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
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
- 2 -
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
Annual Report 2006 Highlights of the Seychelles Economy
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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.
Annual Report 2006 Highlights of the Seychelles Economy
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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
Annual Report 2006 Highlights of the Seychelles Economy
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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
Annual Report 2006 Highlights of the Seychelles Economy
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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.
Annual Report 2006 Highlights of the Seychelles Economy
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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
Annual Report 2006 Highlights of the Seychelles Economy
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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.
Annual Report 2006 Highlights of the Seychelles Economy
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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;
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Annual Report 2006 Financial Survey
• 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
illio
n
0
5
10
15
20
25
30
Perc
enta
ge
Net Foreign Assets Domestic Assets % Change in Total Assets Source: Central Bank of Seychelles.
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Annual Report 2006 Financial Survey
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).
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Annual Report 2006 Financial Survey
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
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Annual Report 2006 Financial Survey
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
illio
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0
5
10
15
20
25
Perc
enta
ge
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.
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Annual Report 2006 Financial Survey
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
illio
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.
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Annual Report 2006 Financial Survey
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
illio
n
-60
-40
-20
0
20
40
60
80
Perc
enta
ge
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
illio
n
-20
-10
0
10
20
30
40
50
60
70
80
Perc
enta
ge
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
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Annual Report 2006 Financial Survey
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.
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Annual Report 2006 Financial Survey
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
illio
n
Agriculture & Fishing Manufacturing ConstructionTransportation Tourist Facilities Wholesale & Retail TradeOther Businesses Private Households & Non-Profit Organisations
Source: Central Bank of Seychelles.
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.
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Annual Report 2006 Financial Survey
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
Source: Central Bank of Seychelles.
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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Annual Report 2006 Financial Survey
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
illio
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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Annual Report 2006 Financial Survey
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
illio
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
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
1998 1999 2000 2001 2002 2003 2004 2005 2006
Years
R M
illio
n
Credit Deposits Source: Central Bank of Seychelles.
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Annual Report 2006 Financial Survey
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.
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Annual Report 2006 Financial Survey
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 -
Annual Report 2006 Financial Survey
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
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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
Annual Report 2006 Government Finance
- 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.
Annual Report 2006 Government Finance
- 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
Annual Report 2006 Government 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
Source: Ministry of Finance
Annual Report 2006 Government Finance
- 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
Source: Ministry of Finance
Annual Report 2006 Government Finance
- 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.
Annual Report 2006 Government Finance
- 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.
Source: Ministry of Finance
Annual Report 2006 Government Finance
- 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
Source: Ministry of Finance
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’.
Annual Report 2006 Government Finance
- 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
Source: Ministry of Finance
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
Annual Report 2006 Government Finance
- 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
Annual Report 2006 The External Sector
- 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.
Annual Report 2006 The External Sector
- 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
Annual Report 2006 The External Sector
- 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
Annual Report 2006 The External Sector
- 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.
Source: Central Bank of Seychelles
Annual Report 2006 The External Sector
- 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.
Annual Report 2006 The External Sector
- 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.
Annual Report 2006 The External Sector
- 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%
Source: National Statistics Bureau, Central Bank of Seychelles
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.
Annual Report 2006 The External Sector
- 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
Source: National Statistics Bureau, Central Bank of Seychelles
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.
Annual Report 2006 The External Sector
- 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
Annual Report 2006 The External Sector
- 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
Annual Report 2006 The External Sector
- 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.
Annual Report 2006 The External Sector
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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.
Annual Report 2006 The External Sector
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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.
Annual Report 2006 The External Sector
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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
Source: Central Bank of Seychelles
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.
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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.
Annual Report 2006 The Real Sector: Production, Labour and Prices
- 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
Source: National Statistics Bureau
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
Annual Report 2006 The Real Sector: Production, Labour and Prices
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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.
Annual Report 2006 The Real Sector: Production, Labour and Prices
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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
Annual Report 2006 The Real Sector: Production, Labour and Prices
- 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.
Annual Report 2006 The Real Sector: Production, Labour and Prices
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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.
Annual Report 2006 The Real Sector: Production, Labour and Prices
- 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.
Annual Report 2006 The Real Sector: Production, Labour and Prices
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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
Annual Report 2006 The Real Sector: Production, Labour and Prices
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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.
Annual Report 2006 The Real Sector: Production, Labour and Prices
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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
Annual Report 2006 The Real Sector: Production, Labour and Prices
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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)
Annual Report 2006 The Real Sector: Production, Labour and Prices
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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
Annual Report 2006 The Real Sector: Production, Labour and Prices
- 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
Annual Report 2006 The Real Sector: Production, Labour and Prices
- 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
Annual Report 2006 The Real Sector: Production, Labour and Prices
- 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
Annual Report 2006 The Real Sector: Production, Labour and Prices
- 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
Annual Report 2006 The Real Sector: Production, Labour and Prices
- 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
Source: National Statistics Bureau
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.
Annual Report 2006 Operations and Administration of the Central Bank
- 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,
Annual Report 2006 Operations and Administration of the Central Bank
- 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
Annual Report 2006 Operations and Administration of the Central Bank
- 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
Annual Report 2006 Operations and Administration of the Central Bank
- 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
Annual Report 2006 Operations and Administration of the Central Bank
- 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.
Annual Report 2006 Operations and Administration of the Central Bank
- 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
Annual Report 2006 Operations and Administration of the Central Bank
- 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
Annual Report 2006 Operations and Administration of the Central Bank
- 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).
Annual Report 2006 Operations and Administration of the Central Bank
- 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
Annual Report 2006 Operations and Administration of the Central Bank
- 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
Annual Report 2006 Operations and Administration of the Central Bank
- 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.
Annual Report 2006 Operations and Administration of the Central Bank
- 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.
Annual Report 2006 Operations and Administration of the Central Bank
- 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.
86
87
88
89
90
CENTRAL BANK OF SEYCHELLES
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
CENTRAL BANK OF SEYCHELLES
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
CENTRAL BANK OF SEYCHELLES
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
The notes on pages 94 to 103 form an integral part of these financial statements. Auditors’ report on pages 88 and 89.
93
CENTRAL BANK OF SEYCHELLES
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
The notes on pages 94 to 103 form an integral part of these financial statements. Auditors’ report on pages 88 and 89.
94
CENTRAL BANK OF SEYCHELLES
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
CENTRAL BANK OF SEYCHELLES
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
CENTRAL BANK OF SEYCHELLES
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
CENTRAL BANK OF SEYCHELLES
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
CENTRAL BANK OF SEYCHELLES
Notes to the Financial Statements – Year Ended December 31, 2006
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
CENTRAL BANK OF SEYCHELLES
Notes to the Financial Statements – Year Ended December 31, 2006
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
CENTRAL BANK OF SEYCHELLES
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
CENTRAL BANK OF SEYCHELLES
Notes to the Financial Statements – Year Ended December 31, 2006
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
CENTRAL BANK OF SEYCHELLES
Notes to the Financial Statements – Year Ended December 31, 2006
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
CENTRAL BANK OF SEYCHELLES
Notes to the Financial Statements – Year Ended December 31, 2006
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