Wednesday, July 8, 2009

The Seychelles Column - By Christopher Gill

Central Bank Moves To Legislate Confidence in Seychelles Rupee

After floating the Seychelles Rupee in November 2008 and finally allowing bureau de change offices to compete with commercial banks, the Central Bank of Seychelles, headed by Mr. Pierre Laporte, has now passed legislation in conspiracy with the Ministry of Finance to attempt to legislate confidence in the Seychelles Rupee, before the market does.

The proposed new law, passed by the National Assembly and likely to be assented into law by the President of Seychelles, requires all tourism businesses in Seychelles to now charge clients in Seychelles Rupees and not in hard currency. The law has the effect if put in practice, to force businesses all over Seychelles to take Seychelles Rupees as legal tender, whether or not they have any confidence in the currency. Establishments cannot set their own rates and must follow Central Bank Rates, a significant departure from liberalization of currency activity.

In theory, the visitors will change their Euro and US Dollars at a currency trader bureau or at a bank, at rates set by the Central Bank. But bureaus and banks set their own rates. The market will as well, in case Mr. Laporte missed that slight fundamental detail when concocting this dubious piece of legislation that will be bound to set the reform program Michel has embarked on back a few more years.

The most damaging part of this legislation is the fact that the tourism industry as of November had started to bank money earned into the banking system, which has helped the Central Bank increase its reserves from an all time low of $12 Million (less then one days supply of money for imports) to a whopping $75 Million (about 4 weeks of imports). This represents a significant turnaround, when balanced against a severe downturn in receivables (-40%&-25%) from the fishing industry and tourism industry in 2009.

Because the tourism industry was slowly gaining confidence in the banking system which includes the dubious Central Bank of Seychelles that does not have the best track record, this new legislation will undoubtedly threaten the viability of the seed of confidence sown in November 2008 by Mr. Laporte himself.

Mr. Laporte Ask Why?

Mr. Laporte may ask why is confidence threatened with the new legislation? Mr. Laporte has a tendency to have lapses in understanding monetary policy. He had one of those lapses when he was the Foreign Exchange Controller at the Central Bank of Seychelles under Mr. Francis Chang Leng before he left to join the IMF, out of sheer stress over the lapse.

As Foreign Exchange Controller, it was Mr. Laporte himself, who administrated seizures of hard currency an individual would possess without necessary documentation. It was Mr. Laporte who would recommend prosecution to the Attorney General’s office. As fate would have it, today, Mr. Laporte himself, is tasked with returning some of those monies at today’s rate, no interest paid for the use of the money, to the victims of that preposterous Foreign Exchange Control Act.

Unfortunately, one Chinese gentleman that had his money taken, will not have it returned, right Mr. Laporte. Or is this another lapse of memory?

To Erode Confidence Is A Sign Of Desperation

Last November, Mr. Laporte told us that tourism industry could trade hard currency and set rates in the same. When trading, currency rates would be set by the establishment. Guests were free to accept rates or free to take their money elsewhere. This a partial insight into the functionality of the Free Market system. The consumer is free, to spend his money, where he/she is happy to.

As payments are made, they enter the banking system. Hotels for example, secure their hard currency investment, by accepting the same in kind for services. The new proposal was working. Banks receive hard currency, because no retention scheme exists. Business can make up their investments in the same. Government can increase its reserves to stabilize and meet obligations, and have something when it rains. Something is always better then nothing.

80% of what makes a hotel is in hard currency

Under the new law, tourism establishments which have been created through hard currency investments, will now simply recoup profits and capital investments through risky Seychelles Rupees remittance. This a dangerous precedence that will cause more FDI flight from our shores.

While Seychelles Rupee is legal tender, it is not a legal tender of confidence. The new French Ambassador should be made aware of that, after all, his country has played a significant role in nursing the socialist leftist state Rene ran for years, that led to the loss of confidence in the Seychelles Rupee.

Hence, the Ambassador should be happy and willing to settle his bills in Euros. If he pays in Seychelles Rupees, then it should be at the rate the establishment sets. If he is unhappy with the rate, he should take his business elsewhere and complain about the establishment if he has been treated unfairly, there is no need to make a fuss over a simple matter. After all, we are not in Paris, this is Seychelles the measure of tolerance in a leftist state is much higher then free Paris. As a consumer, the French Ambassador is free to spend his money where he chooses too. I defend him in that regards.

Mr. Laporte will say, “you can convert your Seychelles Rupees into hard currency”. Well, this is where London Bridge comes falling down for Mr. Laporte and his financial reforms. He takes us now down a dangerous river of many hazards financially.

In reality, we cannot convert our investments back to hard currency. If you take a composite of the total local investments and FDI over the last ten (15) years in Seychelles, you will exceed the total reserves of the Seychelles Central Bank hands down. In fact, the total current reserve is less than many single hotel developments. If Maia was sold tomorrow in Seychelles Rupees, the Seller would wipe out the Central Bank if he presented his Seychelles Rupees for US Dollars. Same for Silhouette Labriz or St. Anne Beachcomber and a number of little projects under 25 rooms.

To test Mr. Laporte’s intellectual integrity in his new legislation, take a walk to a local commercial bank on Monday, ask your banker for US$25,000 and see what he says. Will your banker honour the published rates or will he say the board rate is an indicative rate and if you want that much money you must pay a higher rate. Basically, some managers are playing a black market role as it is.

The next day, ask the manager for US$200,000, which is not much for a little tourism business (a couple of outboard engines and some new kitchen equipment). But an amount like this is too much to entertain for your commercial bank. Immediately, the manager will start making phone calls. He will tell you the Central Bank requires a high deposit so he cannot help so quickly. The lesson is this: the Seychelles Rupee is not convertible. With the new legislation, the Seychelles Rupee will not become convertible. Why, why Mr. Laporte ask?

Because you cannot legislate confidence in a currency. Simple. Confidence must be earned the hard way. We must work through the problems and build confidence in the Seychelles Rupee over time and encouraging those that hold hard currency it is right and good investing to place the money in Seychelles.

The Central Bank can do that by offering favourable interest rates for hard currency deposits as it does for Seychelles Rupees. It is the reverse of the mop up operation conducted since November.

You see Mr. Governor, in an economy, goods have value according to the supply of the goods in relation to the demand for the same. This is called the Law of Supply and Demand. It applies to goods and to currency as well. Your currency must be legal tender in practice not solely by legislation. “Legal” means recognized by the jurisdiction, and “Tender”, infers precious, important or of great cherished and respected value, like a baby or infant when referred to as “tender”.

Politeness aside, this is a tall order for the Seychelles Rupee today, Mr. Laporte is aware of that.

Lack of confidence in a currency does not change when placed under chains of compliance legislation. The more you legislate, the more you increase risk and enhance value of a good or currency in limited, finite supply. As you do that, you will make hard currency more expensive against a Seychelles Rupee.

As hard currency becomes more expensive, your fixed and fiddled rates will be mindless when compared to the real market rates, set by the same.

The variance between the two rates is where the black market will frolic, thanks to this dubious legislation.

Beach boys will want Mr. Laporte to be President. We will be back to the horse and pony show again. Tourist will be harassed daily hour by hour. Do you remember what that did to the industry?

Currency is used as a symbol that represents a determined value that is accepted by the general public. A currency will be accepted in exchange for goods and services if and only if, the currency is perceived to retain the value being parted and imparted. If it is not, the Seller will simply ask for another denominated currency that he/she perceives to be an acceptable mode of exchange for his/her goods and services.

Unfortunately, the Seychelles Rupee has not achieved this level of confidence in the market place yet. Look at the Treasury Bills rates. They opened at 32% and a mere six month later, rates are down to 12%. This is not a sign of confidence. The variance shows Mr. Laporte created artificial value to simply take money out of circulation to reduce the black market activity. He has passed the results of this exercise off as new confidence in the Seychelles Rupee. It is not.

The size of the Seychelles economy in Seychelles Rupees does not correspond to the hard currency reserves. The disparity is indicative of the lack of real value of the Seychelles Rupee and indicative of the real confidence in the Seychelles Rupee. There is little confidence.

Imagine now, that every car dealer starts selling cars in Seychelles Rupees. What will Honda or Toyota do with all those Seychelles Rupees? They of course will not accept the currency. These manufacturers will tell a dealer to convert the Seychelles Rupees and send them US Dollars. Where will we get all those Dollars when your reserves are fledging in spite of not paying any debts this year?

Black Market Will Come Back

Anytime the Central Bank creates anomalies in the financial system by mismanagement and improper monetary policy that is not in step with market forces, the black market weed will spurt its little head out of the ground. This is right where Mr. Laporte has now taken us.

After this dubious ill-thought out legislation takes effect, the Black Market will be back knocking on the doors of the Central Bank to give it a little competition. Unfortunately for Mr. Laporte and the Central Bank, that is exactly what we all do not want to happen. But it will, because your policies are again out of sync with market forces. Policy must be set within the realities of the market. You cannot successful legislate market realities. Rene tried that for years and failed. Now, you are doing the same as Aboo, Weber did to please Rene.

Now that the Black Market will creep its way back before the year ends, Mr. Laporte, is it acceptable for a Governor of the Central Bank to receive an annual bonus of SCR 1 Million from the Ministry of Finance each year, when the Central Bank Act does not make any provisions for annual bonuses?

Does not this annual bonus compromise your independence per se, which may cause you to implement legislation like the new amendments that will erode confidence in the Seychelles Rupee, all with the objective of helping the Government come up with some hard currency to pay its obligations, when it cannot come up with sufficient good ideas on how to earn the money to meet the January 2010 deadlines. Recall well your words to the people October 31, 2008, on launching of the Reform, “for the Reform to work, the tourism industry must continue to succeed”.

When a cowboy is riding in the desert, the worse thing he can do is shoot his horse, because it drinks water!

May God Bless All Freedom Loving Seychellois and Our Beloved Seychelles!


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