise relative to 2005. This growth was attributable to the opposite movements in foreign and domestic assets of the banking sector with an increase in the former dominating the outcome. Net foreign asset of the banking sector, improved significantly by R788 million, whilst domestic assets fell by R315 million. Whilst strong FDI flows throughout the year and the proceeds from the sovereign bond issued on the international market in the second half of the year enhanced the overall foreign reserves position, they were conversely, the causes of the monetary expansion.

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Annual Report 2006 Financial Survey

With further consolidation of the government budget position, domestic assets of the banking sector declined as stated above. For a fourth consecutive year, net banking sector claims on government fell and in 2006, declining by 9.0 per cent relative to 2005. In the absence of a strengthening of the external asset position, the decline in domestic credit would have had a strong dampening impact on liquidity growth. The significant reduction in domestic government debt with the banks is a welcome development, but contra-wise, this came at a cost of higher external indebtedness since the domestic debt retirement was largely made possible by proceeds from the US$200 million sovereign bond issue. Judging by the movements in the balance sheets of the banking sector, the liquidity position of commercial banks was not seriously affected by the recent economic events and as such, the banks made little recourse to Central Bank financing during the year. Interest rates on the other hand were strongly influenced by the revision in monetary policy in the second half of the year. For most of the year, rates on most maturities of bank deposits declined with the exception of savings deposits as the latter’s rate was a prescribed one, under the ambit of the Central Bank. However, on August 1, the Bank introduced a minimum deposit rate of 2.50 per cent applicable to all deposits except on current accounts. This change in policy meant that the whole interest rate structure moved upwards

from the point of introduction of the policy. However, on an average basis, the full effect would only be seen in the coming year. 2.1 Monetary Policy Instruments At the start of 2006, with the evaluation of changes in the economic landscape as well as in anticipation of important policy changes, especially in respect of foreign exchange liberalisation, the Bank thoroughly re-assessed its monetary policy framework. Having considered the implications of the choice of various policy instruments, the Board approved a revised monetary regime which was implemented on August 1 with a transitory period of two months to allow the banks time to make the necessary balance sheet adjustments so as to be fully compliant with the new measures. The new monetary policy rules called for a tightening of liquidity conditions in preparation for the foreign exchange liberalisation which had been set to start in the last quarter of the year. The new rules are outlined below.

• An immediate imposition of a minimum deposit rate of 2.50 per cent applied to all deposits with the exception of current accounts;

• An increase in the local asset ratio

from 50 per cent to 65 per cent. It must be noted that the scope of eligible assets covered by the ratio has been extended to include home ownership loans and excess cash reserves above the statutory limit in addition to government securities;

- 11 -


• An increase in the minimum cash

reserve requirement from 2.5 per cent to 5.0 per cent. Any excess above the prescribed limit is remunerated at the minimum deposit rate plus a margin of 75 basis points; and

• The re-introduction of secondary

market operations for treasury bills. After implementation, the Bank closely monitored the banks ensuring that in adjusting to the new measures, a smooth transition was attained and any potential systemic risks avoided. Initially, a few banks faced some liquidity difficulties but by the end of September, all banks were fully compliant to the new requirements. Nevertheless whilst the Bank did not foresee further disruptions in the financial market for the rest of the year, it continued to maintain a vigilant eye on liquidity developments. 2.2 Net Foreign and Domestic Assets One of the most important changes in the monetary sector in 2006 has been in respect to

the country’s banking sector (Central Bank and commercial banks) net foreign asset position (Chart 2.1). For the first time since 1997, the position turned positive to R539 million at the end of December from negative R274 million a year earlier. The movement came primarily in the Central Bank net balances, which increased by R739 million, or 862 per cent, relative to end 2005. The contributing factors in the improvement were related to stronger FDI flows during the year as well as the impact of the left-over balance of proceeds from the Bond issued in September. Within the scope of the latter, the Bank liquidated its outstanding loan balance to the Bank of Tokyo-Mitsubishi UFJ, leaving its external liability at a nil balance at the end of the year. Whilst the trend of increasing reserves is expected to continue in the coming year - given the committed FDI flows especially in the tourism sector - there are strong risks that this could be jeopardised by the need to fund government payments in respect of national priorities.

Chart 2.1: Net Foreign and Domestic Assets (1998 – 2006)

-1000

0

1000

2000

3000

4000

5000

60001998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R M

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10

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25

30

Perc

enta

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Net Foreign Assets Domestic Assets % Change in Total Assets Source: Central Bank of Seychelles.

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Mirroring the Central Bank, the commercial

banks also observed an improved position in

their external accounts even though at a lesser

extent, from negative R188 million in 2005 to

negative R115 million at the end of 2006.

Stronger external asset consolidation through

FDI flows coupled with a decline in foreign

liabilities underlined the overall change in the

banks’ external position during the current

year.

On the other hand, domestic assets of the

banking sector showed a declining trend after

three years of stable growth. During the year

under review, domestic assets fell by R353

million, or 6.8 per cent relative to 2005,

attributable to the decline in net claims on

government as well as outstanding credit to the

parastatals. Net claims on government fell by

R370 million, the bulk being reduction in the

holdings of treasury bills.

The turnaround in the government financial

position was mostly related to the rupee

proceeds of the Bond issued on the

international market in September. After

discharging certain multilateral debt

obligations and some other overdue payments,

the balance of the US$200 million foreign

exchange bond issue was sold to the Central

Bank to build up reserves and the local

currency gained from this transaction was used

to clear part of government’s outstanding

domestic debt. With government still

accounting for a major share of the banking

sector’s domestic assets, it follows that any

movement in that portfolio will most likely

outweigh changes in the allocation of the other

economic sectors, namely the private and

parastatals. In 2006, this was again clearly

demonstrated by monetary developments.

2.3 Money Supply

Liquidity growth as measured by the broad

money aggregate M2(p) grew by R219 million

or 4.9 per cent in 2006 to reach R4,660

million. This change represented an increase

of 88 basis points relative to a year earlier

(Table 2.1 and Chart 2.2). The strong

improvement in the external sector was the

main contributing factor in money growth

which outweighed the decline in domestic

assets.

The movement in money was more prominent

in the less liquid component – quasi-money –

which rose by 13 per cent. All components of

the latter observed significant double digit

increases with the highest being 30 per cent in

foreign currency deposits to reach R318

million at the end of the year, compared to

R246 million at the end of 2005. The rise in

foreign currency holdings clearly reflected the

growth in tourism activities during the year as

well as an exchange rate effect on conversion

of foreign earnings (see Section Four for

details of the exchange rate regime).

- 13 -


Table 2.1 Monetary Survey;1 2001-2006

2001 2002 2003 2004 2005 2006

(R million) Net Foreign Assets -190.5 -394.1 -516.5 -414.5 -273.7 538.8 Central Bank -162.6 -450.3 -324.2 -306.2 -85.7 653.3 Commercial banks -247.2 271.0 -192.3 -108.3 -188.0 -114.5 Domestic Assets 4280.9 4965.1 5177.1 4780.0 5223.0 4869.7 Claims on private sector 655.5 773.9 993.8 1162.1 1247.3 1320.3 Claims on parastatals 10.8 5.4 100.9 183.3 296.8 240.1 Claims on government (net) 3626.6 4206.3 4082.5 3849.1 3678.8 3309.3 Total Assets 4090.4 4571.0 4660.6 4827.5 4949.3 5408.5 Money Supply, M2(p) 3682.5 4165.4 4222.7 4268.5 4442.5 4659.7 Money Supply, M2 3554.8 4062.1 4120.6 3679.1 3944.1 4275.8 Money, M1 1290.6 1576.9 1570.9 1226.9 1397.0 1392.0 Currency with public 279.9 301.0 305.9 295.8 325.7 392.8 Demand deposits 1010.7 1275.9 1265.0 931.1 1071.4 999.2 (of which parastatals) 232.7 354.7 477.2 283.9 264.6 192.7 Quasi-money 2264.2 2331.9 2549.7 2452.2 2547.1 2883.8 Time deposits 1540.0 1587.1 1537.8 1420.9 1452.9 1613.3 (of which parastatals) 183.9 223.3 227.5 152.2 152.8 312.5 Savings deposits 724.2 744.8 806.7 805.6 847.9 952.6 Foreign Currency deposits - - 205.2 225.7 246.2 317.9 Pipeline deposits 127.7 103.3 102.1 589.5 498.4 383.9 Other items, net 407.9 405.6 437.9 517.7 506.9 748.8 Figures do not necessarily add up due to rounding. 1 End of period data. Source: Central Bank of Seychelles.

The other two components of time and savings

deposits grew by 11 and 12 per cent

respectively. Growth in time deposits grew

faster in the second half of the year due to the

interest rate effect of the new monetary

measures. With the introduction of the

minimum deposit rate of 2.50 per cent in

August, the upward movement in time deposit

rates meant that agents decided to shift

otherwise idle liquid funds into such accounts.

This change in liquidity composition is very

important to note and to monitor. The

movement from very liquid asset to less liquid

asset if continued will help a long way in

either postponing or reducing the pressure on

the external sector.

Another important development in the

movement in the elements of the money

supply was related to pipeline deposits. For a

- 14 -


second consecutive year, there was a fall in

these deposits and this year the decline was

attributable to developments associated with

the liberalisation of exchange control, a

process which began in mid-October. In this

process, all deposits in the pipeline scheme

were frozen to be gradually paid out in the

months ahead, with support from the Central

Bank.

For the more liquid component M1, there was

a decline of 0.4 per cent mainly on account of

a fall in demand deposit of the parastatals

sector. On the other hand there was an

increase in currency with the public for a

second consecutive year. The rising trend of

the latter reflects to a greater extent the need

for higher transaction balances consistent with

the underlying growth in the economy.

Chart 2.2: Money Supply (1998 – 2006)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

50001998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R M

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25

Perc

enta

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Demand deposits Time deposits Savings deposits Pipeline depositsCurrency with public Foreign Currency deposits % change in M2(p)

Source: Central Bank of Seychelles.

2.4 Domestic Credit

2.4.1 Central Bank and Commercial Bank

Credit

Movements in domestic credit during the year

clearly reflected changes in fundamentals,

namely in terms of the performance of the

government budget, activity in the real sector

and developments in the external sector. Total

domestic credit in the banking sector (Central

Bank and commercial banks) amounted to

R5,303 million falling by R221 or 4.0 per cent

relative to last year. The change was mainly

on account of Central Bank credit which is

extended solely to the government, which

declined from R1,341 million to R1,111

million, a drop of 17 per cent (Table 2.2,

Chart 2.3, Chart 2.4).

At the commercial banks, credit dynamics

were more or less stable compared to 2005

influenced by the underlying borrowing

activities of the private sector and parastatals.

- 15 -


Banks claims on the private sector rose further

in 2006 with a growth of 5.9 per cent

indicating a much stronger real sector. On the

other hand, there was a decline in parastatal

credit by 19 per cent, mainly due to

repayments of outstanding loan balances by

the Housing Finance Company.

Chart 2.3: Total Domestic Credit (1998 – 2006)

0

1000

2000

3000

4000

5000

6000

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R M

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n

-10

-5

0

5

10

15

20

25

30

35

Perc

enta

ge

Commercial Banks Central Bank % Change in Total Domestic Credit Source: Central Bank of Seychelles.

Table 2.2 Credit;1/2 2001-2006

2001 2002 2003 2004 2005 2006

(R million)

Total Credit 4529.9 5234.5 5441.8 5492.6 5523.5 5302.7 Commercial banks 3755.9 3941.2 4430.2 4092.1 4182.7 4191.7 Claims on private sector 643.5 753.5 993.8 1162.1 1247.3 1320.3 Claims on parastatals 10.8 5.4 100.9 183.3 296.8 240.1 Claims on government 3101.6 3182.4 3335.5 2746.6 2638.5 2631.3 Of which: Dev. Fund Stocks (139.7) (139.7) (140.0) (147.1) (147.1) (147.1) Treasury bonds (940.4) (794.3) (1167.4) (1079.4) (1095.0) (1342.4) Treasury bills (1771.0) (1784.4) (1003.9) (1511.6) (1302.2) (1132.8)

Central Bank 774.0 1293.2 1011.7 1400.6 1340.8 1111.1 Claims on government 774.0 1293.2 1011.7 1400.6 1340.8 1111.1 Of which: Advances (472.4) (1092.0) (811.0) (1316.6) (0.0) (0.0) Treasury bonds (300.7) (200.0) (200.0) (84.0) (1340.8) (1111.1) Treasury bills (1.0) (1.2) (0.7) (0.0) (0.0) (0.0)

Figures do not necessarily add up due to rounding. 1 End-of period data. 2 All figures for stocks, bonds and bills are at cost value.

- 16 -


Chart 2.4: Central Bank Credit (1998 – 2006)

0

200

400

600

800

1000

1200

1400

1600

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R M

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n

-60

-40

-20

0

20

40

60

80

Perc

enta

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Advances Treasury Bonds Treasury Bills % Change in CBS Credit Source: Central Bank of Seychelles.

Chart 2.5: Commercial Bank Credit (1998 – 2006)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R M

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n

-20

-10

0

10

20

30

40

50

60

70

80

Perc

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Claims on Private Sector Claims on Public Sector Claims on Government % Change in Commercial Banks Credit Source: Central Bank of Seychelles.

2.4.2 Sectoral Allocation of Credit to

Private Sector and Parastatals

As explained above, the allocation of credit at

the commercial banks reflected the more

favourable economic landscape in 2006. The

non-government sector debt at the commercial

banks rose to R1,560 million, an increase of

R16 million or 1.1 per cent relative to last

- 17 -


year, driven mainly by the private sector

(Table 2.3). Private sector credit grew by 5.9

per cent whilst claims on parastatals fell by 19

per cent (Chart 2.5). With these movements,

the share of private credit at the banks rose to

31 per cent from 30 per cent and that of

parastatals fell to 5.7 per cent from 7.1 per

cent from the previous year.

The observed changes in credit allocation

reflected the vigorous movements in the real

sector reacting to fiscal concessions and

emerging opportunities in a more liberalised

economy. The key driver in credit growth, as

shown above, was the private sector, namely

through higher demands from agriculture

(R1.0 million), manufacturing (R4.5 million),

private households and non-profit

organisations (R20 million) and wholesale and

retail trade (R79 million). The latter reflected

the significant extent in the expansion of the

import and retail business brought about by the

more liberalised trade regime and some further

reductions in the trades’ tax rates introduced at

the beginning of the year. An increased

allocation of loans in foreign currency was

also observed from R221 million to R338

million, mostly to entities in the tourism

sector.

Despite the above increases, there were sectors

which experienced declines in their

outstanding loan balances. These were in

construction (R5.4 million), tourism (R14

million), and other businesses (R74 million).

These decreases however should not be taken

in a worrisome light as most of the financing

of projects in these three categories of

businesses are increasingly being financed by

FDI flows (see Section Four for discussion on

FDI in 2006).

Table 2.3 Commercial Banks – Loans and Advances

To Non-Government Sector by Economic Sectors;1 2002-2006 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 (R million) (per cent) Total Advances 779.3 1096.5 1345.4 1544.2 1560.4 100.0 100.0 100.0 100.0 100.0 Of which: Foreign Currency Loan 20.4 73.1 121.9 222.1 338.0 2.6 6.7 9.1 14.4 21.7 Agriculture & fishing 13.4 14.3 11.6 10.4 11.3 1.7 1.3 0.9 0.7 0.7 Of which: Refinance scheme 1.5 2.0 0.0 0.0 0.0 0.2 0.2 0.0 0.0 0.0 Manufacturing 9.0 10.4 7.9 7.0 12.2 1.2 0.9 0.6 0.5 0.8 Construction 38.2 43.2 87.0 85.9 80.5 4.9 3.9 6.5 5.6 5.2 Transportation 3.5 10.6 6.6 5.1 9.1 0.5 1.0 0.5 0.3 0.6 Tourist facilities 207.0 317.4 361.5 438.1 424.0 26.6 28.9 26.9 28.4 27.2 Wholesale & Retail trade 53.3 70.1 124.4 104.3 183.5 6.8 6.4 9.2 6.8 11.8 Other businesses 106.2 281.2 366.1 511.0 437.4 13.6 25.6 27.2 33.1 28.0 Private households & Non-profit organisations 348.7 349.4 380.4 382.4 402.3 44.7 31.9 28.3 24.8 25.8 Of which Mortgage loans 184.1 197.6 232.9 217.5 199.1 23.6 18.0 17.3 14.1 12.8 Figures do not necessarily add up due to rounding. 1 End-of-period data.

- 18 -


Chart 2.6:Commercial Banks’ Loans and Advances to the Non-Government Sector (1998–2006)

0

100

200

300

400

500

600

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R M

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n

Agriculture & Fishing Manufacturing ConstructionTransportation Tourist Facilities Wholesale & Retail TradeOther Businesses Private Households & Non-Profit Organisations


With the movements in credit allocation

during the year, the share of the different

sectors also changed relative to 2005. As

illustrated in Chart 2.7 below, “other

business” accounted for the bulk of credit with

a share of 28 per cent, falling by 5.0 per cent

to R437 million. The second largest share was

tourism with a stock of R424 million or 27 per

cent of the total. As explained above, the

declining share of commercial bank credit to

tourism was more than compensated by

increased financing through higher FDI flows.

Such financing to tourism is expected to

continue in the coming years and is likely to

gain in scope and strength as well as extending

to the fisheries sector. The third largest

borrower was the “private households and

non-profit organisation” with R402 million,

thus increasing its share to 26 per cent. The

most significant increase was recorded in

respect of “wholesale and retail trade”, which

saw its share rise from 6.8 per cent in 2005 to

12 per cent in 2006, reflecting an improved

environment for trade.

- 19 -


Chart 2.7: Commercial Banks’ Loans and Advances to the Non-Government Sector percentage share

0.7%0.8% 5.2% 0.6%

27.2%

11.8%28.0%

25.8% Agriculture & FishingManufacturingConstructionTransportationTourist FacilitiesWholesale & Retail TradeOther BusinessesPrivate Households & Non-Profit Organisations


2.4.3 Development Bank’s Credit2 The Development Bank of Seychelles is the microfinance institution in the financial system, providing advances across economic sectors. In 2006, the loan portfolio of the institution remained relatively stable compared to last year, dominated by credit to the tourism and “other services” sector.

The outstanding loans at the bank amounted to R331 million, an increase of R3.7 million relative to 2005 attributed solely to a rise in credit to the category of “other services” associated to the growth of cottage industries. For the rest of the sectors, there were declines ranging from R500,000 to R4.9 million, the largest being for the fishing sector (Table 2.4 and Chart 2.8).

Table 2.4 Loans by Development Bank by Economic Sectors;* 2002-2006

2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 (R million) (per cent) Total Advances 260.2 267.7 307.5 327.0 330.7 100.0 100.0 100.0 100.0 100.0 Agriculture 6.1 8.1 12.5 12.9 12.4 2.4 3.0 4.1 3.9 3.7 Fishing 22.2 21.9 22.1 22.4 17.5 8.5 8.2 7.2 6.8 5.3 Industry 13.5 13.8 14.9 17.5 17.6 5.2 5.2 4.8 5.4 5.3 Tourism 93.6 85.0 103.2 106.3 101.5 36.0 31.8 33.6 32.5 30.7 Other services 124.8 138.9 154.8 168.0 181.8 48.0 51.9 50.3 51.4 55.0

Figures do not necessarily add up due to rounding.

*End-of-period data. Source: Development Bank of Seychelles

________________________________ 2 From January 17, 1994, the Development Bank of Seychelles provided credit to Seychellois investors at concessionary rates. To qualify as “Seychellois”, nationals must own at least 50 per cent of the investment. Currently, DBS charges 7.5 per cent p.a. on loans up to R250, 000 and 9.0 per cent p.a. on loans above R250,000. The minimum contribution for the investor has remained constant for the past 10 years ranging from 25 per cent to 40 per cent of the total project cost. The Development Bank does not provide credit for purposes of working capital.

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Chart 2.8: Loans by Development Bank by Economic Sectors (1998 – 2006)

0

20

40

60

80

100

120

140

160

180

200

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R M

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n

Agriculture Fishing Industry Tourism Other Services Source: Central Bank of Seychelles.

2.5 Liquidity of Commercial Banks

The liquidity position of commercial banks

improved further during 2006 as indicated by

the credit to deposit ratio (Table 2.6, Charts

2.10 and 2.11). At the aggregate level and

year-on-year, there was a decline in the ratio

from 108.7 to 102.2 at end-December, albeit

with some significant variations amongst

banks. The overall movement continued the

rising trend observed in the previous year,

where increases in deposits were the primary

influential factor. Given the favourable

liquidity position, banks recourse to short-term

advances financing under the Central Bank’s

usual facility was limited; however evidence

would seem to suggest that certain banks with

liquidity needs opted instead to tap the inter-

bank market. In 2006, the banks borrowed

only R34 million under the Central Bank

facility, the lowest amount since 2002 (Table

2.5 and Chart 2.9).

Table 2.5CBS Advances to Commercial Banks; 2001-2006

2001 2002 2003 2004 2005 2006

(R million) Advances 254.7 82.5 379.5 1063.5 224.0 34.0 Repayments 276.7 82.5 360.5 962.5 344.0 34.0 Stock of credit1 0.0 0.0 19.0 120.0 0.0 0.0 1 End-of-period data.

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Chart 2.9: Central Bank Advances to Commercial Banks (1998 – 2006)

0

200

400

600

800

1000

1200

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

RM

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n

Advances Repayments Source: Central Bank of Seychelles.

Interestingly, the liquidity position of the banks improved somewhat relative to 2005, notwithstanding the introduction of the new monetary policy measures in August and the commencement of the foreign exchange liberalisation process in October. This demonstrated the flexibility of the banks in making the necessary balance sheet

adjustments in response to changes in regulatory conditions. Nevertheless, at year’s end, the full impact of the new measures had yet to filter through the economy and until then, liquidity developments will require careful monitoring. In light of the outcome, the stance of monetary policy will correspondingly be reviewed.

Chart 2.10: Credit and Deposits at Commercial Banks (1998 – 2006)

0

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1000

1500

2000

2500

3000

3500

4000

4500

5000

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R M

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Credit Deposits Source: Central Bank of Seychelles.

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Table 2.6 Liquidity Indicators of Commercial Banks;1 2001-2006

2001 2002 2003 2004 2005 2006

(R million) Credit 3767.9 3961.7 4464.7 4085.8 4182.7 4191.7Deposits 3401.8 3824.2 4059.1 3658.8 3848.2 4103.2

(per cent) Credit-deposit ratio 110.8 103.6 110.0 111.7 108.7 102.2 Figures do not necessarily add up due to rounding. 1 End-of-period data.

Chart 2.11: Credit/Deposit of Commercial Banks (1998 – 2006)

96.0

98.0

100.0

102.0

104.0

106.0

108.0

110.0

112.0

114.0

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

Per c

ent

Credit/Deposits Ratio Source: Central Bank of Seychelles.

2.6 Interest rates

As mentioned above, one of the major

influences on the movement in interest rates in

2006 was the introduction of a prescribed

minimum deposit rate set at 2.50 per cent,

except for current accounts which remained at

the discretion of the commercial banks. This

mandatory requirement shifted the yield

upwards on most deposit maturities at the

banks and exerted upward interest rate

pressure in the tender system for treasury bills,

namely the 91-day bills. On the lending side,

a corresponding movement was also recorded

in the average lending rate.

- 23 -


Nevertheless, movements in interest rates for

the whole year were mostly on downward

trend, given the continuous decline in rates

prior to the change in monetary policy, Table

2.7 and Chart 2.12, which in any event came

into force only in the latter part of the year.

The decline in rates was most evident between

January and September and was underpinned

to a large extent by the growth in money

supply (year-on-year), which remained bullish

prior to the tightening in monetary conditions.

With the new monetary policy measures in

August, money growth abated somewhat in the

final three months of the year.

Table 2.7 Interest Rates;1/2 2001-2006

2001 2002 2003 2004 2005 2006

(per cent) Volume-weighted average deposit rates: Savings rate 3.03 3.03 2.85 2.88 2.98 2.78Time deposits 7 days 2.89 2.78 2.39 2.28 1.91 2.56 > 7 days < 3 months 4.92 4.93 3.99 3.55 3.72 2.60 > 3 months < 6 months 4.98 4.98 4.22 3.78 3.21 2.81 > 6 months < 12 months 4.31 4.34 3.98 3.32 3.19 2.94 > 12 months 4.80 4.26 3.75 3.04 2.99 3.12Volume-weighted Average lending rate 11.14 11.09 11.08 10.13 9.98 10.5191-day treasury bill rate3 4.50 4.50 4.50 - - -91-day treasury bill rate4 - - 2.02 2.02 - -91-day treasury bill rate5 - - - 2.34 2.82 3.17365-day treasury bill rate6 - - - 3.84 3.87 4.231 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 the exception of the 91-day bill rate, all other figures differ to the 1994 Annual Report, due to revision. 3 With effect from September 15, 1998, new issues of 91-day bills were issued on tap. 4 With effect from July 15, 2003, new issues of 91-day bills were issued on tap, available to commercial banks only. 5 With effect from January 13, 2004, new 91-day bills were issued on tender. 6 With effect from December 20, 2004, new issues of 365-day bills were issued on tender.

However, movements in the yield of treasury

bills, namely for the 91-day maturity, tended

to move against the growth in the money

stock, suggesting that speculative forces were

at play, or an imperfect or distorted short-term

money market. Such a rate continued on an

upward path, consistent with the trend

observed since the re-introduction of the

tender system in 2004. At the end of the

period under review, the average rate of the

- 24 -


91-day bill increased to 3.17 per cent from

2.82 per cent in 2005, representing a rise of 35

basis points. As for the rate of the 365-day

bill, it fell marginally from 4.24 per cent a year

earlier to 4.12 per cent. As a result of these

changes in short-term rates in government

debt, there was an increase in interest cost for

government during the year. Nonetheless,

government reduced the stock of such

instruments to mitigate the rise in costs.

With deposit rates on an upward trend, some

upward adjustment in the yield curve of

government instruments beyond the 91-day

bills can be expected in 2007; conversely

however, with further fiscal consolidation,

downward pressure on interest rates could

result in government’s recourse to domestic

financing declining.

Chart 2.12: Interest Rates (1998 – 2006)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

Per c

ent

Savings Rate Time Deposit: 7 Days Time Deposit: > 6 ≤ 12 Months Average Lending Rate Source: Central Bank of Seychelles.

- 25 -

SECTION THREE

Government Finance

3. Overview

For the year 2006, the fiscal account ended

with another positive balance, amounting to a

surplus of R174 million, the equivalent to 4.1

per cent of nominal GDP. This was almost in

line with the budgeted surplus of R178

million, and marked the fourth consecutive

year of fiscal surpluses. The outcome

reflected strong revenue inflows rather than

expenditure restraint, as government’s

outgoings exceeded target by some significant

extent.

On the revenue side, receipts posted under

trades tax and Goods and Services Tax (GST)

continued to show buoyancy despite further

downward rate revisions leading to an

effective contraction in the overall taxable

base. This, along with exceptional ‘dividends

& interest’, ‘fees & fines’ and ‘miscellaneous’

collections, greatly contributed to the year’s

record total revenue results, which at R2,476

million, were 14 per cent above 2005.

Most other revenue heads performed up to or

above expectations, providing compelling

evidence that the underlying economic

recovery is gaining in scope as well as in

strength. However, whilst GST on imports

and services fared better due to a growth in

import demand and a strong upturn in the

services sector, more particularly in tourism,

some setbacks in the manufacturing sector

were experienced. These were mainly

associated with the shortages of foreign

exchange in the official sector which disrupted

activity in some industries.

Against such a positive revenue landscape, the

financial accounts should have comfortably

surpassed the budget target but such an

opportunity could not be exploited in light of

public pressure to raise expenditure on

services and social development projects,

particularly housing development. In

consequence, total outlays amounted to

R2,302 million, as against a budgeted R1,751

million.

Government’s current expenditure exceeded

forecast by R387 million, some R227 million

of the overrun was on account of higher

interest costs arising from an unanticipated

increase in market interest rates and increased

- 26 -

Annual Report 2006 Government Finance

- 27 -

external debt repayments made possible by the

US$200 million sovereign bond. Of the

remaining amount, R116 million could be

attributed to higher spending by ministries and

departments’, which partly arose out of a

restructuring exercise involving the creation of

new ministries.

For the year 2006, the financing side of the

government budget was dominated more by

the impact of the proceeds from the US$200

million sovereign bond issue than the overall

surplus. This is reflected in net new draw

downs of R878 million on foreign loans

permitting in the process, the retirement of

about R522 million of domestic debt, leaving

R531 million being reflected as a rise in

government cash balances.

Chart 3.1 - Government Finance Outcome for 1998-2006

(1,000)

(500)

-

500

1,000

1,500

2,000

2,500

3,000

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R m

illio

n

Total Receipts Total Outlays Overall Balance

Source: Ministry of Finance

3.1 Outcome for 2006

The attainment of a fiscal surplus for the year

2006 was consistent with the government’s

current strategy to achieve economic

stabilisation, principally through fiscal

consolidation and economic growth through a

more competitive exchange rate policy.

As highlighted earlier, such fiscal outcome

reflected a record revenue performance,

achieved under, ‘current receipts’ and ‘grants’.

At R2,476 million, 97 per cent of total revenue

reflected current receipts with the balance

representing ‘grants’. In 2006, total receipts

were 28 per cent above expectation and a

noteworthy 14 per cent higher than the amount

collected in 2005.

In terms of total outlays, R2,302 million was

spent, some R551 million or 31 per cent in


- 28 -

excess of budget. This was associated with

unplanned expenditure under ‘capital outlays’

and current spending which were 70 per cent

and 26 per cent above their respective

allocations.

Overruns relating to capital expenditure were

in respect of ‘land acquisition’ (R11 million as

against R7.0 million) and ‘capital projects’

(R404 million as against R237 million

budgeted). The latter was mostly in regard to

the ongoing housing programme and other

public sector infrastructure and social projects,

some of which associated with the 2004

tsunami reconstruction works. As for the

excess current spending, most was attributable

to overruns in administrative costs relating to

ministries/departments following a

government reorganisation and higher interest

costs due to unanticipated interest rate

increases and a rise in external debt payments

made possible by the US$200 million

sovereign bond issue.

3.2 Revenue

Total revenue collection by the government

for the year 2006 was R2,476 million or 28 per

cent above the budgeted amount.

Current receipts were in aggregate 25 per cent

in excess of the budget. The improvement in

collections was generally broad-based, the

exception being the subgroups

‘income/business tax’ and ‘administrative fees

and charges’, which underperformed by 2.4

per cent and 24 per cent respectively.

For yet another year, revenue collection under

‘indirect taxes’, driven by earnings relating to

GST collected on locally manufactured goods,

services and imported goods, rose to record

levels. Revenue collection under ‘indirect

taxes’, on an aggregated basis, was 7.4 per

cent above expectations and accounted for 30

per cent of current receipts. Primarily, this

was in respect of a rise in GST revenue from

R673 million budgeted to R723 million

realised. A noteworthy development was

trades tax receipts, which despite a general

reduction in the taxable base was 13 per cent

above forecast.

Positive variances of 128 per cent and 116 per

cent were recorded under the entries

‘miscellaneous’ receipts and ‘dividends and

interests’ respectively. The former rose to

R253 million whilst the latter to R347 million,

in both cases possibly record levels. ‘Rents

and royalties’, ‘fees and fines’ and

‘reimbursements’ also performed well,

showing revenue gains of 51 per cent, 43 per

cent and 21 per cent respectively. The entry

‘transfers from SSF’ was the only revenue

item which exactly matched its budget.


- 29 -

Table 3.1 Government Budget; 2004 - 2007

Summary 2004 2004 2005 2005 2006 2006 2007 Budget Actual1 Budget Actual1 Budget Actual1 Budget

R million

Total Receipts 2111 1891 2004 2168 1929 2476 2422 Current receipts 2110 1886 1999 2118 1924 2403 2362 Of which: Trades tax [362] [3 51] [306] [281] [199] [225] [260] Transfers from Social Security [110] [110] [125] [325] [125] [125] [125] Business/income tax [274] [298] [317] [277] [304] [297] [316] Other indirect taxes [702] [612] [628] [684] [673] [723] [883] Grants 1 5 5 50 5 73 60 Total Outlays 1517 1789 1725 1816 1751 2302 2095 Current outlays 1467 1671 1507 1555 1514 1901 1856 Appropriation items 1234 1396 1196 1301 1357 1477 1479 Of which: Ministries/departments [811] [877] [794] [809] [836] [952] [933] Social Security contributions [133] [143] [143] [143] [143] [147] [170] Current outlays to parastatals [30] [36] [30] [48] [62] [124] [121] Charges 233 275 312 254 193 [424] [377] Of which: Interest payments [222] [263] [301] [243] [179] [406] [360] Contingency Fund 0 0 0 73 0 0 0 Capital outlays 50 118 200 254 237 404 239 Net lending 0 0 0 7 0 -3 0 Of which: Parastatals [0] [0] [0] [-35] [0] [-3] [0] Primary Balance2 815 365 580 595 357 580 687 Overall Balance 593 102 279 352 178 174 327 Financing (net) -593 -102 -279 -352 -178 -174 -327 Foreign loans (net) -46 -10 -116 133 -2 878 -27 Domestic loans (net) -547 -103 -163 -274 -176 -522 -300 Cash movements 0 12 0 -211 0 -531 0 Memorandum Items: Amortisation of loans 4562 1548 2034 6955 1150 1373 1108 Of which: Foreign loans 88 15 199 40 50 453 144 Domestic loans 4474 1533 1835 6915 1100 919 964 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


- 30 -

Table 3.2

Government Budget; 2004-2007 Revenue

2004 2004 2005 2005 2006 2006 2007

Budget Actual1 Budget Actual1 Budget Actual1 Budget

(R million)

Total Receipts 2111 1891 2004 2168 1929 2476 2422

Current receipts 2110 1886 1999 2118 1924 2403 2362 Transfers from social security fund 110 110 125 325 125 125 125 Trades tax 362 351 306 281 199 225 260 Income/business tax 274 298 317 277 304 297 316 Other indirect taxes 702 622 628 684 673 723 883 Of which GST on: Locally manufactured goods 287 239 232 241 219 217 222 Services 187 197 197 209 212 235 293 Imported goods 169 126 120 165 170 170 265 Fees and fines 102 110 128 116 116 166 143 Administration fees and Charges

160

150

119

102

97

74

103

Rent and royalties 20 27 89 127 96 144 256 Income – public service 10 9 10 9 9 9 9 Dividends and interest 141 47 156 137 161 347 129 Reimbursements 42 29 30 34 33 40 40 Miscellaneous 188 132 91 26 111 253 66

Grants 1 5 5 50 5 73 60

Figures do not necessarily add up due to rounding. 1 These series are subject to audit and might be revised accordingly. Source: Ministry of Finance

Chart 3.2: Major Revenue Flows in Current Receipts: 2006

0

100

200

300

400

500

600

700

800

2006

R m

illio

n

Transfers from SSF Trades Tax Income / business tax

Other Indirect Taxes Fees and Fines Rents and Royalties



- 31 -

3.3 Expenditure

From an expenditure perspective, the 2006

outcome was most surprising and clearly

demonstrated the vulnerability of the fiscal

accounts to public pressure and interest rate

movements. For the most part, the overruns in

public debt interest were either market induced

or a result of developments that could not be

predicted at the start of the year. For example,

the hardening in interest rates on short-term

domestic debt instruments followed from the

change in monetary policy stance whilst on

external debt service front, interest overruns

were incurred simply on account of the

discharge of various multilateral payments

made possible by proceeds from the sovereign

bond issue.

Overall, current outlays exceeded its budget by

some R388 million and rose to R1,901 million.

Of this total, R406 million was in regard to

interest payments on public debt. Such

payments exceeded planned amount by a

significant 127 per cent.

In the case of capital outlays, a total of R404

million was spent, about R167 million more

than budgeted. This was mostly on housing

development (R117 million) and social

projects (R99 million). Excluding interest

payments, the primary surplus stood at R580

million, about R223 million over budget. It is

of interest to note that in the absence of

expenditure overruns, the surplus would have

risen to an unprecedented R904 million, about

21 per cent of estimated GDP.

A positive outcome was recorded under ‘net

lending’. Against a budgeted nil balance, the

actual result was a net repayment of R3.2

million, representing ‘general loans’.

Chart 3.3: Government Expenditure by Main Heading; 1998 - 2006

(500)

-

500

1,000

1,500

2,000

2,500

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R m

illio

n

Current Outlays Capital Outlays Net Lending



- 32 -

3.3.1 Current Outlays

As mentioned earlier, current outlays for the

year was R1,901 million or 26 per cent in

excess of its allocation. This was associated

with an overrun under most categories of

expenditure.

As expected, the bulk of disbursements under

current outlays was in respect of

‘appropriation items’. Most entries under

‘appropriation items’ exceeded their respective

budgeted amounts. Overruns under this

category, were mainly due to unanticipated

expenses in respect of ‘ministries and

departments’ (partly corresponding to the

increased number of ministries and

departments), ‘outlays on parastatals’, ‘social

security contributions’ and ‘pension scheme

contributions’. These exceeded their

allocations by R116 million, R62 million, R3.6

million and R1.2 million respectively.

Expenditure under the head ‘pensions and

gratuities’, ‘current outlays on regulatory

bodies’ and ‘centralised payments’ was less

than their planned limit by R2.4 million, R8.5

million and R15 million respectively. As for

‘current outlays to other bodies’, the

expenditure exactly matched the planned limit.

With regards to charges, these were R424

million in aggregate, as against a budgeted

R193 million. Such significant variance

mainly reflected overspending under ‘public

debt interest’, which was R227 million in

excess of its budget. An overrun was also

recorded under ‘constitutional appointments’

amounting to R3.7 million over and above the

R12 million budgeted.

3.3.2 Capital Outlays

The year 2006 recorded yet further

investments by the public sector on capital

projects. In 2006, total capital spending

amounted to R404 million, or 18 per cent of

total outlays. The bulk of capital outlays

represented expenditure under ‘capital

projects’ in the magnitude of R372 million. In

addition to spending on civil and social

infrastructure, expenditure was significant

with regards to the government’s housing

programme, including the housing estate on Ile

Perseverance. The Ile Perseverance housing

project is the most ambitious housing

development undertaken in Seychelles and is

anticipated to cater for the housing need of

around 2,000 families in its first phase.

Disbursements under ‘capital projects’

exceeded its planned limit by R172 million, or

86 per cent. An overrun was likewise

registered under the head ‘land acquisition’,

which amounted to R11 million as against a

budgeted R7.0 million.


- 33 -

Table 3.3 Government Budget; 2004-2007

Expenditure

2004 2004 2005 2005 2006 2006 2007

Budget Actual1 Budget Actual1 Budget Actual1 Budget

R million

Total Budget Outlays 1517 1789 1726 1816 1751 2302 2095

Total Current Outlays 1467 1671 1508 1555 1514 1901 1856 Appropriation items 1234 1396 1214 1301 1320 1477 1479 Ministries/departments2 811 877 794 809 836 952 933 Tourism & Transport 72 73 67 40 29 29 32 Education & Youth 157 166 151 171 178 197 185 Health 159 176 155 183 176 194 22 Defence 74 90 69 71 77 88 77 Internal Affairs 14 16 16 13 14 16 17 Pension & Gratuities 40 28 33 27 33 31 35 Subventions 77 85 85 104 133 187 198 Regulatory bodies3 46 47 53 51 66 57 71 Parastatals 30 36 30 48 62 124 121 Other bodies 1 1 1 4 6 6 6 Social Security Contributions 133 143 143 143 143 147 133 Pension Fund Contributions 7 5 7 5 7 8 10 Land Acquisitions 5 6 0 0 0 11 5 Development grants to parastatals 8 53 0 0 0 0 34 Other appropriations4 154 198 153 212 170 122 131

Charges 233 275 312 254 193 424 377 Public debt interest 222 263 300 243 179 406 360 Other charges5 12 12 12 11 14 18 17

Capital Outlays 50 118 200 254 237 404 239 Development grants to parastatals (-) (-) 11 26 30 20 34 Land acquisitions (-) (-) 7 5 7 11 5 Capital projects 50 118 200 223 200 372 200

Net Lending 0 0 0 7 0 -3 0

BTL advances – parastatals 0 0 0 (35) 0 0 0 BTL advances – others 0 0 0 37 0 -3 0 Capital subscriptions 0 0 0 5 0 0 0 Equity participation 0 0 0 0 0 0 0 Figures do not necessarily add up due to rounding. 1 These series are subject to audit and might be revised accordingly. 2 Due to a reclassification, there is a break in the series of this item. Road and building maintenance, contributions to political parties, and housing improvement grants are examples of items that were recorded under “other current transfers” in previous Reports, but are included in various “ministries/departments” or “other charges” in this Report. 3 Regulatory bodies are Seychelles Licensing Authority, Seychelles Fishing Authority and Seychelles Bureau of Standards. For 1995 Seychelles International Business Authority is also regulatory body. 4 Examples of “other appropriations” are contributions to a training fund and international organisations. 5 “Other charges” consist of : salaries of constitutional appointees; contribution to political parties; and execution of elections. 6 Land acquisitions expenditure has been re-classified from capital outlays to current outlays.



- 34 -

Chart 3.4: Government Capital Expenditure; 1998 -2006

-

50

100

150

200

250

300

350

400

450

500

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R m

illio

n

-100

-50

0

50

100

150

Capital Outlays % Change


3.4 Public Sector Capital Project

Expenditure

Of the R372 million spent on capital projects,

the services sector as defined in Table 4

absorbed some R325 million, followed by

infrastructure & utilities with R43 million and

economic sector with the R4.1 million

balance. Compared with 2005, total

expenditure stood some R150 million higher.

3.4.1 Economic Sectors

In comparison with other sectors, government-

sponsored economic projects totalled

R4.1 million, or a mere 1.0 per cent of total

capital outlays. Within the sector, ‘fisheries’

accounted for R2.6 million, representing the

amount spent on the ‘Bel-Ombre fishing port’.

Expenses under ‘agriculture’ increased by 57

per cent compared to 2005 to stand at R1.4

million. This went towards the financing of

the project to eradicate melon fruit fly, a

programme which started in December 2003.

As for the ‘tourism sector’ a mere R12,000

was spent, in support of the project

‘sustainable coastal tourism development in

Africa’.


- 35 -

Table 3.4

Public Sector Capital Expenditure; 2002-20062002 2003 2004 2005 2006

(R thousand)

Total 254,297 65,417 114,084 223,002 372,121Economic Sectors 2,994 849 5,450 1,869 4,054 Agriculture 738 745 3,777 921 1,449 Fisheries 1,382 - 0 822 2,593 Tourism 851 104 1,664 127 12 Outer island development - - 0 - - Craft & home industries 23 - 0 - - Trade & commerce - 0 9 - -Infrastructure and Utilities 101,719 22,090 26,121 20,411 43,420 Transport 13,624 12,826 13,860 8,711 33,581 Water supply & sanitation 411 152 275 4,572 313 Communications 7,621 491 122 1,035 3 Land Reclamation 65,232 8,621 6,880 - - Land Bank 14,830 - 4,984 6,093 9,523Services 149,584 42,478 82,513 200,722 324,647 Education 16,355 12,741 17,424 22,824 1,662 Health 1,376 377 2,245 5,418 17,728 Housing 64,017 1,868 4,088 79,552 117,185 Social development 24,622 10,870 12,921 31,842 99,273 Culture 1,923 920 1,613 1,607 3,777 Sports 14,884 2,847 3,765 7,812 2,996 Information & media - - - 30 34,623 Internal affairs - 644 4,998 1,951 242 Public sector management 18,971 7,908 25,790 43,947 36,774 Environment 7,436 4,302 9,668 5,739 10,388


3.4.2 Infrastructure & Utilities

There was a considerable increase of 113 per

cent under the ‘infrastructure and utilities’

sector for the year 2006, with outlays

amounting to R43 million as against R20

million in the previous year. Spending under

‘transport’ absorbed most of the year’s

allocation, rising from R8.7 million last year to

R34 million. This was followed by another

R9.5 million spent under the head ‘land bank’.

In comparison, expenditure under the

classifications ‘water supply & sanitation’ and

'communication’ fell to R313,000 and R3,000

in 2006, representing a drop of 93 per cent and

by almost 100 per cent respectively relative to

2005.

3.4.3 Services

In 2006, the service sector was the main target

of capital expansion with some R325 million

spent on projects. This represented an increase

of 62 per cent, or R124 million compared to

fiscal year 2005. The most significant

increase was under ‘social development’

which rose to R99 million, mostly on


- 36 -

construction works for government

departments; ‘community life project’ and

‘self help project’. Works on these projects

amounted to R34 million, R19 million and

R17 million respectively. In addition, some

R35 million was spent on projects categorised

under ‘information and media’, of which R22

million was spent on the ‘national data centre’

project. Other projects roofed under the

service sector namely, ‘environment’, and

‘culture’ amounted to R10 million and R3.8

million respectively.

In 2006, government accelerated its housing

programme, incurring some R117 million on

various projects, including the flagship Ile

Perseverance Housing Project. This was

substantially more than in 2005 when R80

million was spent.

On the other hand, relative to 2005, there were

cutbacks under ‘education’, ‘sports’, ‘internal

affairs’ and ‘public sector management’.

These registered declines of 93 per cent, 62

per cent, 88 per cent and 16 per cent, ending

the year with expenditures of R1.6 million,

R3.0 million , R0.2 million and R37 million

respectively.

3.5 Net Lending

For the year 2006, the government maintained

its strict policy on ‘net lending’ and targeted a

nil balance. However, the actual outcome was

a net repayment of R3.2 million in respect of

advances under ‘others’, representing net

settlement under ‘general purpose loans’

originally disbursed to public servants.

As implied, the remaining entries under ‘net lending’ matched their budgeted outcome of a nil balance. 4. Financing Against the backdrop of substantial expenditure overruns, the fiscal surplus of R174 million was a most commendable result and virtually in line with the budgeted level of R178 million. In line with government’s policy, the surplus was deployed to discharge domestic debt obligations. However in 2006, the net reduction achieved in domestic financing was far higher than expected at R522 million, reflecting the outcome of new draw downs of R397 million and actual amortisation of R919 million. This was made possible through an increase in external borrowings, principally in regard to the US$200 million sovereign bond issue. Reflecting the financing impact of the foreign bond, external borrowings rose to a peak of R1,332 million. This event eased the foreign exchange position of the country and permitted the government to clear R453 million of external obligations, including some important arrears with key multilateral creditors, including the African Development Bank and the European Investment Bank (EIB). The year therefore closed with a net increase of R878 million in official external borrowings. Against the above-the-line surplus of R174 million and net domestic and foreign financing operations, is an over-funding balance of R531 million, reflected in the accounts as a rise in government cash balances.

SECTION FOUR

The External Sector

4. Overview

In 2006, Seychelles’ overall external position

improved remarkably on account of continued

strong foreign direct investment (FDI) inflows,

record tourism earnings and an exceptional

financial event. As a result, the country’s

Balance of Payments (BOP)3 posted an overall

surplus of R583 million as against R84 million

in 2005, and was by far the best outcome on

record. This large surplus permitted the

country to repay R238 million of its arrears,

whilst enabling the Central Bank to improve

its external reserves position by R345 million.

The positive overall balance was the combined

outcome of improvements in both the current

and financial accounts.

The Seychelles’ economy is by structure,

heavily dependent on imports for

consumption, investment, production and re-

exports. The recent upsurge in economic

activity has generated an increase in demand

for foreign goods, which was stronger than the

expansion in export earnings. In consequence,

the trade deficit worsened. Nonetheless, the

current account position improved, moving

from a deficit of R1,075 million in 2005 to

R905 million, primarily on account of a

growth in the surplus under the services

account combined with a higher level of net

inward current transfers. In respect of the

services account, the determining factor was a

record performance by tourism with earnings

exceeding R1.2 billion, thanks to a 9.3 per cent

growth in visitors to a new record of 140,627

visitors.

Notwithstanding the improved current account

balance, Seychelles continues to face a

structural problem in reconciling the

requirements of development and a viable

external position. Over the years, the foreign

exchange earning capacity of the economy has

expanded significantly, but not sufficiently

enough to cover the growth in external

requirements. In the absence of corresponding

inflows in the capital and financial accounts,

this has in previous years translated into a

build-up of arrears by both the government

and private sectors.

_______________________________________

3 The Seychelles’ Balance of Payments statistics is compiled based on the concepts and methodologies outlined in the International Monetary Fund (IMF) Balance of Payments Manual, fifth edition (BPM5).

- 37 -

Annual Report 2006 The External Sector

- 38 -

In 2006, for a second consecutive year – and

in contrast to earlier years, the capital and

financial accounts were in surplus. At R1,477

million, the surplus was at a record high. Two

main developments explained such outcome.

Firstly, the balance under direct investment

stood at a peak of R759 million, reflecting

strong investment inflows, mainly in the

sectors of tourism, fisheries and

telecommunications. Secondly, portfolio

investment, which has traditionally ended with

a very small surplus showed net inflows of

R1.1 billion in 2006. This represented a

significant increase in liabilities associated

with the Government of Seychelles US$200

million sovereign bond issue. In the case of

bilateral and multilateral capital transfers to

the domestic economy, inflows however

dropped significantly relative to 2005, when a

high level of donor assistance was received in

the aftermath of the December 2004 tsunami

event.

As a Small Island Developing State (SID), and

given the openness of the Seychelles economy,

the country is vulnerable to unfavourable

international developments. Its dependency

on key commodities from abroad such as

petroleum products and food items implies

that economic performance can be affected by,

for instance, changes in commodity prices and

exchange rate movements internationally;

factors which may destabilise domestic prices

and disrupt productive activity. In 2006, as in

the previous year, the major concerns were the

continued uncertainties regarding energy

prices against the backdrop of strong global

demand, conflicts in the Middle East and

terrorism threats. With current annual

domestic energy imports amounting to about

US$50 million, a prolonged increase in prices

of fuel is clearly unsustainable for Seychelles.

In light of the above, energy security must be

seen as the country’s most critical challenge in

2007. Mindful of this, within the foreign

exchange liberalisation process which started

in October 2006, a provision was made to

ensure some banking resources are allocated to

the importation of fuel. However, this

arrangement is far from adequate with energy

prices at present high levels. In the medium-

term, Seychelles Petroleum Company Ltd.

(SEPEC), the national oil company, expects to

generate enough surplus foreign exchange

cash flow to cover domestic energy

consumption from its international tanker

operations. In addition, under the

government’s integrated fisheries development

plan, an increase in bunkering activity in Port

Victoria is anticipated and profits from this

activity should assist with the financing of

domestic energy consumption.

In 2006, the discrepancies between the value

of imports as reported by customs data and the

amount of foreign exchange paid for imports

by the banking system remained significant.

As concluded in the previous Annual Report,

this suggest that a large amount of imported

items continue to be financed outside the

domestic financial system, implying an under

reporting of foreign earnings by the country as

measured by banking sector data. Whilst most


- 39 -

of this parallel funding could be attributed to

tourism sector leakages, there are allegations

that some of the imports could have been

financed from the diversion of inward private

remittances away from the banking system, to

the accounts of suppliers directly overseas.

Of late, the stock of external debt (including

payment arrears) has hovered above 50 per

cent of GDP. In 2006, following the

successful launch of a sovereign bond issue,

the country managed to clear a significant

proportion of its official arrears, the bulk of

which represented the amount due to the

African Development Bank (ADB). At the

same time, it pre-paid its obligations on the

Tokyo-Mitsubishi syndicated loan and entered

into negotiations with its bilateral creditors for

the rescheduling of other external borrowings.

The government plans to reduce its debt level

(both domestic and external) to a sustainable

threshold over a reasonable period of time,

whilst minimising risks to economic growth

and development. At the end of 2006, the

stock of official external debt to exports of

goods and services stood at around 83 per

cent.

Chart 4.1: The overall balance, current account and capital & financial account of the BOP from 1998 – 2006

-1,500

-1,000

-500

-

500

1,000

1,500

2,000

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R m

illio

n

Current Account Capital & Financial Accounts Overall Balance

Source: Central Bank of Seychelles

On the external policy front, the authorities

have tended to take a very cautious, if rigid,

approach to exchange rate policy. For more

than two decades, the exchange rate was

assigned an explicit inflation/welfare

objective, a policy that has led to erosion in

external competitiveness and domestic price

distortions leading to resource misallocation.

More recently, with the policy focus shifting

from wealth distribution to wealth creation,

targeting competitiveness has become a

necessary requirement and the challenge has

been to achieve this whilst minimising risks to

inflation and consumer welfare.


- 40 -

In 2006, the exchange rate regime remained unchanged which implied that the domestic currency continued to be pegged to the Seychelles Trade and Tourism Weighted Basket (STTWB). However, during the year, the Central Bank made an assessment of the basket to review its currency composition and respective weights. This was in order to reflect any recent change in the country’s trade and tourism pattern over the period January 2003 to December 2005. In light of the findings, the STTWB was

revised and is now composed of only the three

most dominant trading currencies with their

respective weight as follows; euro (59.1%),

UK Sterling (30.2%) and the US dollar

(10.7%). The revised basket became effective

as from Monday 9, October 2006 and the old

exchange rule which placed an appreciation

ceiling of R5.50 on the R/US$ value was

abandoned. Presently therefore, the domestic

currency is allowed to fluctuate in response to

international currency movements as reflected

through the basket mechanism.

In 2006, the rupee’s external competitiveness

improved slightly with no apparent impact on

the Consumer Price Index (CPI), which

actually posted a deflation rate of 0.4 per cent.

This stated, many imported goods falling

outside the statistical parameters of the CPI,

have remained high despite the reduction in

trades tax on a number of imported items.

Accordingly, their effects are not captured by

the CPI, implying that the CPI possibly

understates the true inflationary situation in

the country.

At the end of December 2006, foreign exchange requests, as represented by the pipeline deposits, fell to their lowest level since the re-introduction of this scheme in April 2004. This development followed the implementation of certain revisions in foreign exchange allocation policy as well as the Central Bank’s efforts to gradually clear the pipeline deposits within six months from October 2006. Overall, the year 2006 ended on a positive note. Some important progress was achieved in reducing payment arrears and normalising relations with key creditors, made possible by the country’s successful US$200 million sovereign bond issue. In addition, the Central Bank experienced an unparalleled improvement in its reserves position to the extent of R345 million (US$62 million). This brought the stock of official reserves to R654 million (US$113 million). In terms of import adequacy, gross official reserves were equivalent to 8.1 weeks of 2006’s estimated c.i.f. imports. For the country as a whole, net external reserves improved from negative R274 million in 2005 to R539 million. This was the main impetus behind the observed expansion in liquidity to a peak of R4.7 billion at the end of December 2006. 4.1 Current account From a national income accounting perspective, a current account deficit depicts the fact that national expenditure (or absorption) exceeds output, highlighting in other words, the economy’s dependency on foreign savings (or resources) to finance an excess of imports. In 2006, the current


- 41 -

account deficit narrowed to R905 million, or around 22 per cent of the nominal GDP, down from 27 per cent in the preceding year. 4.1.1 Trade in goods The BOP statistics, especially the entries on the debit side of the goods account, capture certain structural changes implemented as part of the government’s trade liberalisation policy. The trade liberalisation process started in mid-2004 and has continued thereafter. It reflects the government’s roadmap to prepare for the country’s participation in the Free Trade Agreement (FTA) of the Common Market for Eastern and Southern Africa (COMESA) and its policy of reducing operating costs of businesses and enhancing consumer welfare. Consistent with the government’s policy to liberalise trade, effective January 1st, 2006, the rate of trades tax on a wide range of goods was revised downwards. The reductions were applicable on a number of items such as food, raw materials, selected capital equipment and machinery for the manufactures sector and also household appliances. The rate payable

on many items was reduced to zero and consequently, the average rate of trades tax fell to 10 per cent. With these revisions, government has rationalised its trades tax base to essentially four import categories - fuel, alcohol, vehicles and tobacco. As expected, the current account showed a deficit under the goods account. Nonetheless, although the year recorded a worsened trade balance (‘general merchandise’), the net outflow under ‘goods’ contracted compared to the year 2005. Such a result was primarily associated with an increase in credit entries which exceeded the growth on the debit side. Whilst the rise in debit was influenced by the higher imports of merchandise, the increase in credit reflected an expansion in exports of merchandise, coupled with a significant rise in inflows under ‘goods procured in ports’, primarily representing sales (re-exports) of petroleum products. Apart from being influenced by the rise in oil prices, the movement in the latter was directly linked to the growth in the volume of such transactions.

Chart 4.2: Trade in Goods; 1998 – 2006

-3,000

-2,000

-1,000

-

1,000

2,000

3,000

4,000

1998 1999 2000 2001 2002 2003 2004 2005 2006

Years

R m

illio

ns

Merchandise Exports Merchandise Imports Merchandise, net

Source: National Statistics Bureau, Central Bank of Seychelles


- 42 -

Table 4.1Balance of Payments;1/2 2001-2006

2001 2002 2003 2004 2005 2006Provisional

(R million)

CURRENT ACCOUNT -896.5 -555.0 -49.3 -330.0 -1075.0 -905.1

Goods, -1242.9 -785.6 -481.4 -853.5 -1646.2 -1585.2 Credits (of which) 1267.9 1297.1 1546.9 1656.0 1930.0 2334.4 Merchandise exports (f.o.b) 954.7 992.2 1180.3 1097.3 1165.1 1194.6 Debits (of which) 2510.8 2082.7 2028.3 2509.5 3576.2 3919.6 Merchandise imports (f.o.b) 2438.3 2017.6 1957.3 2374.7 3434.6 3640.1

Services 460.4 528.9 595.0 609.2 619.9 657.1 Credits (of which) 1723.0 1716.8 1784.4 1796.3 2028.2 2377.3 Tourism Earnings 848.7 893.9 918.1 938.3 1050.5 1251.7 Debits 1262.6 1188.0 1189.4 1187.1 1408.3 1720.2

Income -171.2 -372.6 -233.3 -185.3 -220.4 -241.0 Compensation of employees -12.1 -17.5 -25.5 -28.3 -31.8 -40.8 Credit 1.0 1.1 0.9 0.9 1.0 1.0 Debit 13.1 18.6 26.4 29.2 32.8 41.8 Investment income -159.1 -355.1 -207.8 -157.0 -188.6 -200.2 Credits 47.3 39.7 63.9 51.0 52.9 55.7 Debits 206.5 394.7 271.6 208.0 241.5 255.9

Current transfers 57.3 74.4 70.3 99.5 171.7 264.0 General government 67.5 72.8 56.9 75.6 128.2 120.3 Credits 69.6 73.8 59.0 77.1 129.9 122.2 Fishing license fees 38.4 35.0 42.6 58.4 52.4 59.5 Educational grants 9.5 6.8 0.8 6.7 9.9 3.7 Other grants 21.7 32.0 15.6 12.0 67.6 59.0 Debits 2.1 1.0 2.1 1.5 1.7 2.0 Other sectors -10.2 1.6 13.5 23.9 43.6 143.7 Credits 9.5 9.8 26.6 38.4 65.5 197.5 Debits 19.7 8.2 13.1 14.4 22.0 53.8

CAPITAL AND FINANCIAL ACCOUNT 603.6 743.3 -126.9 -162.1 977.7 1477.1 CAPITAL ACCOUNT 55.3 27.5 40.1 5.4 164.3 72.9 FINANCIAL ACCOUNT 548.4 715.5 -166.9 -167.6 813.4 1404.2

Direct investment 329.2 213.6 271.5 167.3 431.4 759.4 Abroad 50.0 47.9 44.0 41.8 41.0 44.2 In Seychelles (of which) 379.2 261.5 315.5 209.1 472.3 803.6 Sale of Assets (Privatised enterprises) 0.0 0.0 85.0 0.0 1.9 5.0 Equity capital 331.7 205.8 181.7 176.0 410.5 705.1 Re-invested earnings 47.5 55.7 48.8 33.1 59.9 93.5

Portfolio investment 6.0 5.7 6.1 5.9 5.6 1105.4 Assets 0.4 0.4 0.1 0.2 0.2 0.3 Liabilities 6.4 6.1 6.2 6.1 5.8 1105.7

Other investment 213.1 496.1 -444.6 -340.8 376.4 -460.7 Assets 51.3 58.4 80.0 67.4 52.9 47.0 Liabilities 264.5 554.8 -364.6 -273.4 429.3 -413.7

Net errors and omissions 6.6 -55.3 -26.4 2.0 13.2 11.0

OVERALL BALANCE -286.3 133.0 -202.7 -490.2 -84.1 583.0

Financing of overall balance 286.3 -133.0 202.7 490.2 84.0 -583.0 Reserve assets3 60.5 -141.7 -16.9 181.3 -120.9 -344.6 Arrears 225.8 8.6 219.5 308.8 204.9 -238.4

Memorandum items: Current account (percentage of GDP) -24.7 -14.5 -1.3 -8.6 -27.0 21.8 Trade Balance (f.o.b) -1483.7 -1025.4 -776.9 -1277.4 -2269.5 -2445.5 Stock of Reserves (Gross)(R million) 210.6 352.3 369.2 187.8 308.7 653.3 Stock of Reserves (Gross) (Weeks of cif imports) 3.9 8.0 8.6 3.5 4.2 8.1 1 Contrary to the exchange record, this series is recorded on an accrual basis. 2 Data series differ from previous publications due to revisions. 3 (-) sign indicates increase in reserves.



- 43 -

4.1.2 Merchandise exports A limited range of commodities is exported from Seychelles. In 2006, total exports (f.o.b.) amounted to R1,195 billion, after posting a growth of 2.5 per cent compared to 2005. Consistent with the trend set in the previous years, such expansion primarily reflected an increase in exports of canned tuna. In 2006, canned tuna represented 86.0 per cent of total merchandise exports. Sales of canned tuna abroad grew by 6.4 per cent to R1,031 million, to reach the highest level since 2004. Consequently, the Indian Ocean Tuna (IOT) canning factory remains the largest single tuna manufacturing and exporting entity in the region. During the year, Lehman Brothers acquired shares in IOT, amounting to 60 per cent of

the capital previously held by the multinational Heinz. The new part-owner plans to diversify IOT’s output and expand production further in the coming few years. Such development could see a doubling in the volume and value of tuna exports from the country. Excluding canned tuna, the remaining exports from the fisheries industry are ‘fresh and frozen fish’, ‘processed fish’, ‘fish meal’, and ‘crustaceans’, the latter of which consists mainly of frozen prawns. Disappointingly, the combined value of exports of those commodities was less than the amount recorded in the previous year.

Chart 4.3: Exports 2006

Other Processed fish

0.3%

Other exports10.0% Cinnamon bark

0.1% Frozen and fresh

fish1.2%

Canned tuna86%

Crustaceans2.1%

Source: National Statistics Bureau

Exports of the country’s traditional crops,

namely cinnamon bark and copra, have in

recent years experienced a significant

downturn. Similar to past years, no export of

copra was recorded. However, from R0.5

million in 2005, R0.8 million worth of

cinnamon bark was exported in 2006. This

slight pick-up in earnings from this

commodity was consistent with the increase in

such production observed during the year.


- 44 -

Table 4.2

Domestic Exports; 2001-20062001 2002 2003 2004 2005 2006

(R million)

Total 954.7 992.2 1180.3 1097.3 1165.1 1194.6Copra 0.3 0.0 0.0 0.0 0.0 0.0Cinnamon bark 1.3 1.2 1.0 0.5 0.5 0.8Frozen and fresh fish 17.3 18.2 28.0 13.3 16.5 14.5Canned tuna 771.2 843.7 1023.1 923.2 985.2 1031.4Other processed fish 50.4 47.3 27.1 8.3 14.2 3.1Shark fins (dried) .. .. .. .. .. ..Crustaceans 13.2 8.7 41.2 42.7 31.5 25.1 of which: Frozen prawns 12.1 8.7 41.2 42.7 31.5 25.1Other exports 101.0 73.1 59.9 109.4 142.6 119.7Source: National Statistics Bureau

4.1.3 Merchandise imports For the year 2006, the provisional trade figures show an increase of R205 million (6.0 per cent) in imports relative to the year 2005. This was against expectations, as the previous year’s outcome was above norm, being distorted by the imputed costs of two oil tankers with an estimated combined value of R476 million. Various factors seem to have affected the current year’s outcome, most notably the high level of investment activity, bullish energy prices and the underlying expansion in economic activity. A detailed look at the breakdown of merchandise imports for the year showed that growth was broad-based with only ‘chemicals’ and ‘machinery and transport equipment’ posting declines. The value of imported chemicals dropped 20 per cent to its lowest level since 2003. On the other hand, ‘machinery and transport equipment’, declined by 28 per cent, an outcome explained by the

impact of the SEPEC tankers - MT Seychelles Pioneer and MT Seychelles Progress – on 2005 figures. An increase in domestic demand coupled with higher prices raised the share of imported mineral products to total imports, from 22 per cent in 2005 to 26 per cent in 2006. For the year as a whole, the (f.o.b.) value under this entry grew by 28 per cent to R947 million. Merchandise categorised as ‘manufactured goods and miscellaneous manufactured articles’, amounted to R803 million and accounted for 22 per cent of total imports in 2006. Imports under this entry –which partly include items used for construction and business purposes – recorded a strong growth rate of 43 per cent relative to the previous year’s level. With regards to ‘food, live animals and vegetable oil’ a growth of 24 per cent was registered whilst in the case of ‘beverages and tobacco’, the corresponding increase was 32 per cent.


- 45 -

A development of note in 2006 is the

movement in the value of items brought into

the country not captured by customs data or

balance of payments surveys – ‘other

unrecorded shipment’ or ‘shuttle trade’. This

entry is estimated to have contracted further

from R75 million to R53 million. It is

believed that under the new liberalised trade

policy, there are arguably less incentives for

importers not to declare their goods, thus

resulting in an improvement in the coverage of

imports by customs data.

Chart 4.4: Imports (f.o.b.) 2006

Chemicals4%

Manuf act ured goods & misc. manuf act ured art icles

22%

Machinery and t ransport equipment

19%

Ot her commodit ies2% Ot her unrecorded shipment

(shut t le t rade)1%

Food, live animals & veget able oils

24%

Beverages and t obacco1%

Mineral f uels27%


Table 4.3 Imports (c.i.f.) – by HS1 Sections; 2001-2006

2001 2002 2003 2004 2005 2006

Prov. (R million)

Description

Total imports 2776.0 2294.9 2230.6 2769.3 3846.0 4218.3

Food and live animals 645.6 673.8 669.3 740.3 808.8 1004.6Beverages & tobacco 21.9 36.5 32.8 35.4 45.9 60.4Mineral fuels 409.6 327.9 358.3 718.6 872.4 1113.8Chemicals 144.9 152.0 207.0 198.5 238.4 191.8Manufactured goods & Misc. manufactured articles 459.2 520.4 533.6 560.6 661.0 944.8Machinery & transport equipment* 1056.5 542.5 394.4 440.0 1045.2 814.5 Other commodities 38.3 41.9 36.2 38.4 44.5 76.51 Harmonised System * Include the value of the Boeing 767-300 acquired by Air Seychelles in April 2001 under a financial lease agreement, an oil tanker in 2002 and two in 2005.Source: National Statistics Bureau, Central Bank of Seychelles.


- 46 -

4.1.4 Goods procured in ports

In line with previous trends, the account under

‘goods procured in ports by carriers’ posted a

surplus in 2006, amounting to R903 million as

against R650 million in 2005. On a gross

basis, both credit and debit entries increased,

albeit at different rates.

The growth in credits was directly linked to

the higher inflows from the sale of petroleum

products to foreign ships and aircraft, and

income from oil tanker operations in

international waters. This arose on account of

higher oil prices and the increase in SEPEC’s

tanker fleet to three vessels.

The increase in debit was again primarily influenced by payments for petroleum products abroad. From R110 million in 2005, total debit under this account grew to a remarkable R232 million, out of which, R220 million represented the purchase of fuel. In addition to reflecting an increase in the value of petroleum products, the movement in debit was again also influenced by transactions in respect of the operations of the three oil tankers.

Table 4.4Goods procured in Ports; 2001-2006

2001 2002 2003 2004 2005 2006(R million)

Goods procured in ports, net 246.8 242.7 298.5 446.6 650.1 902.9

Credits 309.1 300.7 362.2 554.7 760.5 1135.0 Petrol 296.6 290.9 352.7 531.0 736.2 1107.2 Food and beverages 7.1 7.4 7.8 8.5 9.5 11.1

Others 5.4 2.4 1.6 15.2 14.8 16.7Debits 62.3 58.0 63.7 108.1 110.5 232.1 Petrol 53.0 47.1 50.7 94.4 96.7 220.1 Food and beverages 9.3 10.9 13.0 13.7 13.8 12.0


4.1.5 Repairs

In 2006, the balance under ‘repairs on goods’

remained in deficit. The net outflow for the

year increased to R43 million compared to

R27 million in 2005. Such movement was to a

large extent influenced by an increase on the

account’s debit side, which corresponded to

the repairs on residents’ ships and aircraft.

The bulk of the entries under this head

represented the cost of maintenance and minor

repairs incurred by the national airline.

4.2 Services

By nature of its economy, and as depicted

from its vital contribution to GDP, Seychelles

is in effect a ‘service economy’ dominated by

tourism. Transactions under ‘services’ of the

external account are directly linked to the

performance of the tourism sector. Owing to

the foreign exchange inflows from tourism and

its associated activities, the services account is

invariably in surplus.


- 47 -

Table 4.5

Services;1 2001-2006 2001 2002 2003 2004 2005 2006 Provisional

(R million)

SERVICES, NET 460.4 528.9 595.0 609.2 619.9 657.1

Transportation 231.8 178.7 222.5 133.3 140.9 184.0 Passenger 332.9 344.7 373.7 360.1 313.8 412.4 Credits 437.2 455.0 472.4 463.4 425.0 525.0 Ticket sales to non-residents by Air Seychelles 417.0 451.0 472.4 463.4 425.0 525.0 Others 20.2 4.1 0.0 0.0 0.0 0.0 Debits (tickets to foreign airlines by residents) 104.3 110.3 98.7 103.3 111.2 112.6

Freight -170.6 -257.9 -244.0 -305.3 -266.6 -358.2 Credits 112.9 28.9 34.8 36.2 138.4 167.6 Debits 283.5 286.9 278.8 341.5 405.5 525.8

Other transportation services 69.6 91.9 92.8 78.5 93.8 129.7 Credits (of which) 124.5 148.1 166.5 150.6 170.7 195.8 Marine and port charges 27.0 30.8 35.6 34.6 39.3 40.7 Income from stevedoring 44.9 61.8 68.4 58.8 65.5 69.2 Agency service income 15.0 10.6 21.5 19.5 23.0 28.6 Ground handling fees 14.2 15.5 15.9 15.2 16.1 24.5 Aircraft landing fees 13.1 14.6 15.1 12.2 15.0 20.2 Others 10.2 14.7 10.0 10.4 11.8 12.7

Debits 54.9 56.3 73.7 72.1 76.9 66.1

Travel 723.3 720.7 728.2 760.0 843.8 1059.0 Credits (of which) 856.2 900.5 924.2 944.4 1056.5 1257.4 Tourism earnings1 848.7 893.9 918.1 938.3 1050.5 1251.7 Others 7.4 6.6 6.1 6.0 6.0 5.6 Debits 132.8 179.8 196.0 184.4 212.7 198.3 Foreign travel expenditure 92.9 131.2 129.2 109.0 120.9 109.7 Training of residents abroad 30.9 30.4 24.5 38.4 42.9 43.1 Others 9.0 18.3 42.3 30.1 48.1 45.1

Insurance, net -81.1 -79.8 -80.1 -90.2 -91.6 -135.1

Royalty debits -2.5 -3.0 -3.0 -3.0 -3.0 -3.0

Financial and Business Services -261.3 -194.1 -244.4 -281.2 -183.2 -190.9 Credits (of which) 92.7 79.3 72.4 93.8 97.8 106.5 Telecommunications 54.8 56.0 56.2 66.8 69.4 70.9 Debits 354.0 273.6 316.8 274.9 281.0 297.4

Construction service -208.3 -143.2 -92.2 -83.6 -188.2 -328.2

Government services 58.4 49.9 64.1 73.9 101.1 71.3 Credits 82.0 90.1 105.7 100.1 120.1 120.1 Foreign embassies in Seychelles 3.0 3.0 3.0 2.7 2.7 2.8 Licences and other fees 79.0 86.3 101.8 96.5 116.4 116.4Debits 23.5 40.2 41.6 26.2 18.9 48.8Expenses by Seychelles embassies 6.5 6.7 6.1 3.3 3.4 2.6Tourism promotion 17.1 13.6 15.2 12.7 11.0 6.0Government others - 19.9 20.3 10.2 4.6 40.21 Tourism earnings include tourism income as per banks’ records and an estimate of earnings not captured by the banking system. Source: Central Bank of Seychelles


- 48 -

In 2006, the surplus amounted to R657

million, which represented an increase of R37

million or 6.0 per cent. The input from the

tourism and related activities is income earned

or ‘tourism earnings’. For the year under

review, the tourism industry registered a good

performance both in terms of visitor arrivals

and the amount spent by tourists.

Consequently, from an estimated R1,050

million in 2005, tourism earnings rose to

R1,252 million in 20064. Total inflows under

the services account – of which 53 per cent

was accounted for by tourism earnings –

amounted to R2,377 million, representing a

growth of R349 million. On the debit side, the

movement was again an increase but by a

lower R312 million.

The balance under ‘transportation’, which is

one of the main components of the services

account showed a surplus of R184 million.

Firstly, this can be attributed to a growth in the

net inflows under ‘passenger’, corresponding

to a 9.3 per cent increase in visitors coming as

against a 4.1 per cent rise in the total number

of residents who travelled abroad during the

year. The higher net inflow under

‘transportation’ was also influenced by a

growth under ‘other transportation’ on account

of higher credits under ‘port and marine

charges’, ‘income from stevedoring’, ‘agency

service income’ and ‘airport ground handling

fees’, all of which were consistent with

increased tourism and fisheries activity. These

increases in inflows more than compensated

for the enlarged import-induced net payments

posted under ‘freight’.

Another important component of the services

account is the subgroup ‘travel’. Although

payments on overseas travel by residents

increased, these were outweighed by record

tourism inflows, resulting in a R1.1 billion

surplus as against one of R844 million in

2005. After remaining somewhat stable in the past

few years, the balance under ‘insurance’

continued to show a deficit, albeit at R135

million compared with R92 million in 2005.

With regards to the net outcome under royalty,

this remained fairly constant showing net

payments of R3.0 million. On account of the country’s limited human

resource base, the balance under ‘financial and

business services’ remained in deficit implying

that during the year, on a net basis, Seychelles

continued to rely heavily on non-resident

labour services. Given the planned growth in

tourism and fisheries activity, this trend is

expected to persist. The remaining sub-account under ‘services’,

namely ‘construction’ and ‘government

services’, ended with a deficit and a surplus

respectively. Transactions under ‘construction

services’ are directly linked to FDI projects.

The increased level of FDI has therefore

translated into a commensurate rise in the net

import of construction services to R328

million as against one of R188 million in

2005. With regards to ‘government services’

this remained in surplus. However, owing to a

higher level of payments, the surplus narrowed

from R101 million in 2005 to R71 million.

______________________________________

4 This refers to foreign exchange earnings from the tourism sector through the banking system, and an imputed amount not recorded by banks. The estimate shows that 22 per cent of tourism earnings in 2006 were not captured by banking


- 49 -

4.2.1 Income

For the year being reviewed, the income

account remained in deficit, but the shortfall

widened to R241 million compared to R220

million in 2005. The main subgroups under

this account namely ‘compensation of

employees’ and ‘investment income’,

contributed mostly to the shortfall.

The deficit under ‘compensation of

employees’ increased by R9.0 million, or 28

per cent. Such development reflected a net

increase in the participation of non-resident

workers in the Seychelles economy, mainly in

industrial fisheries, tourism, construction and

the public sector.

The deficit under ‘investment income’

increased from R189 million in 2005 to R200

million in 2006. The result was associated

with a higher level of payments compared to

receipts, mostly in respect of interest payments

made to overseas creditors by the private, as

well as the public sector.

4.2.2 Transfers

The transfers account represents the smallest

group of current transactions in the Seychelles

BOP statistics. However, despite its size, the

balance has traditionally been in surplus which

implies that the country is a net recipient of

current transfers from the rest of the world. In

2006, net inward transfers amounted to R264

million. This was an improvement compared

to the previous year and was due to higher net

inflows under both the ‘general government’

and the ‘other sectors’ subgroups.

The official net inflows (under ‘general

government’) dropped from R128 million in

2005 to R120 million in 2006. Whilst outward

transfers remained somewhat stable and

insignificant at around R2.0 million, the

reduced level of inward official transfers

signified an expected drop in financial

assistance to the country in 2006 relative to

2005. Similar to the previous year, the lion’s

share of inward transfers represented the

contributions from fishing license fees which

amounted to R60 million (or 49 per cent of

official transfers to the Seychelles

government), showing an increase compared

to R52 million registered in 2005.

With regards to the ‘other sectors’, the entries

include an estimate of remittances to residents

that are not captured through the domestic

banking system and balance of payments

surveys. Taking this into consideration, the

account showed a further increase in net

inflows to a new peak of R144 million in

2006. These net flows reflected a growth in

transfers to non-resident individuals and

businesses for the financing of imports against

a lower increase in the amount of outward

transfers. The observed rise in the latter is

attributed to an increase in the number of

foreign labour within the country.

4.3. Capital and financial account

The ‘capital and financial account’ gives an

indication of capital movements between the

compiling economy and the rest of the world,

as well as providing key insights in cross

border financial and investment flows.


- 50 -

As a SIDS, capital inflows from abroad are

essential for the support of economic growth

and many other socioeconomic objectives of

the country. In 2006 and for the second

consecutive year, the provisional estimate for

the ‘capital and financial account’ showed a

surplus. This amounted to R1,477 million, the

highest level on record. Given that in 2006,

the net transfers of capital to the country were

less than in 2005, the result posted under the

combined capital and financial surplus was

associated with the strong net inflows under

the financial account.

4.3.1 Capital account In the aftermath of the December 2004

tsunami, there was an increase in the amount

of bilateral and multilateral donations to the

country. Consequently, the capital account

which records such inflows reached a peak of

R164 million in 2005. For the year 2006, the

net inflows of capital to the domestic economy

expectedly fell to R73 million. 4.3.2 Financial account The estimated financial account result for the

year 2006 showed that the surplus attained in

2005 was not only maintained but increased

significantly. This was from R813 million to a

significant R1,404 million. Such remarkable

development reflected strong net inflows

under ‘direct investment’ and unlike preceding

trends, ‘portfolio investment’.

The balance under ‘direct investment’

registered a 70 per cent growth relative to the

previous year. This portrayed the investment

boom being experienced in the country where

strong inflows of FDI to the tourism and

fisheries industry were observed. With strong

investment confidence in the economy and the

record number of investment projects in line

for implementation, the growth in FDI inflows

is expected to persist through to at least the

year 2010.

With regards to the balance under portfolio

investment’, a remarkable R1,101 million

surplus was recorded as against a small stable

surplus in earlier years. This outcome

reflected the increase in liabilities associated

with the US$200 million government of

Seychelles bond issued on the international

capital market in September 2006.

As for the balance under ‘other investment’,

this moved from a surplus of R376 million to a

deficit of R461 million, thus showing a net

reduction in liabilities. To a large extent, this

represented repayment of external debt by the

public sector (government and parastatals), a

development partly executed from the

proceeds of the bond.

4.4 External reserves

In 2006, Seychelles registered another positive

annual movement in its reserves position.

From R309 million (US$56 million) in 2005,

gross official reserves5, grew to a peak of

R654 million (US$113 million), representing

an accumulation of R345 million between the

two periods. The strengthening in the external

position was mostly reflected in the Central

Bank’s account, which moved from R309

million (US$56 million) at end-2005 to R653

million in December 2006. Of lesser

_______________________________________

5 Reserves of the Central Bank and of the government.


- 51 -

significance, government net reserves

improved from R0.6 million to R1.1 million.

In terms of import adequacy, the gross official

reserves were equivalent to 8.1 weeks of

2006’s c.i.f. imports value as against 4.3

weeks in 2005. On a net basis, the official

reserves improved from negative R85 million

in 2005 to R654 million in 2006.

Table 4.6 External Reserves;1 2001-2006

2001 2002 2003 2004 2005 2006

(R million)

Gross official reserves 213.4 352.7 370.6 190.2 309.3 654.4 Central Bank 210.6 352.3 369.2 187.8 308.7 653.3 Government 2.8 0.5 1.4 2.4 0.6 1.1Central Bank’s short-term Borrowings 373.2 802.6 693.3 494.0 394.4 0.0 Net official reserves -159.8 -449.8 -322.7 -303.8 -85.1 654.4 1 End-of period data. Source: Central Bank of Seychelles

4.5. Exchange rates

Following the revision and rationalisation of

the Seychelles Trade and Tourism Weighed

Basket (STTWB) on October 9, 2006, the

market expected a major shift in the parity of

the domestic currency consistent with an

undisclosed competitiveness target. In the

event, this did not materialise and the

movements of the rupee against the world’s

most-traded currencies, were mixed.

The domestic currency gained 5.2 per cent

against both the South African rand and

Japanese yen, and 0.9 per cent relative to the

Austrian dollar. However, the rupee weakened

compared to all of the currencies incorporated

in the revised STTWB. Such movement

ranged from 0.3 per cent to 1.6 per cent. The

lower end of the bracket was the rupee/US

dollar rate which moved away from its annual

average of 5.50 for the first time since 2004.

The loss of 1.6 per cent was relative to the UK

sterling whilst the rupee weakened 1.2 per cent

against the euro.

Relative to some selected currencies not

featured in the STTWB, but published by the

Central Bank, the domestic currency weakened

7.1 per cent compared to the Canadian dollar,

1.4 per cent against the Swedish Krona but

gained 0.4 per cent relative to the Swiss franc.


- 52 -

Chart 4.5: Exchange rate movements of the three main currencies in the STTWB; 1998 – 2006

0

2

4

6

8

10

12

1998 1999 2000 2001 2002 2003 2004 2005 2006Years

UK Sterling US Dollar Euro


In consideration of the foreign exchange

shortages, hard currencies continued to be

actively traded outside the banking system.

Due to incomplete information, it has not been

possible to ascertain whether the domestic

currency strengthened or weakened in the

unofficial market in 2006.

Table 4.7Exchange Rates;1 2001-2006

2001 2002 2003 2004 2005 2006(Seychelles Rupees per currency unit)

Euro 5.2516 5.1751 6.1156 6.8378 6.8483 6.9300US dollar 5.8585 5.4883 5.4013 5.5000 5.5000 5.5190Pound sterling 8.4397 8.2329 8.8292 10.0747 10.012 10.1692Japanese yen 0.0483 0.0438 0.0467 0.0509 0.0501 0.0475South African rand 0.6925 0.5225 0.7211 0.8532 0.8661 0.8211Singapore dollar 3.2714 3.0633 3.1001 3.2539 3.3047 3.47511 Period averages. Source: Central Bank of Seychelles

4.6 Offshore developments

In the offshore sector, around 8,238 new

international business companies were

registered in 2006. This brought the total

number of registered international business

companies (IBC) to nearly 33,162. In the

international trade zone, the total number of

registered licensed companies amounted to 51

at the end of the year.

In terms of earnings generated from the provision of services by the offshore sector, these are estimated at between US$20 million and US$25 million, excluding income from the international trade zones (ITZ).

SECTION FIVE

The Real Sector: Production, Labour and Prices

5. Overview – Domestic Income and Production

Seychelles observed a surge in economic activity in 2006 and thus a major strengthening of the incipient economic recovery which surfaced in the second half of 2005. The preliminary estimates for official Gross Domestic Product (GDP) at constant market prices show that real GDP grew by some 5.3 per cent in 2006, as against 1.2 per cent in the previous year. The expansion in economic activity translated in a significant rise in import levels. In 2006, merchandise imports reached record levels, resulting in a deterioration in the trade balance to R2,446 million. The growth in the value of imports was largely driven by heightened tourism and investment activity, strong consumer expenditure following certain policy revisions involving some tax reductions6, and higher energy costs. As in recent years, investor confidence remained upbeat; maintaining this positive sentiment is critical for the country’s medium-

term growth objective and heavily dependent on the government’s commitment to pursue reforms and embrace a more liberal and deregulated economic framework. Over the past years, a clear correlation has emerged between improvements in the general business climate and the level of Foreign Direct Investment (FDI). In the year under review, FDI rose from US$78 million in 2005 to a peak of US$138 million net, suggesting that investor confidence was similarly at a record high. In consideration of ongoing and approved projects in the pipeline, further growth in FDI inflows is anticipated in at least the next three years. Most of the FDI has been concentrated in the tourism sector, notably in the construction of world-class high-end properties with the involvement of strong internationally known hotel management companies. This, along with the Ile Perseverance housing programme, was the main impetus behind the hectic activity in the construction sector, which in turn caused critical shortages in the market for basic locally-sourced building materials.

____________________________ 5 During the year, pressure on consumption levels emerged in response to reductions in the rates of trades tax applicable on a wide range of commodities. Additionally, a significant proportion of the population benefited from the introduction of: cash discounts under the housing ownership schemes; R100 increment in social security benefits for the elderly; reduction in public transport bus ticket; a revision in a number of schemes of services in the public sector; and a 10 per cent reduction in rent for tenants in state-owned apartments.

- 53 -

Annual Report 2006 The Real Sector: Production, Labour and Prices

- 54 -

Table 5.1 Gross Domestic Product by Kind of Economic Activity; 2002 – 2006

at constant (1986) market prices

2002 2003 2004 2005 20061

(R million)

GDP at market value 2,587.1 2,434.5 2,365.3 2,393.9 2,520.7Agriculture, forestry and fishing 75.6 71.6 68.2 69.9 72.7Mining, manufacturing and Handicrafts 446.5 425.4 390.8 423.2 431.5Electricity and water 113.5 125.3 132.4 135.4 147.3Building and construction 204.7 198.0 163.9 201.2 265.6Transport, distribution and Communications 970.3 882.3 812.3 843.1 898.3Hotels and restaurants 79.2 72.9 66.7 70.3 82.6Financial and business services 231.8 203.5 202.4 204.1 223.8Government services 193.5 194.7 180.1 180.5 172.1Other services 272.0 260.8 348.5 266.2 226.9

1 Preliminary Estimates Source: National Statistics Bureau

Besides the high-level of investment activity,

the tourism industry experienced its best year

on record both in terms of visitors and foreign

exchange earnings. From January to

December 2006, the number of tourists to

Seychelles was 140,627, representing an

increase of 9.3 per cent relative to the previous

year. The growth in arrivals was primarily

marketing and product-led although without

doubt, better air access following adoption of a

more liberal open sky policy contributed to the

result. Moreover, technical and marketing

assistance provided by the Seychelles Tourism

Board (STB) to the trade, for example to small

hotels under its ‘Seychelles Secret’

programme, has helped improve product

visibility, quality and service levels. In

reflection of the increased tourism activity7,

earnings from the industry and related

activities shot up to an estimated R 1,252

million, representing a 19 per cent increase

above the previous 2005 record.

After a lull, the fisheries sector entered an

active phase with the acquisition of Heinz’s

share in the country’s tuna processing facilities

(Indian Ocean Tuna) by the investment

bankers, Lehman Brothers, and the high-

profile launch of the Fisheries Integrated

Project in June. The latter, which includes

construction of two new berths, cold storage

facilities, workshops, net repairs, and

container depots among others, will provide

new business opportunities for the local

private sector. The total cost of the plan is

estimated at US$80 million and is expected to

be privately funded.

____________________________ 6 The foreign exchange earnings from the tourism sector includes both the amount collected through the banking system and an estimate of what is not recorded by banks. The proportion of tourism earnings not captured through domestic banks in 2006 is estimated at 22 per cent, compared to 18 per cent in 2005.


- 55 -

Chart 5.1: Gross Domestic Product at Constant Market Prices; 1998 - 2006

2200

2250

2300

2350

2400

2450

2500

2550

2600

2650

1998 1999 2000 2001 2002 2003 2004 2005 2006Years

GD

P(at

mar

ket p

rice

s)

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

GDP (Real) Percentage change


Elsewhere in the economy, notably in

wholesale and retail trade, a surge in business

confidence was likewise noted with a reported

increase in new retail outlets. Clearly, the

prevailing foreign exchange difficulties in the

official banking sector have not acted as

prohibitive barriers to the trade, implying that

the sector’s growth has been supported by hard

currency sourced from the parallel market.

Interestingly, this has resulted in less

commodity shortages nationwide and provided

an outlet for pent-up demand. In addition, it

has impacted positively on trades tax and

goods and services tax (GST) revenue.

Consistent with the observed growth in real

sector activity, is the 5.9 per cent increase in

the amount of credit extended by the

commercial banks to the private sector.

Further confirmation of the expansion in

national output is provided by energy

indicators which point to a 8.7 per cent

increase in electricity generation to 251

million Kwh. However, whilst production

increases were recorded in various lines,

notably mineral water, alcohols and soft-

drinks, domestic supply of a number of

locally-produced items fell short of demand,

resulting in sporadic shortages during 2006.

Most enterprises attributed production

disruptions to inadequate access to foreign

exchange, causing procurement difficulties for

raw materials and machinery spare parts. In

addition to this, enterprises faced some

unfavourable cost developments. Although

government continued with its policy to

absorb the impact of higher international

energy prices, businesses could not be shielded


- 56 -

from the energy-induced cost increases on

shipping rates and raw material prices. Some

companies even reported that global factors,

such as avian flu and harvesting difficulties

directly affected their manufacturing activity

within the Seychelles as the global supply of

raw materials tightened whilst the price

increased.

Table 5.2 Gross Domestic Product by Kind of Economic Activity; 2002 - 2006

at current market prices

2002 2003 2004 2005 20061

(R million)

GDP at market value 3,822.4 3,811.3 3,848.9 3,974.4 4,276.7Agriculture, forestry and fishing 110.3 100.5 100.7 104.8 107.4Mining, manufacturing and Handicrafts 698.0 623.2 541.4 586.0 663.5Electricity and water 74.7 91.2 97.3 100.6 107.0Building and construction 384.2 342.5 379.8 466.1 540.7Transport, distribution and Communications 1,110.6 1,111.9 1,182.0 1,221.0 1,248.7Hotels and restaurants 379.8 350.5 397.8 419.2 482.1Financial and business services 372.4 389.7 431.6 434.6 466.9Government services 458.0 488.8 489.0 490.0 596.4Other services 234.4 313.0 229.3 152.1 64.01 Preliminary Estimates Source: National Statistics Bureau

As part of its commitment to fundamental

reforms, involving the dismantling of controls

and tackling economic distortions, the Central

Bank initiated some important steps at foreign

exchange liberalisation in October 2006 with

the ultimate objective of restoring a fully

liberal exchange and payments system.

Consistent with this objective, the foreign

exchange surrender requirement was reviewed

downwards and responsibility for foreign

exchange allocation was transferred to the

commercial banks against the issuance of

some broad priority guidelines. This was

aimed at improving allocative efficiency and

signalled government’s commitment to fast-

track the elimination of price-distortions in the

foreign exchange market. In a connected

development, the Central Bank announced

plans to clear all legitimate balances lodged

under the pipeline payments system within a

period of six months from October 2006. By

the end of December 2006, such deposits have

dropped to their lowest level since the re-

introduction of the scheme in April 2004.

Economic recovery has also impacted

positively on retail banking business,

stimulating competition, and resulting in new

products being introduced by banks. These

included the introduction of the ‘Western

Union Money Transfers’ and a specialised

service, ‘Prestige Banking’ by Nouvobanq and

Barclays Bank respectively.


- 57 -

Nouvobanq introduced the Western Union

Money Transfers to the Seychelles towards the

end of the year and has since seen the service

used for emergency situations due to the

immediacy of the transfer, but has found that

their present inability to send transfers, is a

deterrent to customers. The currency of

preference is the US Dollar followed by the

Swiss Franc. For 2007, Nouvobanq hopes to

extend the service to out-going transfers if

conditions permit.

Table 5.3 Gross Domestic Product by Broad Productive Sectors; 2002 – 2006

at current market prices 2002 2003 2004 2005 20061

(R million)

GDP 3,822.4 3,811.3 3,848.9 3,974.4 4,276.7

Agriculture, forestry and fishing 110.3 100.5 100.7 104.8 107.4Industries 1,128.4 1,030.6 988.1 1,120.3 1,275.8Tourism 707.0 694.0 776.5 807.7 912.8Government 458.0 488.8 489.0 490.0 596.4Other services 1,418.7 1,497.4 1,494.6 1,451.6 1,384.3

1 Preliminary Estimates Source: National Statistics Bureau

Prestige banking was introduced by Barclays

Bank in April 2006. The service provides a

dedicated, one-to-one relationship between the

bank and the customer. Several incentives –

free chequebooks, different ATM cards and

relatively better loan options – are offered to

eligible clients. This faster and more focussed

service provided by Barclays aims to attract

and retain the business of high-income local

professionals. Based on client feedback,

further improvements to the service are

expected in 2007.

In 2006, government confirmed its intention to

move out of commercial activity and adopt the

role of facilitator and regulator in the

economy. This manifested in the form of the

partial privatisation of the state owned

insurance company, State Assurance

Corporation of Seychelles (SACOS) ,which

was completed in August. In the next phase of

its privatisation programme, the details of

which are to be published in early 2007, the

government plans to sell a major stake

(amounting to 30 per cent of the capital base)

in the largest domestic commercial bank,

Nouvobanq and 30 per cent of the Seychelles

Savings Bank, a 100 per cent government-

owned bank, and some production units of the

Seychelles Marketing Board (SMB).

Against the backdrop of rising economic

activity, labour market conditions inevitably

tightened. In 2006, the average number of


- 58 -

active employees is estimated to have reached

39,561 employees, resulting in a further

decline in the rate of unemployment from 3.6

per cent at the end of December 2005 to 2.6

per cent. During the year, many businesses,

notably in tourism and construction, faced

chronic manpower shortages, and were thus

forced to seek relief on the international labour

market.

On the inflation front, movement in prices as

denoted by changes in the Consumer Price

Index (CPI) showed a drop in the average

price level during the year. However, in

consideration of other economic indicators,

some evidence of inflationary pressures

existed in the economy. Many of these were

associated with the prices of goods not

covered by the CPI but increasingly forming

part of normal consumption expenditure. The

National Statistics Bureau (NSB) is aware of

such situation and has already started its new

consumer survey in order to update the basket

of goods upon which price movements are

measured.

5.1 Primary Sector

Production statistics on the primary sector, notably in agricultural production, showed that 2006 was a better year than 2005 when production was disrupted by the after-effects of the December 2004 tsunami and inclement weather conditions. Tax incentives provided under the Agricultural & Fisheries (Incentives) Act 2005 have to an extent improved operating conditions, but many operators have been unable to exploit the concessions for lack of

access to foreign exchange. In consequence, production continued to be affected by shortages in critical inputs, including fertilisers, pesticides and farming equipment. Moreover, farmers and fishermen continue to face the omnipresent risk to income posed by weather conditions. To ease their plight, an insurance scheme for farmers and fishermen was considered and negotiated during the year with an implementation target date now set for 2007. The difficulty of promulgating such a scheme has been in respect of costs; to expedite the process, the government intends to subsidise the insurance scheme so that entities in need of cover, are able to afford. The scheme will also serve as a comfort to financial institutions with an exposure on operators in the sector. 5.1.1 Fisheries Despite the overall high level of real sector activity in the economy, the year 2006 was not the best year for the fisheries sector. Mixed results prevailed across the broad spectrum of the activity. In 2006, the total amount of artisanal catch, targeted mostly at meeting domestic demand, was 3,849MT, representing a 13 per cent decrease upon the 4,439MT landed during 2005. This triggered an increase in the price of fish during the year with the fish component of the CPI showing a 6.1 per cent rise compared to the previous year. Provisional catch figures for the purse seine fishery in the Western Indian Ocean similarly indicates that a total of 389,936 MT of tuna were caught in 2006, an increase by a mere 0.2 per cent, or 680 MT, over 2005.


- 59 -

Table 5.4 Estimates of Fish Landed

2002 2003 2004 20051 2006

(Metric tonnes)

Artisanal method 4,914 3,852 4,374 4,439 3,849Semi - industrial (long line) 190 76 111 251 260Industrial method - Caught 296,141 378,027 408,366 389,256 389,936 - Transhipped 335,549 359,379 300,937 338,271 371,0871 Figures for 2005 has been revised Sources: Seychelles Fishing Authority

Nonetheless, despite the lower catch levels,

improved performance was registered in

respect of output of certain fish products. For

example, the production of smoked fish

reached a record 25,205 tonnes, corresponding

to a 91 per cent increase over 2005 production.

However, unlike 2005, none of the smoked

fish produced was exported during the year.

In terms of production by the Indian Ocean

Tuna Caning Factory (IOT), now under

Lehman Brothers control, a decline in output

was recorded in 2006, but export volumes

were not affected as the company covered the

shortfall by reducing inventory level. In fact,

exports of canned tuna increased to R1,031

million, its highest level since 2004. Such

result confirmed the status of IOT as the

country’s main single exporting entity. Of

note is that in addition to canned tuna, IOT

also produces and exports other fish products

such as tuna loins and fish meal.

The volume of investment in the artisanal and

semi-industrial fisheries sector reportedly

declined as well during the year. This

sentiment is clearly reflected in the lending

activity of the Development Bank of

Seychelles which indicates a decrease of 34

per cent in loans to the sector.

In terms of contribution to GDP, the fisheries

sector is estimated to have generated R39

million8 in 2006. During the year, excluding

canned tuna, exports of fresh and frozen fish,

including dried sea cucumber and shark fins,

amounted to 443 metric tons for a total value

of R14 million. The demersal fisheries sector

is traditionally inward-looking, with most

catch targeted at meeting domestic demand;

this has limited the potential for export

growth. Interestingly, raising catch levels

to overcome the constraint is not an option, as

there is scientific consensus that exploitation

of demersal species has reached its peak, and

stock depletion could result if fishing efforts

are intensified. Although annual data for

___________________________ 8 Preliminary estimate from NSB.


- 60 -

catch levels are yet to be released, figures for

the period January-September point to a 16 per

cent decrease over the same period for 2005.

The drop in catch could in part be attributed to

unfavourable climatic conditions.

Looking towards 2007, the Seychelles

Fisheries Authority plans to initiate its five-

year development plan for the sector, which

sets measurable benchmarks to maintain Port

Victoria as the primary tuna fishing port of the

region, increase the quality and scope of the

facilities available for tuna fleet; and to

encourage investment in processing and

transformation facilities which add value to

the product. 2007 should also see the increase

of air and sea surveillance within the

Economic Exclusive Zones (EEZ) to eliminate

illegal fishing.

5.1.2 Aquaculture

The main activity under ‘aquaculture’ in

Seychelles is prawn farming and this is

undertaken by the state-owned entity, the

Seychelles Marketing Board. The harvest of

frozen prawns is primarily exported, but

surplus output is sold on the domestic market.

The amount of prawns harvested in 2006 was

638 tonnes, which represents a 14 per cent

decrease upon the 2005 figures. Contrary to

2005, which saw almost 100 per cent of

prawns harvested being sold to the overseas

market, only 42 per cent of the prawns

produced during 2006 were exported. The

decline in output is partly attributed to damage

to the Coetivy prawn farm infrastructure

caused by the December 2004 tsunami, for

which some repairs are still pending.

5.1.3 Agriculture

Based on available production indicators, a

general increase in agricultural output was

achieved in 2006 compared to the previous

year. In response to recent fiscal

incentives, there has been an expansion in the

production of certain livestock and traditional

crops. This is evident in GDP data, which

suggest an output increase of 2.1 per cent

increase over 2005 to R53 million.

With regards to livestock, the number of

chicken slaughtered rose by 8.9 per cent to

817,940 units; however, abattoir data show

that there was a decline of 32 per cent and 1.4

per cent in the number of cattle and pigs

slaughtered respectively.


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Table 5.5 Production and Import of Crops and Livestock products

2002 2003 2004 2005 2006

(tonnes) Local Production Crops 3,698 4,253 3,032 2,608 5,568 Livestock product 1,980 2,047 2,170 2,228 2,241 Imports Crops 6,646 6,901 4,032 5,721 5,674 Livestock products 1,705 1,596 1,175 1,208 2,152

Sources: Ministry of Environment and Natural Resources

During the year under review, the agricultural

sector benefited from various important

developments, including the establishment of a

geographic information system, further staff

training in the land management field and

closer collaboration with the European Union

in regard to the melon fruit fly eradication

programme.

Several projects are planned for 2007 within

this sector. These include but are not limited

to: increase of farm equipment to assist

farmers and agricultural department in more

efficient operations and service; renovation of

livestock buildings; and the establishment of a

poultry parent stock farm.

5.2 Industries

On the basis of the GDP estimate, industries

experienced a growth during 2006. However,

in many instances, the short supply of foreign

exchange caused serious domestic production

disruptions and loss of market to importers

with external credit arrangements or unofficial

access to hard currency. Still, some

enterprises achieved record production levels

in the wake of strong domestic demand.

Moreover, the high-level of FDI activity being

undertaken has meant that local suppliers,

contractors and sub-contractors associated

with tourism projects could negotiate for part-

payment in foreign currency and thus

overcome the prevailing external constraint

and achieve favourable output results. Indeed,

this came out strongly in an informal survey of

businesses involved directly or indirectly with

the construction industry.

5.2.1 Construction

The year 2006 observed a major strengthening

of construction activity, causing

unprecedented stresses on available productive

capacity down the supply chain. This was

mostly felt in the short-supply of blocks,

aggregates and crusher dust despite a major

increase in local production. By way of

illustration, a 52 per cent increase in the

production of blocks was recorded between


- 62 -

the 1st quarter and 4th quarter but in spite of

this, shortages occurred resulting in

construction delays and the postponement of

important tourism projects.

On a global perspective, 2006 was a strong

year for construction with strong activity

evident in many parts of the world, from Asia,

Middle East and even regional countries such

as Mauritius and South Africa. In

consequence, prices of building materials,

such as timber, cement, copper fittings and

steel reinforcement products, firmed

significantly and resulted in difficulties for

promoters to secure favourable contract terms.

Adding to the inflationary situation were

higher freight rates arising from energy price

developments, and rising labour costs as

demand for construction workers soared.

In 2006, Seychelles faced a serious shortage of

domestic capacity to undertake large

construction projects. Of the few large

reputable Class 1 contractors, all were

inundated with work, either in respect of

housing, civil projects or hotel development.

Consequently, construction contracts for

various key projects, including the Port

Launay Ephelia Resort & Spa could not be

concluded, leading to costly delays. In future,

promoters may be left with no choice but to

turn to regional contractors as the only

solution, a development that will certainly be

detrimental to the economy in terms of loss of

value-added.

As in previous years, most of the added labour

required in the construction sector was sourced

overseas, mostly India, Sri Lanka and China.

This dependency will worsen in 2007 as

various new projects break ground.

5.2.2 Manufacturing

On the basis of the production indicators,

some losses in manufacturing output were

recorded in 2006. However, the estimated

GDP for manufacturing shows a 2.0 per cent

increase in real terms on 2005 level. The

increase in tourism activity boosted the

manufacturing industry by creating further

demand for products such as soft drinks,

alcoholic beverages and necessities such as

toilet paper. The year under review, saw an

overall increase in the production of soft

drinks, mineral water, juice and alcohol. On

the other hand, output losses in the production

of sauces and dairy products and other import-

competing goods, were observed.

To stimulate the supply side, reduce

production costs and raise productivity, the

government announced some important tax

changes during the year targeted at

manufacturing outfits. This involved the

reduction of trades tax on raw materials,

selected capital equipment and machinery for

the manufactures sector to zero. Against the

prevailing exchange regime, trade

liberalisation and trades tax reductions on

various consumer goods, this initiative was

critical to the survival of the domestic

manufacturing sector. In its absence, the

sector would have experienced an

unsustainable erosion in relative

competitiveness.


- 63 -

According to a recent survey, fewer machinery

breakdowns were experienced amongst

manufacturers in 2006, allowing for less

shortage of locally produced goods in the

market. This was most evident in the

production of soft-drinks, beer & stout and

mineral water, all of which hit record levels of

9,225 Kltrs, 6,737 Kltrs and 6,027 Kltrs

respectively.

In the International Trade Zone, the Indian

Ocean Tuna Company has seen a minor

decline in the production of canned tuna,

decreasing by 384 tonnes or 0.9 per cent. This

reduction can be attributed more to fish

shortages than to increasing competition from

the Far Eastern countries (Philippines,

Thailand and Indonesia) which have

nevertheless gained 5.0 per cent in market

share during the year. However export levels

were maintained by drawing down on

inventory. The company is currently actively

diversifying in other tuna products, notably the

production of high-value tuna loins, in order to

secure its commercial existence and enhance

profitability.

Prospects for the manufacturing sector in 2007

are uncertain. Besides persisting foreign

exchange difficulties, several global events

may continue to impact negatively on local

companies; including in particular, higher raw

material prices caused by rising global

demand, poor harvests, pandemics such as

bird flu, continued increase in oil prices and

geopolitical conflicts.

5.3 Services

The tertiary sector, which covers all services,

remained, once again, the largest segment of

the economy. All services posted growth

during 2006 with the preliminary estimate for

GDP at current market prices showing ‘hotels

and restaurants’ experiencing the most at 15

per cent increase compared to 2005, and

‘private non-profit’ services experiencing the

least growth with 1.9 per cent increase.

5.3.1 Tourism

For the year 2006, the recovery in the tourism

sector gained added momentum. The

industry’s performance improved on the

previous year’s result both in terms of the

number of visitors to the country and the

associated foreign exchange earnings. Such a

development contributed positively to reported

expansion in economic output. Tourism

earnings increased by 19 per cent to R1.3

billion. Likewise, visitor arrivals grew by 9.3

per cent to stand at 140,627. This was the

second major consecutive annual increase in

the number of visitors to the country and more

than compensated for the ground lost in the

years 2003 and 2004.

Of the various reasons attributable to the

tourism upturn are, the new generation of

world-class upper segment properties,

improved access transport and more focussed

and effective marketing. The last in particular

has seen a quantum improvement as new

partners – airlines and hotel management

companies – introduced the islands in their

promotional campaigns and reservation

networks. This has enhanced the country’s


- 64 -

international visibility, not simply as a tourism

haven but as a potential investment

destination. In this connection, the extensive

marketing efforts of the promoters of Eden

Island residential project at Roche Caiman

have been especially noteworthy.

The growth in arrivals is set to continue as

Seychelles consolidate its position in the

traditional mature European markets and

intensifies its sales efforts in emerging

markets, from the CIS region to South-East

Asia, China in particular. Although in the

short-term, the EU will maintain its top

position as the largest geographical source of

visitors, there are promising prospects in the

emerging markets; however the realisation of

such promises would rely critically on the

country’s ability to deliver the essentials:

namely frequent and direct air access from

potential stations, development of appropriate

ground support logistics (language skills,

ethnic restaurant outlets, appropriate excursion

programmes) and the right accommodation

products (in terms of price, design and market

segment). Emphasis should however be

placed on the first factor as recent experience

in a competitor destination has shown that the

key to filling beds on the ground is to have

access to more seats in the air.

The above stated, Seychelles, like any tourism

destination, is inherently vulnerable to external

shocks, both direct and collateral. This has

been clearly demonstrated in both 2004 and

2006 with events as disparate as the Asian

tsunami and the Chikungunya fever epidemic.

Although, the country recovered rapidly from

the two events, thanks to the rapid responses

of government and the trade, the costs have

been significant, and the destination’s safe and

idyllic reputation somewhat damaged.

Table 5.6 Tourism

2002 2003 2004 2005 1 2006 2

Visitors arrivals 129,762 122,038 120,765 128,654 140,627 Average length of stay ( nights) 10.1 10.2 10.0 9.7 9.8

Tourism Foreign Exchange Earnings -R million 894 918 938 1,051 1,251 Average expenditure per diem - Rupees 668 739 775 841 908

Memorandum Hotel bed occupancy rate (%) 52 46 44 46 48 1 Hotel bed occupancy rate for 2005 has been revised 2 Hotel bed occupancy rate for 2006 is CBS estimate Sources: National Statistics Bureau (expect tourism foreign exchange earnings which are from Central Bank data)


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A breakdown of countries of origin of the arrivals for 2006 show that the country posted increases in arrivals from Europe (10 per cent), Africa (7.4 per cent) and Asia (12 per cent). However, declines were recorded from America (12 per cent) and Oceania (7.9 per cent). As expected, the number of visitors from Europe continued to account for the lion’s share of tourists to the Seychelles. A total of 114,009, or 81 per cent of total arrivals, came

from Europe in the year. This represented an annual growth rate of 10 per cent over last year, which likewise registered an increase, albeit lower at 5.1 per cent. At the top of the market were France (24 per cent), followed by Italy (20 per cent), Germany (17 per cent) and UK & Eire (14 per cent). Of note is that the number of visitors from UK & Eire maintained its declining trend to reach only 16,001 visitors for the year – the lowest level in seven years.

Chart 5.2: Visitor Arrivals; 2002 – 2006

110,000

115,000

120,000

125,000

130,000

135,000

140,000

145,000

2002 2003 2004 2005 2006

Years

Num

ber of

Arrival

s

-10.0-8.0

-6.0-4.0-2.0

0.02.0

4.06.08.0

10.012.0

perc

enta

ge

Visitor Arrivals percentage growth

Source: National Statistics Bureau The recent decline strongly correlates with the

suspension of flights from London by British

Airways in 2004. However prospects for 2007

are brighter and a recovery in that market is

confidently predicted. In 2006, the French

market contracted by a slight 0.9 per cent

whilst the Italian market expanded by a highly

significant 26 per cent to reach a new record.

Thanks to high frequency flights operated by

Emirates and Qatar Airways, over 4,700

arrivals were recorded from the Middle East.

Feedback from destination management

companies (DMCs) has confirmed that 2006

was a very good year for the tourism industry.

Global tourism remained on an upward trend,

buoyed up by growing international affluence,

a proliferation of budget airline seats, and

more competitive rooms on the ground.

According to the Seychelles Tourism Bureau

(STB) there has been a 4.0 per cent increase in

the global tourism market, with Africa

reporting the highest increase of 8.0 per cent in


- 66 -

terms of geographical region. Interestingly

enough, travel agents, tour operators and other

tourism bodies agree that so far the war in

Iraq, increased terrorism threats and rising fuel

prices have had little negative impact on the

global tourism industry. This might be so but

in the absence of these factors, the expansion

would possibly have been stronger still.

The national carrier, Air Seychelles, posted

encouraging results for 2006. Passenger loads

and revenue, notably over Europe and the

Republic of South Africa, confirmed that the

government’s ‘open sky’ policy has had no

detrimental impact on Air Seychelles. If

anything, loads over Europe have increased in

response to greater demand because the

Middle-Eastern carriers continued to face seat

bottlenecks over the Europe-Dubai/Doha

sector. Moreover, the new class of clients

holidaying in the archipelago prefer to fly

direct rather than face the inconvenience of a

hub-over flight. From this perspective, Air

Seychelles currently holds a monopoly

position over Europe and so long that this

remains so, the national airline has its

commercial future well secured.

In tandem with the increase in arrivals,

investment in the tourism sector remained

high. 2006 saw the launch of new properties,

as well as upgrades and extension of existing

products. These included: MAIA Resort at

Anse Louis; the new Hilton Seychelles

Northolme Hotel; and the Labriz Silhouette

Resort. The Maison des Palmes hotel, Coco

de Mer/Black Parrot Hotel and various self-

catering chalets underwent renovation,

extensions and redevelopments. As such, 170

beds entered the industry in 2006, increasing

the total national bed capacity to 5,954 beds.

With the considerable increase in arrivals, the

estimated average hotel bed occupancy rate for

the whole of 2006 improved to 48 per cent,

from 46 per cent in 2005. As for the average

length of stay, this rose slightly from 9.7 for

2005, to 9.8 nights for 2006.

In sum, 2006 ended with confidence that the

incoming year would see a new record level of

arrivals. In this connection, the target set by

the STB for visitor arrivals in 2007 is 147,000.

5.3.2 Telecommunications The telecommunications industry has seen major advancements during 2006 – the introduction of 3G and GPRS, the arrival of a new telecom provider and thus an expansion of telecom products available. To the benefit of the consumers, this resulted in increased competition leading to reduced rates and more competitive packages. International voice traffic has increased by 16 per cent between the first and fourth quarter of the year under review. In addition, local voice traffic increased by 68 per cent. However, whilst telecom service providers have seen a 23 per cent growth in mobile accounts, they have witnessed a decline in income of local and international voice traffic due to reduced rates. The year under review, as in 2005, was operationally a difficult year for telecommunications providers: the companies reported limited availability of foreign


- 67 -

exchange for maintenance and expansion requirements. Moreover, they are of the opinion that growth in the service is being hampered by the high telecommunications license fee of 10 per cent. On the upside however, the telecommunications industry has benefited from demand induced by increased economic activity as well as tax concessions on the importation of capital equipment.

Overall, telecommunication companies within

the Seychelles anticipate continued growth and

strong demand for 2007.

5.4 Labour Market

With the high level of investment and the

resulted pick-up in economic activity, labour

market conditions tightened significantly.

This introduced welcome dynamics in a

normally laid-back market environment.

During the year, competition from scarce

labour resources increased, as evidenced by an

increasing list of unfilled vacancies especially

in tourism, fisheries and construction. By

year’s end the labour force had grown to

41,132 persons as against an average of 39,516

for the year and an average of 34,542 in 2005.

5.4.1 Employment

2006 saw the revision of the ‘Employment Act

1995’ and ‘Conditions of Employment

Regulations 1991’. This was aimed at

updating employment regulations consistent

with the country’s economic transformation.

Several schemes of service were also revised,

and these covered: Graduate employment;

Teaching profession; Health profession; and

the Defence Forces. In addition, Social

Workers were also added to the list of

professions with specific schemes of service

during 2006.

Table 5.7

Employment and Unemployment Rate1 2002 2003 2004 2005 2006

(end - of - year) Total Employment 41,631 33,111 32,780 34,542 39,561

Private Sector 24,625 17,408 16,944 18,595 20,778Parastatals 5,179 5,459 5,545 5,931 6,010Government 11,827 10,244 10,293 10,015 12,773

Unemployment Rate (%) 4.0 3.1 3.5 3.6 2.6

1 Figures for 2003, 2004 and 2005 has been revised Source: Employment Division - Ministry of Social Affairs and Employment


- 68 -

In aggregate, the average number of

employees increased by 5,019 persons or 15

per cent in 2006 compared to 2005. The

increase was generally broad-based. As

expected the upward trend was visible in

tourism (up 299), trade (up 165),

manufacturing (up 141) and construction (up

1,034). However, significant increases were

seen in ‘Public Administration & Defence’ (up

915) and ‘Other Community, Social &

Personal Services’ (up 2,067). The latter

covers employment under the government’s

various special employment schemes.

In 2006, the private sector employed 53 per

cent of all registered employees, followed by

government with 32 per cent and the parastatal

sector with 15 per cent.

5.4.2 Unemployment

The year in review saw a decrease of

unemployment levels compared to 2005, with

the average total unemployment rate for 2006

at 2.6 per cent, 1.0 percentage point less than

in 2005. It is interesting to observe that for the

first two quarters of 2006, the number of

unemployed men was greater than that of

unemployed women; however this was

reversed in the second half of the year.

5.4.3 Earnings

Notwithstanding the increase in employment,

average monthly earnings for 2006 were

R3,817, representing a 1.8 per cent growth

compared to 2005. This was the net outcome

of a 2.8 per cent increase in average monthly

earnings of the private sector, an 11 per cent

increase in those of parastatals and a 4.7 per

cent decrease in those of the government

sector.

Table 5.8 Average Monthly Earnings

2002 2003 2004 20051 2006

(Rupee - current prices)

All Sectors 3,417 3,603 3,708 3,750 3,817 Private Sector 3,269 3,297 3,441 3,469 3,566 Parastatals 3,865 3,984 4,038 4,072 4,528 Government 3,593 3,918 3,971 4,081 3,891 1 Figures for 2005 has been revised Sources: National Statistics Bureau

The average earnings of employees in ‘Education’ within the private sector saw the largest percentage rise over 2005, with 7.7 per cent. This reflected the increased demand for qualified educators as enrolment in private schools continued to rise. This growth was

followed by a 5.5 per cent increase in earnings of parastatals ‘Transport, Storage and Communication’. During 2006, government implemented an upward salary review straddling the band


- 69 -

R100-R300 through its various updated schemes of service. In addition, eligibility for housing allowance was extended to certain classes of employees. Moreover, a reduction of Social Security Contributions for employers, from 35 to 30 per cent for the salary range of R2,001 to R10,000, may have acted as an incentive to increase salaries of private sector employees.

Earnings in 2007 are likely to increase as

labour market conditions tightened, especially

for skilled employees.

5.5 Prices

Average prices, as measured by the official

Consumer Price Index (CPI), turned negative

in 2006, albeit to the small extent of 0.4 per

cent.

Contrary to 2005, the component of imported

goods rose by 1.7 per cent whilst that of

domestically produced goods dropped by 1.5

per cent. The decrease in the local component

of the index was notwithstanding an 11.5 per

cent rise in fish prices.

So far, government policy has insulated the

economy from the effects of volatile and rising

energy prices. However, if world energy

prices continue their bullish trend, government

may be compelled to review its present policy

and allow price increases to filter through to

the domestic economy.

Chart 5.3: Price Movements; 2002 - 2006

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2002 2003 2004 2005 2006

Years

%

Average Inflation Rate End of Year Inflation


- 70 -

Table 5.9

Annual Average Inflation Rates 2002 2003 2004 2005 2006

Weights

2001 (percentage change)

All Items 1000 0.2 3.3 3.9 0.9 -0.4 Local 656 0.6 4.0 3.4 1.5 -1.5 Imported 344 -0.6 2.2 4.6 0.0 1.7 Fish 32 4.9 9.0 -7.1 5.4 11.5 Other Food Items 234 0.2 1.8 1.9 0.6 2.8 Local 119 2.0 3.4 2.8 3.9 -1.1 Imported 115 -1.2 0.6 1.1 -2.0 5.9 Non-Food Items 734 0.0 3.6 5.0 0.8 -1.8 Local 505 0.1 3.8 4.1 0.7 -2.4 Imported 229 -0.2 3.2 6.7 1.3 -0.8


Even though figures for 2006 suggest

deflationary pressures, inflationary tendencies

remain strongly evident in many sectors of the

economy where price controls are determined

on external c.i.f. prices (eg. Vehicle spare

parts, imported tea/coffee), or where they have

no legal jurisdiction (eg. locally-produced

goods, airline tickets).

Moreover, there is increasing evidence that

consumption patterns have changed since the

last Household Survey, and that coverage of

the current statistics need to be extended to

include new items of relevance. Accordingly,

the National Statistics Bureau is undertaking a

new Household Survey to capture the recent

shifts in households’ expenditure pattern.

SECTION SIX

Operations and Administration of the Central Bank9

6. Overview

The year 2006 marked the second full year

under which the Central Bank operated as an

independent institution under the provisions of

the Central Bank Act 2004. In many ways,

this was a highly successful year for the Bank,

marked by some important policy landmarks

and achievements.

During the year, the Central Bank was very

active in its mission of promoting sound

economic management through greater

dissemination of economic thinking,

enhancing its own internal capacity in

anticipation of the challenges of a more

liberalised economic environment,

implementing new policy rules and

participating in events in a supporting role

with government and private sector.

Consistent with its forward looking approach

to management, the Bank also launched its

strategic plan which was undoubtedly one of

the key elements of its 2006 work programme.

Also important in the year was the coming into

force of the new Anti-Money Laundering Act,

2006, replacing the previous Anti-Money

Laundering Act 1996. As stipulated under the

new Act a specialised unit was created – the

Financial Intelligence Unit (FIU). The FIU is

the focal point for receiving, analysing and

disseminating reports, of transactions or

attempted transactions related to the offence of

money laundering or of financing of terrorism,

to the appropriate law enforcement agencies

and supervisory agencies.

As the authority responsible for ensuring

compliance with the requirements of the Act,

the FIU is authorised to conduct on-site

examinations of reporting entities and transmit

any information derived from such

examinations to the appropriate domestic law

enforcement agency. The FIU may with the

approval of the Attorney General, enter into an

agreement or arrangement in writing with

foreign institutions or agencies with similar

powers to those of the FIU for the exchange of

information. The FIU has so far not entered

into any such agreements. Already, the staff

of the Unit has received training from various

international bodies such as the IMF.

______________________________________

9 All the data presented in this section is actual.

- 71 -

Annual Report 2006 Operations and Administration of the Central Bank

- 72 -

In its efforts to build capacity in technical

areas, the Central Bank received a number of

visits from international institutions, the first

one being in the second quarter of the year. At

the request of the Central Bank, a Technical

Assistance (TA) working visit of the IMF’s

Monetary and Financial Systems Department

was organised. The IMF delegation focussed

on providing assistance on issues related to

strengthening the capacity of the institution to

handle new challenges in its core areas in the

context of future broader policy reforms. The

mission’s work concentrated on four main

areas.

Macro-prudential framework – the

mission advised on how to refine the

analysis of the financial health of

individual banks and the banking

system as a whole;

Banking supervision – the mission

reviewed existing supervision

practices and advised on new tools

and procedures for strengthening on-

site examination;

Legal, institutional and supervisory

frameworks of the AML/CFT regime

– the mission assisted with the legal

and institutional frameworks of the

new regime for anti-money laundering

and combating the financial of

terrorism, including recommendation

for making the Financial Intelligence

Unit (FIU) operational and the related

reporting obligations; improving the

AML/CFT legislation; and the

implementation of the AML/CFT

legislation; and

TA needs assessment – the mission

identified, in discussions with the

Central Bank management, the

specific TA needs consistent with the

policy reform benchmarks.

Later in the year, the Bank also received a

team of nine evaluators from the Eastern and

Southern Africa Anti-Money Laundering

Group (ESAAMLG) which undertook a

Mutual Evaluation of Seychelles after the

jurisdiction had volunteered to undergo such

an exercise. Seychelles has been a member of

ESAAMLG since its establishment in August

1999 and one of the conditions of membership

is that each member country should undergo

such an evaluation.

During the evaluation, the team held forty

meetings with the various law enforcement

agencies, supervisory agencies and reporting

entities which included the Financial

Intelligence Unit (FIU), the Central Bank, the

Attorney General’s Office, Customs, Tax, and

the Police to name a few. At the end of the

evaluation, an exit meeting was held with the

parties concerned and a draft copy of the

report to be made available to the authorities

by the end of February for their comments and

clarifications which will then be incorporated

in the second draft report. As follow up, it is

expected that the Mutual Evaluation Team will

make a second trip to Seychelles in May 2007

to discuss the second draft with the authorities.


- 73 -

After both parties have agreed to the contents

of the final draft, it will be presented at the

ESAAMLG Council of Minister’s Meeting

which will be held in August 2007 in

Botswana where representatives from the

Seychelles will be present to defend the

findings contained in the report.

Various other missions provided technical

assistance as well as training for the staff of

the FIU as they began implementing the new

law.

In other activities during the year, the Bank

organised its Anniversary Lecture, this year

targeting the tourism industry. Dr Michael

Fabricius, consultant to the World Tourism

Organisation was the guest speaker. The Bank

also completed and launched a Booklet

entitled the “History of Paper Currency in the

Seychelles”. This was a project initiated in

2005 and in 2006 the decision was taken to

compile historical data into a small colourful

booklet, giving details on paper currencies

used in Seychelles as well as a description of

the flora and fauna appearing on the notes.

The project saw the participation of staff from

each division as well as renowned individuals,

namely; Mr. Kantilal Jivan Shah, Mr. Julien

Durup, Mr. Adrian Skerrett, Mrs. Jeanne

Mortimer and Mrs. Stella Doway.

The Bank also participated together with the

Ministry of Finance in the country’s first

country sovereign rating exercise with the

rating agency Standard and Poor’s in August –

September. This was followed by the

successful launch of a bond issue on the

international market.

As is customary every year, the Bank hosted

the Article IV Mission towards the end of the

year for the annual country economic

assessment.

6.1 Administration and Human

Resources

During this year 2006, the Administration &

Human Resources Division continued to

provide administrative guidance and support to

the Bank.

In March 2006, the Board endorsed a 5-year

Strategic Plan which sets out the mission, vision

and objectives of the Central Bank. Following

from this, management carried out an analysis

of the Bank’s priorities, capabilities and

business processes of the different divisions and

this resulted in the reorganisation of some

divisions in line with the strategic plan.

A new performance management scheme was

established in May 2006, which provides a

framework for the assessment of staff against

preset standards or specific competencies. The

process helps to identify areas of weaknesses so

that appropriate training and development can

be provided and addressed.

The Executive Development Programme was

successfully completed in July 2006. The

programme consisted of three phases covering

Management Development Centre,


- 74 -

Management Modules including Negotiating

Skills & Specialisation Units. The participants

were able to meet guest speakers in specialised

areas of Banking and Finance. As part of the

assessment process, the participants were

requested to submit a project on any of the areas

covered in the programme, after which a

certificate was awarded at the end of the

programme.

Over the course of the year, the Bank provided

training to the staff both locally and

internationally. In addition, the staff benefited

from the fully funded courses offered in areas

such as Anti Money Laundering, Banking and

Finance and Statistics.

6.2 Banking Services Division

The role of the Division remained as follows:

to act as banker to the government, financial

institutions and other specialised agencies; to

monitor the reserves of the country under the

Bank’s custodian; and to be responsible for the

issue of currency. To perform these functions

more effectively, the Division upgraded its

processes by computerising most of its

remaining functions, most notably its front

office operations.

6.2.1 Currency issues

Total currency in circulation increased

substantially in 2006, with a rise of 21 per

cent, representing a growth of 11.4 percentage

points to amount to R417 million (Chart 6.1).

Most of this increase was in notes as coins

remained relatively stable compared to last

year. The surge in currency in circulation can

be said to be attributable to the further

recovery in the economy resulting in more

transactions being effected during the year.

The total value of notes amounted to R394

million, with a share of 94 per cent of the total

amount, with the remaining balance in coins.

Chart 6.1: Notes and coins in circulation; 2001 - 2006

0

50

100

150

200

250

300

350

400

450

2001 2002 2003 2004 2005 2006

Years

R m

illio

n

-5

0

5

10

15

20

25

Perc

enta

ge

Notes Coins % Change in Total Currency in Circulation


- 75 -

Table 6.1Circulation of Notes and Coins;1 2001-2006

2001 2002 2003 2004 2005 2006

(R million)Total 299.2 321.4 326.1 314.6 344.8 417.2 Notes 280.9 301.7 305.7 293.5 322.3 393.8 Coins 18.3 19.7 20.4 21.1 22.5 23.4

(per cent)Share Notes 93.9 93.9 93.7 93.3 93.5 94.4 Coins 6.1 6.1 6.3 6.7 6.5 5.6 1 End-of-period data

6.2.2 Numismatic coins

In 2006, there was a further increase in the

value of sale of numismatic coins. From

R45,999 last year, an amount worth R121,524

was recorded.

6.2.3 Annual Balances

For 2006, the Central Bank recorded a net

operating profit of R63 million, an increase of

R33 million or 113 per cent relative to 2005.

This significant growth was related to a

substantial rise in income both in net interest

and non-interest incomes, by R21 million and

R13 million respectively. The improvement in

net interest income was related to the savings

made on the repayment of the Tokyo-

Mitsubishi external loan in early October as

well as income earned on the holdings of

government Treasury bond, whilst at the same

time keeping operating costs at about the same

level as last year.

6.2.4 External Reserves

At the end of the year 2006, gross external

reserves amounted to R653 million, a rise of

R345 million or 112 per cent. This growth

was attributed to two factors; a continued

increase in FDI flows and more importantly,

the left-over balance from the US$200 million

sovereign bond issue. The latter was

successfully launched on the international

market in late September and formed part of

the government’s strategy to gradually

liberalise the foreign exchange control regime

from mid-October onwards.

6.2.5 Accounts of commercial banks

The dynamics of bank deposits at the Central

Bank changed somewhat in 2006, with a rise

in their deposit portfolio with the Central

Bank. This was purely policy-induced, arising

out of an increase in the statutory minimum

reserves requirement from 2.50 per cent to 5.0

per cent starting from August 1. The increase

in this ratio constituted one component of a

package of monetary measures targeted at

reining in liquidity growth.

The Clearing House remained an active

function within the ambit of the Division. The


- 76 -

Bank observed a further increase in the

number of items cleared from 587,552 to

596,638. In terms of value, there was a rising

trend compared to last year, reaching R2.3

billion. With greater economic activity and

some evidence of growing re-acceptance of

cheque payments in the economy, it is

expected that the transactions in cheques will

increase in the near future.

Table 6.2Bankers’ Clearing House Activities; 2001-2006

2001 2002 2003 2004 2005 2006

(Total) Number of items cleared 609,284 606,193 598,907 586,068 587,552 596,638Amount (R’000) 1,676,372 1,662,604 2,007,938 2,386,481 2,192,623 2,339,696

(Daily average) Number of items cleared 2,447 2,454 2,405 2,326 2,341 2,416Amount (R’000) 6,732 6,731 8,064 9,470 8,736 9,472

6.3 Bank Supervision Division

In 2006 the Bank Supervision Division

continued with its supervision of financial

bodies aimed at promoting a sound financial

structure. In January, a second Bureau de

Change was licensed under the purview of the

Financial Institutions Act 2004, thus bringing

the total number of supervised institutions to

9; comprising of 6 commercial banks (of

which 1 conducts both domestic and offshore

banking business), 2 bureau de change and 1

microfinance institution, namely the

Seychelles Credit Union.

The year also saw the change from issuing

yearly to indefinite licences to financial

institutions subject to an annual licence, in line

with the Financial Institutions Act 2004.

On May 2, the Bank of Mauritius and Central

Bank of Seychelles entered into a

memorandum of understanding which sets

forth the framework for mutual assistance and

to facilitate the exchange of information

between the authorities on issues relating to

banking supervision.

During the period under review, the division

intensified its efforts to fight money

laundering and financing of terrorism, which

are global problems that not only affect safety,

but also compromise the stability,

transparency and efficiency of financial

systems, thus undermining economic stability.

Thus, following the enactment of the Anti

money Laundering legislation in May 2006, a

Financial Intelligence Unit was created and the


- 77 -

senior bank supervision officer in the division

was transferred on promotion to be Director of

the new unit.

During 2006, full on-site examination was

carried out on 2 banks including the one with

the offshore unit, 1 bureau de change and the

microfinance institution. An on-site

examination involves the assessment and

analysis of books and records in order to

determine among others, capital adequacy,

asset quality, profitability and liquidity and to

evaluate management and internal control.

The emphasis on strengthening the department

through staff training was sustained in 2006.

This is in line with the conscious effort to

continuously enhance the capacity of the

department to cope with a dynamic financial

environment and keep abreast with new

techniques in bank supervision. Furthermore,

the division continued to subscribe to FSI

connect; an online information and learning

tool on supervisory topics developed by the

Financial Stability Institute of the Bank of

International Settlements in Switzerland. The

site covers wide areas ongoing updates

including risk management and Basel II.

6.3.1 Minimum required capital and

Investment of capital funds

The minimum required capital is applicable to

all financial institutions whilst that relating to

the investment of capital funds is specific to

banks. These requirements which remained

unchanged in 2006 were adhered to by the

relevant institutions.

6.3.2 Minimum reserve requirement and

local asset ratio

As part of the revision of the monetary policy

tools as explained in Section Two above, the

minimum reserve requirements were increased

from 2.50 per cent to 5.0 per cent whilst the

local asset ratio was raised from 50 per cent to

65 per cent. Both changes took place in

August with a transition period of two months

for banks to meet the new requirements

(Charts 6.2 and 6.3). The actual average

outcome for both these requirements was 6.4

per cent on minimum reserves and 75 per cent

on local asset ratio and for the whole year all

banks adhered to the prescribed limit. It must

be noted that prior to the new prescriptions,

the last changes to these requirements were in

November 2001 for the local asset ratio and

September 1998 for minimum reserves.


- 78 -

Chart 6.2: Minimum Reserve Requirement; 2001 – 2006

0

1

2

3

4

5

6

7

2001 2002 2003 2004 2005 2006

Years

Perc

enta

ge

Statutory Limit Outcome

Chart 6.3: Minimum Local Asset Ratio (2001 -2006)

0

10

20

30

40

50

60

70

80

90

100

2001 2002 2003 2004 2005 2006

Years

Perc

enta

ge

Statutory Limit Outcome


- 79 -

The practice of remunerating banks on the

excess of their statutory requirement also

started in October. To this end, such balances

earned 3.25 per cent interest being the

minimum deposit rate plus a margin of 75

basis points.

Moreover, the scope of eligible local assets

was extended to include the balance

outstanding from the government home

ownership finance scheme and any excess

cash balances with the Central Bank over and

above the minimum reserve requirements.

Table 6.3Minimum Reserves and Local Assets Ratio;1 2001-2006

2001 2002 2003 2004 2005 2006

(per cent) Minimum reserve requirement Statutory limit 2.50 2.50 2.50 2.50 2.50 3.16 Outcome 4.61 5.70 5.58 5.60 5.47 6.38 Minimum local assets Statutory limit 84.28 50.00 50.00 50.00 50.00 53.96 Outcome 95.03 81.55 79.46 70.12 70.12 74.851 Yearly average of weekly data. Note: An increase in the local asset ratio from 50 per cent to 65 per cent and the minimum reserve requirement from 2.5 per cent to 5.0 per cent effective August 01, 2006. Banks were given a transition period of two months for adjustment.

6.4 Research and Information

Management Division

During the year, the Division concentrated its

efforts on further upgrading its statistical

standards in view that the country was aspiring

to the IMF’s statistical framework of the

General Data Dissemination Standard

(GDDS). In close collaboration with the

Ministry of Finance and the National Bureau

of Statistics, the designated country

coordinator, work on the project was stepped

up after the Annual IMF/World Bank meetings

in Singapore which involved putting together

the metadata for Seychelles. In mid-

December, Seychelles received notification

that it had been confirmed participation in the

framework.

The Division also worked closely alongside

the Bank Supervision Division to prepare the

new monetary policy strategy for the Board’s

consideration for which the final set of

measures were implemented in August. A

series of research papers were also worked on

during the year for which some were published

in the Bank’s Quarterly Reviews.

6.5 Foreign Earnings Division

The Division continued to use a non-

confrontational approach in its administration


- 80 -

of exchange control in the economic system.

However, its work modalities changed

somewhat towards the end of the year as the

government announced the start of the process

for the complete removal of exchange

controls.

In this first phase of exchange control

liberalisation, the controls on foreign exchange

allocation were replaced by guidelines and

responsibility for foreign exchange allocation

shifted from the division to the commercial

banks. In addition, the foreign exchange

surrender requirement was revised, entailing

an effective reduction from 45 per cent of

eligible inflows to 15 per cent of gross

inflows. At the same time, the pipeline

payment deposits were technically frozen

against the commitment that they will be paid

out over the next six months subject to valid

import documentations.

From October onwards, demand for – and

allocation of - foreign exchange is now

entertained by the banks at their discretion. So

far, the new regime appears to be functioning

well, supported in an important way, by the

build-up of official external reserves. The

scope for further liberalisation will clearly

increase as stronger FDI flows strengthen the

external position and appropriate measures are

taken to enhance the relative competitiveness

of the currency.

6.6 Public Debt Division

The Division maintained its position as being

the registrar of government debt, a

responsibility it discharges on behalf of the

Ministry of Finance. From the second half of

the year, the Central Bank reinstated the

secondary market for Treasury bills within the

framework of the new monetary policy rules.

Accordingly, the administrative structure to

deliver the service was put in place;

disappointingly however, volume-wise,

limited secondary market transactions were

reported during the latter part of the year. It is

however anticipated that as the financial

market develops, liquidity management

through sales/purchases of bills on the

secondary market will grow in importance.

6.6.1 Stock of Domestic Debt

The stock of domestic debt continued to

decline in 2006, reflecting the performance of

the government budget which came in as a

surplus of 4.1 per cent of GDP. The

commitment of government now is to use its

annual fiscal surplus to systematically reduce

its debt over a reasonable timeframe. At the

end of 2006, the total domestic debt

outstanding amounted to R4.6 billion,

representing a fall of R325 million or 6.7 per

cent relative to 2005. As a deliberate act of

policy, the reduction in debt was achieved

more on the short-term end of the debt

instrument spectrum rather than on the longer

term side (Chart 6.4).


- 81 -

Chart 6.4: Stock of Domestic Debt – 2006

4,300

4,400

4,500

4,600

4,700

4,800

4,900

5,000

5,100

5,200

Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06

Months

R m

illio

n

6.6.2 Treasury Bills

The treasury bill market remained more or less

stable in 2006 with eight tenders for 91-day

maturity with one auction for 365-day. As has

been the case in the past, commercial banks

were the main subscribers with only a few

private companies and individuals coming

forth.

In terms of new developments, the important

event this year was the introduction of

secondary market operations for such

instruments. It is important to observe the

trend in the yield outcome of the various

auctions especially that of the 91-day which is

depicted below. With the introduction of the

new monetary rules, the reaction in the

Treasury bill auction market was of an upward

movement in the yield to 3.3 per cent as of

August, moving from an average of 2.8 per

cent in the previous months. At the end of the

year, the yield had stabilised at 3.8 per cent

(Chart 6.5).

Chart 6.5: Average tender rate of 91-day bill – 2006

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06

Months

Perc

enta

ge


- 82 -

Consequential of the rise in the average

interest yield, the amount of discounts paid for

the year increased from R41 million a year

earlier to R45 million. To reduce this cost, the

government restructured its financial exposure

and opted to cut back the aggregate limit on

the amount of bills at the auctions. By the end

of the year, the amount of outstanding bills

stood at R1,186 million at cost value for which

the 91-day maturity accounted for the bulk of

the stock. At this level, the total represented a

decline of R151 million relative to last year.

An important factor that enabled the

government to reduce its short-term debt was

the rupee proceeds arising from the sale of the

international bond issue to the Central Bank in

late September.

Chart 6.6: Total Stock of Outstanding Treasury Bills; 2001 – 2006

0

500

1,000

1,500

2,000

2,500

2001 2002 2003 2004 2005 2006

Years

R m

illio

n

-60

-40

-20

0

20

40

60

Perc

enta

ge

Total T-Bills % Change in Total Stock of Outstanding T-Bills


- 83 -

Table 6.4

Treasury Bills;1 2001-20061/2/3

2001 2002 2003 2004 2005 2006

(R million)Stock outstanding 1/3 1941.3 1941.0 1023.9 1564.7 1336.7 1185.8 91-day bills (new tap issue) - - 796.0 - - - 91-day bills (tender issue) - - - 1369.1 1144.88 1089.7 91-day bills (tap issue) 691.4 691.5 - - - - 182-day bills (tap issue) 634.1 633.5 81.7 - - - 365-day bills (tap issue) 615.8 616.0 146.2 - - - 365-day bills (tender issue) - - - 192.6 191.9 96.1 Stock outstanding 2/3 1998.7 1998.4 1038.1 1577.9 1353.2 1200.0 91-day bills (new tap issue) - - 800.0 - - - 91-day bills (tender issue) - - - 1377.9 1153.2 1100.0 91-day bills (tap issue) 699.2 699.2 - - - - 182-day bills (tap issue) 649.9 649.3 83.8 - - - 365-day bills (tap issue) 649.6 649.9 154.3 - - - 365-day bills (tender issue) - - - 200.0 200.0 100.0 Held by 3/ Central Bank 1.0 1.2 0.8 0.0 0.0 0.0 Commercial banks 1815.6 1828.6 1018.2 1523.3 1315.7 1143.0 Other financial institutions 13.5 9.2 2.0 0.0 0.0 0.0 Others 168.6 159.4 17.1 54.6 37.5 57.0 Non-residents - - - - - 1 At cost value. 2 At face value. 3 End-of-period data. Note: With effect from January 2004 and December 2004, there were re-introductions of tender for 91-day and 365-day bills respectively.

6.6.3 Treasury Bonds

As a departure from previous policy,

government assumed a more structured

approach to debt management in 2006 with the

clear objective of promoting monetary stability

by extending the maturity profile of public

debt. Within this framework, two new

medium term instruments were launched in the

year. These were the 6.0 per cent and 10 per

cent 3-year treasury bonds, the first targeted at

the financial institutions and the other to

private individuals as part of the drive to

encourage more savings at the household

level. The issue of the new bonds also

coincided with the redemption of the 4.0 per

cent, 3-year bond issued in 2003.

With the sales of the new bonds surpassing the

redemption of the old issue, the stock of

treasury bonds outstanding at the end of the

year increased from R1,766 million to R2,078

million.


- 84 -

Chart 6.7: Total Stock of Outstanding Treasury Bonds; 2001 – 2006

0

500

1,000

1,500

2,000

2,500

2001 2002 2003 2004 2005 2006

Years

R m

illio

n

-30

-20

-10

0

10

20

30

40

50

60

70

Perc

enta

ge

Total Stock Outstanding % Change Total Stock Outstanding

Table 6.5Treasury Bonds;1 2001-2006

2001 2002 2003 2004 2005 2006Date Issued

R millionStock outstanding 1229.8 1041.6 1696.5 1674.1 1765.6 2077.92.25%, 1-yr - - 200.0 - - -4.0%, 3-yr - - 405.0 780.0 776.7 410.45.0%, 5-yr - - 301.2 500.0 490.9 490.97.5%, 7-yr - - 200.0 200.0 183.0 183.08.0%, 10-yr - - 100.0 194.1 291.5 293.68.25%, Esmeralda II - - - - 23.5 150.06.0%, 3-yr - - - - - 500.010.0%, 3-yr - - - - - 50.07.5%, 3-yr 450.0 450.0 450.0 - - -6.75%, 2-yr 300.0 162.1 - - - -7.5%, 3-yr 300.0 300.0 - - - -7.5%, 3-yr 24.3 - - - - -8.0%, 5-yr 50.0 50.0 40.3 - - -11.0%, 3-yr - - - - - -11.5%, 5-yr 105.5 79.5 - - - -Held by Central Bank - - - - - - Commercial banks 940.5 794.3 1166.8 1079.4 1094.5 1341.8 Other financial institutions 1.5 1.0 3.5 8.6 94.7 402.8 Others 287.8 246.3 526.2 586.1 576.4 333.31 End-of-period data. Note: With effect from July 2003 there were new issues of bonds: 2.25%,1-yr; 4%, 3-yr;5%, 5-yr; 7%, 7-yr; and 8%, 10-yr. 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.


- 85 -

6.6.4 Government Stocks

As was the case last year, no new issue of

government stocks was issued on the market,

leaving outstanding amount unchanged at

R150 million. The government only effected

payment of half yearly interest to the tune of

R12 million to its subscribers, most of which

are commercial banks.

Table 6.6Government Stocks; 1 2001-2006

2001 2002 2003 2004 2005 2006

(R million) Stock outstanding 139.7 139.7 140.0 150.0 150.0 150.08.00%, 2009 49.7 49.7 50.0 50.0 50.0 50.08.50%, 2005/07 30.0 30 30.0 30.0 30.0 30.08.00%, 2004 60.0 60 60.0 - - -8.00%, 2014 - - - 70.0 70.0 70.0

Held by Central Bank - - - - - - Commercial banks 124.2 139.7 140.0 147.1 147.1 147.1 Other financial institutions - - - - - - Others - - - 2.9 2.9 2.9

1 End-of-period data. Source: Central Bank of Seychelles

6.7 Board of Directors

The Board of Directors met on eight occasions

during the year 2006.

6.7.1 Appreciation

The board wishes to record its appreciation to

the staff, and recognises the hard work,

loyalty, diligence and enthusiasm

demonstrated by each employee in a most

challenging environment. This has reflected

positively on the professionalism and integrity

of the institution.

90


Balance Sheet as at December 31, 2006

Notes 2006 2005 R R EQUITY AND LIABILITIES Capital and reserves Capital 4 1,000,000 1,000,000 Reserves 5 88,043,028 82,568,031

89,043,028

83,568,031 Liabilities Currency in circulation 6 417,212,726 344,903,726 Deposits 7 1,256,316,780 830,560,388 Allocation of special drawing rights 3,569,467 3,220,228 Payable to Government consolidated Fund

3 & 8 79,643,363

41,168,687

Other liabilities 9 - 394,378,162

1,756,742,336

1,614,231,192 Total equity and liabilities

1,845,785,364

1,697,799,223

ASSETS Cash and Cash Equivalent 10 653,312,279 308,708,332 Seychelles Government securities 11 1,111,060,016 1,340,800,000Advances and other accounts 12 61,601,544 28,745,031 Property, plant and equipment 13 19,811,525 19,545,860 Total assets 1,845,785,364 1,697,799,223 These financial statements were approved on 23 March 2007 by the undersigned: P.A. Stravens F. Chang Leng Head of Division Banking Services Governor

The notes on pages 94 to 103 form an integral part of these financial statements. Auditors’ report on pages 88 and 89.

91


Income Statement For the Year ended December 31, 2006

Notes 2006 2005 R R Interest income 14 87,702,989 74,811,200

Interest expense 15 (25,851,724) (34,427,378)

Net interest income 61,851,265 40,383,822

Other income 16 19,270,751 6,328,814 Operating expenses 17 (18,489,410) (17,297,981) Profit Before Taxation 62,632,606 29,414,655 Taxation 18 - - Net Profit for the Year 62,632,606 29,414,655 The notes on pages 94 to 103 form an integral part of these financial statements. Auditors’ report on pages 88 and 89.

92


Statement of Changes In Equity Year ended December 31, 2006

Notes Capital General

Reserve Revaluation

Reserve Net Profit Total

R R R R R At January 1, 2006 1,000,000 20,000,000 62,568,031 - 83,568,031 Exchange differences on translation of assets and liabilities

-

-

22,485,754

-

22,485,754

Net Profit for the Year - - - 62,632,606 62,632,606 Transfer to Government Consolidated Fund

8

-

-

(17,010,757)

(62,632,606)

(79,643,363)

At December 31, 2006 1,000,000 20,000,000 68,043,028 - 89,043,028 At January 1, 2005 1,000,000 20,000,000 31,650,560 - 52,650,560 Exchange differences on translation of assets and liabilities

-

-

42,671,503

-

42,671,503

Net Profit for the Year - - - 29,414,655 29,414,655 Transfer to Government Consolidated Fund

8

-

-

(11,754,032)

(29,414,655)

(41,168,687)

At December 31, 2005 1,000,000 20,000,000 62,568,031 - 83,568,031


93


Cash Flow Statement Year Ended December 31, 2006

Notes 2006 2005 R R Operating activities Cash generated from operations 19 551,701,840 220,844,305 Investing activities Acquisition of property, plant and equipment 13 (1,493,028) (493,129) Proceeds from disposal of property, plant and equipment

202,000

121,318

Proceeds from redemption of Seychelles Government Securities

229,739,984

-

Investment in Seychelles Government Securities

-

28,034

Net cash generated from/ (used) in investing activities

228,448,956

(343,777)

Financing activities Repayment of borrowings from banks (394,378,162) (99,643,353)Paid to Government Consolidated Fund (41,168,687) -Net cash used in financing activities (435,546,849) (99,643,353) Increase in cash and cash equivalents 344,603,947 120,857,175 Opening cash and cash equivalents 308,708,332 187,851,157 Closing cash and cash equivalents 10 653,312,279 308,708,332


94


Notes to the Financial Statements – Year Ended December 31, 2006 1. ACCOUNTING POLICIES

The principal accounting policies adopted by the Central Bank are as follows: (a) Form of presentation

The financial statements have been prepared in accordance with the legislation governing the Bank’s operations - the Central Bank of Seychelles Act, 2004. All section references quoted refer to the latter Act.

(b) Basis of preparation

The financial statements have been prepared in accordance with Generally Accepted Accounting Practices. The financial statements have been prepared under the historical cost convention modified where appropriate to include the valuation of certain assets. Where necessary, comparative figures have been amended to conform with change in presentation in the current year.

(c) Foreign securities

Foreign securities other than treasury bills are stated at market value.

(d) Seychelles Government securities

Seychelles Government securities other than treasury bills are stated on the following bases:

- Treasury Bonds – at nominal value - Other securities – at cost

(e) Treasury bills

Treasury bills, both foreign and local, are stated at cost plus accrued discount.

(f) Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is calculated to write off the cost of property, plant and equipment on a straight line basis over the estimated useful lives of the assets concerned. On this basis the rates of depreciation used are: Building - 1½% p.a. Office Furniture and Fittings - 10% p.a. Computer and Office Equipment - 25% p.a. Motor Vehicles - 20% p.a.

95


Notes to the Financial Statements – Year Ended December 31, 2006 1. ACCOUNTING POLICIES (CONT’D)

(g) Income recognition

Interest income and similar income are recognised on an accruals basis. Commission on foreign exchange dealings are recognised based on the dates of transactions.

(h) Foreign currencies Transactions denominated in foreign currencies are translated into rupees and recorded at the rates of exchange ruling at the date of the transaction. Balances in foreign currencies are translated into rupees at the exchange rates ruling on the balance sheet date. Net exchange differences arising on translation at the balance sheet date are dealt within the Revaluation Reserve Account as per section 28 of the Central Bank of Seychelles Act 2004. The exchange rate of the Seychelles rupee during the year and at year end is determined, in accordance with Section 26(1), by the Board of Directors of the Central Bank, and having due regards to the obligations that Seychelles has assumed in accordance with the provisions of any international monetary agreement to which it is a party or to which it has adhered. The following rates of exchange were applied at December 31, 2006. S.D.R. 1 = R 8.5174 US$ 1 = R 5.7954 £ 1 = R 11.3509 J.P Yen 1 = R 0.0487 CHF 1 = R 4.7523 EURO 1 = R 7.6482 ZAR 1 = R 0.8235

(i) Gratuity and statutory compensation The net present value of gratuity and statutory compensation payable is calculated and provided for. The obligations arising under this item is not funded. 2. FINANCIAL RISK MANAGEMENT The Bank’s activities expose it to a variety of financial risks: market risk, credit risk, liquidity risk and operational risk. A description of the significant risk factors is given below together with the risk management policies applicable. (a) Market risk Market risk arises from open positions in the interest rate and foreign currency products, all of which are exposed to general and specific market movements. The Bank’s exposure to market

96


Notes to the Financial Statements – Year Ended December 31, 2006 risk is the result of both trading and asset/liability management activities. The market risk management policies of the Bank are determined by the Board of directors. Currency risk The Bank operates internationally and takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows primarily with respect to the United States dollar, Euro and Great Britain Pound. The Bank does not hedge against risk of fluctuations in exchange rates. Exchange gains and losses arising from the revaluation of assets and liabilities denominated in foreign currencies are accounted in a revaluation reserve account in accordance with Section 28 of the Central Bank of Seychelles Act 2004. (b) Credit risk The Bank is not exposed to significant credit risk which is the risk that its counterparties will be unable to fulfil their contractual obligations. The Bank is, however, exposed to a geographical concentration of interest bearing assets denominated in foreign currency in the United States and Europe. (c) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. The Bank aims at maintaining flexibility in funding by keeping committed credit lines available.

(d) Operational risk management

Operational risk is the risk of financial loss and business instability arising from failures in internal controls, operational processes or other supporting systems. It is understood that such risks cannot be entirely eliminated and the cost of controls in minimising these risks may outweigh the potential benefits. As part of the implementation of the Bank’s risk strategy, independent checks on risk issues are undertaken by the internal audit unit.

3. TRANSTER TO GOVERNMENT CONSOLIDATED FUND

Transfer to the Consolidated Fund has been carried out in accordance with section 16(3), and section 28 (4) of the CBS Act 2004.

4. SHARE CAPITAL 2006 2005 R R Authorised 10,000,000 10,000,000 Paid up 1,000,000 1,000,000

97


Notes to the Financial Statements – Year Ended December 31, 2006

5. RESERVES 2006 2005 R R

General reserve (Note (a)) 20,000,000 20,000,000 Revaluation reserve (Note (b)) 68,043,028 62,568,031

88,043,028 82,568,031 (a) General Reserve

The general reserve has been established and maintained in accordance with section 16(1) of the CBS Act 2004.

(b) Revaluation Reserve Account

The revaluation reserve account has been maintained during the year in accordance with section 28 of the CBS Act 2004. Gains and losses arising from changes in the valuation of the Bank’s assets and liabilities denominated in foreign currencies and other units of accounts as a result of alterations of parity of the Seychelles rupee have been credited or charged to this account in accordance with section 28 of the CBS Act 2004.

6. CURRENCY IN CIRCULATION

Coins sold for numismatic purposes, with a face value of approximately R16,146,478 at December 31, 2006 (2005 – R16,142,952), have been excluded from currency in circulation since it is unlikely that such coins will be presented at any time for redemption. 2006 2005 R R Currency in circulation 417,212,726 344,903,726

7. DEPOSITS

2006 2005 R R Government and Government related bodies 203,765,310 62,408,120Banks 647,039,773 248,173,650Pipeline Deposit Accounts (repayable on demand) 383,924,499 498,358,361Special 174,939 959,985Staff Welfare Fund 808,357 753,397Mortgage Housing Protection Loan 325,000 200,000Employee Incentive Scheme 632,653 - Gratuity and Statutory Compensation 1,639,052 2,296,826Others 18,007,197 17,410,049

1, 256,316,780 830,560,388

98



2006 2005 R R 8. PAYABLE TO CONSOLIDATED GOVERNMENT FUND Transfer from Income Statement 62,632,606 29,414,655 Transfer from Revaluation Reserve Account 17,010,757 11,754,032 79,643,363 41,168,687 2006 2005 9. OTHER LIABILITIES R R External borrowings account (Note 9(a)) - 394,378,162 (a) External borrowings account 2006 2005 R R (i) Bank of Tokyo – (SEPEC Loan) - 99,141,487 (ii) Bank of Tokyo – Mitsubishi Ltd Syndicated Euro Loan

(2006: Nil – 2005: Euro 45,329,670) - 295,236,675 - 394,378,162

(i) The above loan was fully repaid on October 12, 2006, with Bond proceeds (Euro 15,303,633). (ii) Bank of Tokyo – Mitsubishi Ltd Syndicated Euro loan This loan is secured over receipts from Indian Ocean Tuna, and is repayable as follows: Tranche A: monthly instalments of Euro 559,625 in the first year monthly instalments of Euro 661,376 in the second year monthly instalments of Euro 814,000 in the third year Interest rate on Tranche A is LIBOR + 2.75% Tranche B: monthly instalments of Euro 339,167 in the first three years monthly instalments of Euro 1,187,085 in the fourth and fifth years Interest rate on Tranche B is LIBOR + 3.5% This loan was fully repaid on October 12, 2006, with Bond proceeds. (Euro 35,600,722)

99



10. CASH AND CASH EQUIVALENT 2006 2005 R R

Balances held abroad 653,244,081 308,640,850 Holdings of Special Drawing Rights 14,624 6,587 Notes and Coins in Hand 53,574 60,895 653,312,279 308,708,332

11. SEYCHELLES GOVERNMENT SECURITIES 2006 2005 R R

20-Year Restructuring Bond 1,111,060,016 1,340,800,000 12. ADVANCES AND OTHER ACCOUNTS 2006 2005 R R

Advances to Government - - Other accounts 61,601,544 28,745,031 61,601,544 28,745,031

100


Notes to the Financial Statements – Year Ended December 31, 2006 13. PROPERTY, PLANT AND EQUIPMENT

Building

Office Furniture & Fittings

Computer & Office

Equipment

Motor Vehicles

Total

R R R R R COST At January 1, 2006 24,969,679 2,522,650 4,234,583 577,320 32,304,232Additions 544,595 123,065 685,213 140,155 1,493,028Disposals - - (12,506) (240,805) (253,311)

At December 31, 2006 25,514,274 2,645,715 4,907,290 476,670 33,543,949 DEPRECIATION At January 1, 2006 6,890,916 1,958,427 3,763,492 145,537 12,758,372Charge for the year 382,714 169,883 459,853 84,647 1,097,097Disposal adjustments - - (12,506) (110,539) (123,045)At December 31, 2006 7,273,630 2,128,310 4,210,839 119,645 13,732,424

NET BOOK VALUES At December 31, 2006 18,240,644 517,405 696,451 357,025 19,811,525 At December 31, 2005 18,078,763 564,223 471,091 431,783 19,545,860

101



2006 2005 14. INTEREST INCOME R R Interest on foreign deposits with other banks 19,145,551 6,109,742 Interest on loans and advances to Government 20,873 2,436,604 Interest on local securities 62,515,991 59,246,848 Others 6,020,574 7,018,006 87,702,989 74,811,200 15. INTEREST EXPENSE 2006 2005 R R Interest on deposits 9,014,096 8,154,912 Interest on loans 16,837,628 26,272,466 25,851,724 34,427,378 16. OTHER INCOME 2006 2005 R R Profit arising from dealing in foreign currencies 11,513,146 4,901,392 Gain/(Loss) on exchange 5,989,986 (1,719,107) Other miscellaneous income 1,767,619 3,146,529 19,270,751 6,328,814 17. OPERATING EXPENSES 2006 2005 R R Depreciation charge 1,097,097 1,025,925 Other operating expenses 17,392,313 16,272,056 18,489,410 17,297,981 18. TAXATION The Central Bank of Seychelles is exempted from taxation under Section 49 of the CBS Act 2004.

102



2006 2005 19. NOTES TO THE CASH FLOW STATEMENTS R R Cash generated from operations Net profit for the year 62,632,606 29,414,655 Adjustments for: Depreciation on property, plant and equipment 1,097,097 1,025,925 Gratuity and Statutory Compensation (657,774) (212,167) Profit on disposal of property, plant and equipment (71,735) (75,737) Operating profit before working capital changes 63,000,194 30,152,676 Increase in currency in circulation 72,309,000 30,342,991 Increase in deposits (Exclude Gratuity & Statutory

Compensation) 426,414,166

64,794,583 Increase/(decrease) in deposit for allocation of Special

Drawing Rights 349,239

(239,504) (Increase)/decrease in advances and other accounts (32,856,513) 53,122,056 Exchange differences on revaluation of assets and liabilities 22,485,754 42,671,503 Net cash generated from operating activities 551,701,840 220,844,305 20. CAPITAL COMMITMENTS Capital expenditure approved by the Board and contracted for at year end but not yet incurred is as

follows: 2006 2005 R R Property, plant and equipment 11,101,800 4,522,000 21. FOREIGN CURRENCY SITUATION As at December 31, 2006, the Central Bank had a net assets amounting to R653,258,705.

(Net liability in 2005: R85,730,726; 2004: R306,229,758) made up as follows:

2006 2005 2004 R R R

External assets 653,258,705 308,647,437 187,791,757 External liabilities - (394,378,162) (494,021,515) 653,258,705 ( 85,730,726) (306,229,758)

103



22. CONTINGENCIES

At December 31, 2006, no guarantee was given by the Bank, to third parties. (2005: R 44,000,000 (USD 8.0 million)).

23. REGISTERED ADDRESS The registered address is Independence Avenue, Victoria, Mahé, Seychelles.

ANNEX II

OFFICERS OF THE CENTRAL BANK OF SEYCHELLES (as at December 31, 2006)

Francis Chang Leng - Governor

Jennifer Morel - Deputy Governor

Financial Intelligence Unit

Phillip Moustache - Director

Internal Audit Unit

Steve Fanny - Internal Auditor

Administration and Human Resources Division

Juliana AhThew-Rose - Head of Division

Levina Françoise - Senior Administration Officer

Bank Supervision Division

Vacant - Head of Division

Guyliane Joubert - Bank Supervision Officer

Christine Hitié - Bank Supervision Officer

Jenifer Sullivan - Bank Supervision Officer

Banking Services Division

Patrick Stravens - Head of Division

Jeannette Payet - Accounts Manager

Christophe Edmond - Director Banking and Currency Operations

Mike Tirant - Assistant Accountant

Foreign Earnings Regulations Division

Anitha Naidu - Senior Auditor

Francis Payet - Auditor

Public Debt Division

Jean-Claude d’Offay - Head of Division

Terry Adrienne - Public Debt Officer

OFFICERS OF THE CENTRAL BANK OF SEYCHELLES (Cont’d) (as at December 31, 2006)

Research and Information Management Division

Caroline Abel - Head of Division

Brian Commettant - Senior Economist

Vacant - Senior Statistician

Dorotha Michel - Statistician

Gina Ally - Statistician

Moyra Alexis - Economist

Brigitte Gaylor - Economist

Noemie Gobine - Economist

Juliette Bertin - IT Officer

central bank of seychelles report 2006.pdf · 2020-01-23 · central bank of seychelles board of...

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