central bank of seychelles report 2009.pdf · r = seychelles rupee n.a = figure not available .. =...

CENTRAL BANK OF SEYCHELLES

ANNUAL REPORT

2009

CONTENTS

Page Letter of Transmittal Board of Directors List of Charts and Tables Section One Highlights of the Economy 1 Section Two Financial Survey 2009 5 Section Three Government Finance 23 Section Four The External Sector 35 Section Five The Real Sector: Production, Labour and Prices 57 Section Six Operations and Administration of the Central Bank 73 Annex I Annual Accounts and Auditor’s Report Annex II Officers of the Central Bank of Seychelles

CENTRAL BANK OF SEYCHELLES

Board of Directors

(as at 31st December 2009)

Pierre Laporte - Governor and Chairman

Jennifer Morel - Deputy Governor - Member

Errol Dias - Member

Wilfred Jackson - Member

Steve Fanny - Member

Secretary to the Board

Juliana AhThew-Rose

List of Charts and Tables

Chart No. Title Page Financial Survey 2.1 Net Foreign and Domestic Assets; 2000-2009 10

2.2 Money Supply; 2000-2009 12

2.3 Reserve Money; 2009 14

2.4 Notes and coins in circulation; 1999-2009 15

2.5 Total Domestic Credit; 2000-2009 16

2.6 Commercial Banks’ Loans and Advances to Non-Government

Sectors; 2000-2009 18

2.7 Loans by Development Bank by Economic Sectors; 2000-2009 19

2.8 Central Bank Advances to Commercial Banks; 2000-2009 20

2.9 Interest Rates; 2000-2009 22 Government Finance 3.1 Government Finance Outcome; 2000-2009 26

3.2 Major Revenue Flows in Current Receipts; 2000- 2009 28

3.3 Government Capital Expenditure; 2000-2009 29

3.4 Stock of Domestic Debt; (Jan-Dec 2009) 31

3.5 End of period Treasury Bills average yield; (Jan-Dec 2009) 33 The External Sector

4.1 The overall balance, current account and capital & financial

account of the BOP; 2000-2009 36

4.2 Trade in Goods; 2000-2009 38

4.3 Exports; 2009 41

4.4 Imports (f.o.b.); 2009 42

4.5 Exchange rate movements of the three main currencies; 2000-2009 49 The Real Sector: Production, Labour and Prices 5.1 Visitor Arrivals; 2000-2009 66

5.2 Price Movements; 2000-2009 71

Table No. Title Page Financial Survey 2.1 Weighted Average Deposit Auction Arrangement Rates; 2009 7 2.2 Monetary Survey; 2005-2009 11 2.3 Reserve Money; 2008-2009 13 2.4 Circulation of notes and coins; 2005-2009 14 2.5 Credit; 2005-2009 16 2.6 Commercial Banks – Loans and Advances To Non-Government Sector by Economic Sectors: 2005-2009 18 2.7 Loans by Development Bank by Economic Sectors; 2005-2009 19 2.8 Central Bank Advances to Commercial Banks 20 2.9 Interest Rates; 2005-2009 21 Government Finance 3.1 Government Budget; Summary; 2009 27

3.2 Public Sector Capital Expenditure; 2005-2009 30

3.3 Treasury Bills; 2005-2009 32

3.4 Treasury Bonds; 2005-2009 34

3.5 Government Stocks; 2005-2009 34

The External Sector 4.1 Seychelles Balance of Payments; 2005-2009 39

4.2 Domestic Exports; 2005-2009 40

4.3 Imports (c.i.f.) – by HS Sections; 2005-2009 50

4.4 Goods procured in Ports; 2005-2009 43

4.5 Services; 2005-2009 44

4.6 External Reserves; 2005-2009 47

4.7 Exchange Rates; 2005-2009 48

The Real Sector: Production, Labour and Prices 5.1 Gross Domestic Product by Kind of Economic Activity (at constant market prices); 2005-2009 58 5.2 Gross Domestic Product by Kind of Economic Activity (at current market prices); 2005-2009 60 5.3 Estimates of Fish Landed; 2005-2009 62

5.4 Tourism; 2005-2009 65

5.5 Employment and Unemployment rate; 2005-2009 69

Table No. Title Page 5.6 Average Monthly Earnings; 2005-2009 70

5.7 Inflation Rates; 2005-2009 72

Operations and Administration of the Central Bank 6.1 Bankers’ Clearing House Activities; 2005-2009 76

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

IBC - International Business Company

IOT - Indian Ocean Tuna Limited

ITZ - International Trade Zone

SEPEC - Seychelles Petroleum Company

SFA - Seychelles Fishing Authority

SSF - Social Security Fund

STB - Seychelles Tourism Board

SECTION ONE

Highlights of the Economy

Introduction

Following a tumultuous year when the world economy struggled to maintain its footing as a result of

the financial crisis, 2009 brought some respite from the onslaught of bankruptcies and chaos. Despite

the recession which affected most major economies, the outcome for the year showed that the world

economy performed better than anticipated. This was due mainly to high level of activities in many

emerging and developing countries.

The domestic economy also underwent significant transformation over the past year. The year 2009

was characterized by the strength and resilience of the Seychellois economy. This was very evident in

the way the country, as a whole, pushed forward with its macroeconomic reform programme which

Seychelles embarked on in November 2008. As the programme was front-loaded, the impact of the

new measures that had to be taken was felt throughout 2009. The first half of the year was

particularly harsh but this was followed by a gradual improvement over the ensuing six months,

which was evidenced by an improvement in the internal and external balances

As the Stand-by Arrangement (SBA) approved by the IMF focused on putting in place a more

adequate monetary, exchange rate and fiscal framework, the Central Bank of Seychelles and the

Ministry of Finance were the two main institutions involved in the implementation of the programme.

The general acceptance by all key stakeholders - public and private sector - was crucial in pushing the

reform agenda forward.

The new economic order which emerged in 2009 emphasizes on the need for the private sector to

become the engine of the economy whilst government assumes its role of facilitator and regulator. In

that respect, the authorities continued to review the legal and institutional frameworks that would be

more conducive to a modernised economy.

- 1 -

Annual Report 2009 Highlights of the Economy

- 2 -

For instance, the Foreign Exchange Act, 2009 came into effect in July, repealing and replacing the

previous Exchange Control Act, 1954. Whilst its predecessor imposed administrative controls on

transactions in foreign exchange, this new law seeks to restore the status of the Seychelles rupee as

the legal tender. Its key objective is to regulate the foreign exchange market rather than stifle it.

Other laws such as the Central Bank Act, 2004 and the Financial Institutions Act, 2004 were also

amended to cater for the Bank’s new responsibilities.

Monetary Policy

Subsequent to the monetary policy reform and the adoption of reserve money as its operating target,

the Central Bank remained pro-active in mopping up excess liquidity from the system. The aim was

to keep reserve money tight and maintain positive interest rates in real terms. To achieve its objective

and improve liquidity management, the Central Bank designed and implemented a number of

monetary policy instruments during the year. These were namely standing facilities and other

instruments for the purpose of market operations. Aside from the new policy tools, CBS also

reviewed its existing instruments, such as the minimum reserve requirement, local asset ratio and the

deposit auction arrangement to render monetary implementation more efficient.

A swift return to normalcy, notable and appreciation of the Seychelles rupee and rapidly falling

inflation soon after the liberalisation allowed for a gradual relaxation of monetary policy during the

course of 2009. Despite an increase in bank liquidity resulting from the monetary policy relaxation,

and prompt domestic debt repayment by Government, private sector borrowing have been slow to

pick up due to commercial bank lending rates remaining relatively high, which in turn reflect a lack of

competition in Seychelles’ small banking system.

Fiscal Policy

Under the reform programme, the government has committed to maintaining fiscal discipline. To that

end, there was a noticeable change in government’s approach to public finance during 2009. Strict

fiscal controls were exerted, in line with the adopted policy to tighten liquidity in the system. This,

coupled with more market-based approach to monetary policy increased the need for better

coordination between monetary and fiscal policies. Furthermore, steps were taken to consolidate

financial and governance control of public enterprises through the new Public Enterprise Monitoring

and Control Act which became effective in September 2009. According to this Act, all government-

owned agencies will be closely monitored to ensure effectiveness in the provision of services and that

government gains optimal return on its investment. Furthermore, an external financial and

management audit was conducted on several major public enterprises.


- 3 -

Remarkable progress was made in restructuring Seychelles’ external debt following the launch of the

reform. In April 2009, the Paris Club granted an exclusive debt treatment to Seychelles under the

Evian approach, agreeing to reduce the debt stock by 45 per cent in nominal terms, provided that

Seychelles gets similar treatment from other external creditors. By the end of 2009, the country’s

external debt stood at around 94 per cent of GDP.

A comprehensive tax reform is under way. The reforms have three key elements, namely: (i)

introduction of a personal income tax system as of July 2010 to replace the social security

contribution; (ii) introduction of a value-added tax (VAT) as of 2012 to replace the current GST

regime; and (iii) reform of the business tax regime. These reforms are aimed at consolidating

government revenue, enhancing transparency, efficiency and fairness, as well as creating a level

playing field for all stakeholders.

External Sector

Developments in the external sector showed significant improvements in 2009 compared to past

years. Following the removal of exchange restrictions the availability of foreign exchange in the

banking system increased significantly. The removal of all administrative restrictions meant that

businesses had easy access to hard currency and could effectively pay for goods and services needed

in their production process or for retail. This, coupled with the steady appreciation of the rupee

against the world’s main trading currencies, helped bring down domestic inflation.

However, the still more expensive dollar (relative to past years) led to a drop in the demand for

imported goods. The country’s provisional Balance of Payments (BOP) recorded a current account

deficit of R3,685 million (US$271 million) or 35 per cent of GDP for the year 2009 compared to the

huge deficit of 50 percent of GDP in 2008. Although the overall balance showed a surplus compared

to the deficit recorded in 2008, the BOP was partly financed from the non-repayment of external loans

pending the outcomes of negotiations with respective creditors.

In line with the reform objectives, the Central Bank continued to accumulate external reserves during

the course of 2009. At the end of the year, the country’s net international reserves stood at US$151

million, whilst the gross official reserves were equivalent to 1.6 months of imports.

Real Sector

The measures introduced in the context of the reform programme required substantial adjustments in

certain areas, notably in the real economy. Following the float of the rupee and the increased role of

market forces in determining prices inflationary pressures were felt immediately thereafter. This


- 4 -

resulted in an immediate increase in the cost structure of businesses whilst the purchasing power of

consumers suffered a sudden deterioration. Borrowing costs also rose sharply causing severe

financial stress on both households and businesses as interest rates soared in early 2009 before starting

to decline. Despite such strenuous environment, gross domestic product (GDP) grew by 0.7 per cent.

Outlook

The faster than expected stabilisation of the economy led the authorities to request for the cancellation

of the Stand-by Arrangement with the IMF after the first year of reforms instead of the normal two-

year duration. This was replaced by a three-year Extended Fund Facility (EFF) that was approved by

the Fund in December 2009. The main objectives of the EFF are to (i) preserve macroeconomic

stability; (ii) achieve external sustainability and (iii) improve economic efficiency and durably raise

growth through the implementation of a second generation of reforms.

As regulator of the financial system, the Central Bank remains one of the key players in the

implementation of the EFF. Given that price stability is the primary objective of the Bank’s monetary

policy, the coordination between monetary and fiscal policies remains of utmost importance. CBS is

continuously reviewing its range of monetary policy instruments to create the right environment for

the further development of the economy. On the other hand, the Bank is also continuously

strengthening its supervisory and regulatory functions vis-à-vis the financial sector.

This emerging economic environment is set to provide both challenges and opportunities during 2010.

Following the privatisation of public enterprises and the redundancy of certain categories of staff from

the civil service, numerous new ventures have emerged to cater for goods and services which were

either provided for by public enterprises or imported. The new generation of entrepreneurs should

take into account the need for innovation and adaptation of technology to suit the country’s unique

characteristics. According to projections, real GDP is expected to grow by 4 per cent in 2010,

consolidating the gains achieved thus far under the macroeconomic reform programme.

SECTION TWO

Financial Survey 2009

2.0 Monetary Policy Development 2009

The year 2009 represented an important milestone for the Central Bank of Seychelles where monetary

policy formulation and implementation are concerned. The Bank managed to successfully move away

from a ‘passive’ approach to monetary policy to a more pro-active, market-based approach. Further

progress was made towards having an efficient liquidity monitoring framework as the Bank geared its

effort towards developing the money market and meeting its objectives and targets within the overall

reform program, notably its net international reserves and reserve money targets. Since late 2008,

when monetary policy reforms were introduced, monetary management is based on a monetary

targeting framework with reserve money as the operating target. In the context of this framework, the

Central Bank seeks to attain its final target of achieving price stability, by influencing changes in

broad money supply, which is linked to reserve money through a multiplier. To support this, a number

of instruments were put in place to improve management of liquidity in the financial system.

Taking into account this overall objective, and also to restore confidence in the rupee, the policy

stance of the Bank was to keep reserve money tight in the initial period of the reform program, which

inter alia allowed the economy to return to positive real interest rates in the months that ensued.

Achievement of positive real interest rates was made possible by rapid disinflation throughout the year

which also provided room for a measured easing of monetary policy towards the latter part of the year.

The relaxation of monetary policy was reflected in the raising of the reserve money ceilings in each

consecutive quarter, a reduction in the minimum reserve requirement and the removal of the local

asset ratio.

2.1 Monetary Policy Instruments

With the continuing effort of the Bank to enhance liquidity management by both the Central Bank and

commercial banks and to render the financial system more dynamic and efficient, the Bank put into

operation new monetary policy instruments throughout the course of the year. These were mainly the

- 5 -

Annual Report 2009 Financial Survey 2009

- 6 -

standing facilities and other instruments to conduct market operations. Besides the introduction of

these new tools, CBS also made some revisions to its existing instruments, as detailed below.

2.1.1 Minimum Reserve Requirement

The Minimum Reserve Requirement (MRR) continued to be one important monetary policy tool

despite the gradual move by the Bank to reduce it. With the disinflation trend that was firmly

established during 2009, and as the Bank continued to modernise its monetary policy framework, the

MRR was reduced on three occasions in 2009. From 13 per cent at the start of the year, it was first

reduced to 12 per cent on July 1. By September 1, the rate was further reduced to 11 per cent and on

October 1 to 10 per cent. The objective of the Central Bank is to eventually eliminate the MRR as it

seeks to move away from using direct instruments.

2.1.2 Local Asset Ratio

As the reforms gathered momentum in the second quarter of 2009, this allowed for an earlier-than-

anticipated easing of monetary policy. In this context as an additional step to ease monetary policy

stance as of the second quarter, the Local Asset Ratio (LAR) was revised downwards from 45 per cent

to 40 per cent by April 1. Effective July 1, this was further reduced to 35 per cent. However, on

August 17, 2009 the regulations which prescribed the LAR were repealed on the basis that it was no

longer compatible with the current monetary policy framework. By then, there was already in place a

prudential liquid asset ratio which was introduced in February to replace the LAR. The LAR had been

used by the government, among other things, as a direct source of financing, since 1986.

2.1.3 Deposit Auction Arrangement

The Deposit Auction Arrangement (DAA) which was introduced in September 2008 became the main

instrument to manage liquidity in 2009, through auctions which were conducted on a weekly basis.

This instrument, which is initiated by the Central Bank, allows commercial banks to place funds in

fixed-term deposits with the Central Bank at bid interest rates. In 2009, the Bank continued to offer

only 7-days, 14-days and 28-days maturity options. Participation of the commercial banks in such

instruments remained high. By the end of the year, the DAA outstanding deposits stood at R851

million compared to R159 million by end-January 2009. The rise in the amount of funds placed in the

DAA was principally a reflection of a higher volume of matured Treasury-bills compared to the

amount of intake of such instruments by the government.

Interest rates on these deposits remained market determined and they were closely correlated with

prevailing rates on the weekly Treasury-bills. Thus, as the yield on the government securities declined

sharply throughout the year - as government accelerated its repayment of domestic debt - the interest

rates on the DAA followed a similar trend. Rates fell from an average of 27.56 per cent, 30.04 per


- 7 -

cent and 30.00 per cent in the first quarter of the year to an average of 2.89 per cent, 2.91 per cent and

3.58 per cent in the months of October and November, for the 7-days, 14-days and 28-days maturity,

respectively. Nonetheless, in the auctions held towards the end of the year, the return on these

deposits rose and remained stable at around 4.50 per cent on all three maturities.

Table 2.1 Weighted Average Deposit Auction Arrangement Rates1(2009)

Percentage Maturity Period Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 7 Days 29.45 27.22 24.00 17.25 12.78 13.00 12.00 - 10.10 3.03 0.68 4.50 14 Days 29.50 - - 16.75 12.17 - 12.05 - 10.50 3.07 0.65 4.50 28 Days - - - 17.33 12.55 - 12.01 - 10.60 3.20 0.70 4.50 Notes: 1/ End-of-month data 2/ No Auction in August 2009

Source: Central Bank of Seychelles

2.1.4 Credit Auction Arrangement

Following the introduction of the DAA in September 2008 and to further promote market

development, the Central Bank introduced a Credit Auction Arrangement (CAA) twelve months later.

Similar to the DAA, the CAA forms part of the open market operations instruments of the Bank. The

purpose of CAA is to allow the Central Bank to address systemic liquidity shortages in the system by

auctioning funds for a predetermined period to banks, against eligible collateral. This instrument is

also initiated by the Central Bank, based on current monetary and liquidity stance with the interest rate

generated through an auction process. However, in view of the high level of liquidity in the system

and taking into consideration the reserve money target, the instrument was not used during the year.

2.1.5 Repo Operations

In June, as a further step to improve the efficiency of liquidity management, CBS introduced

repurchase/reverse repurchase agreements with government Treasury bills as the underlying security.

However, taking into account the high level of liquidity in the system, the bank only undertook reverse

repo transactions during the year. By the end of the year, the amount of securities that had been repoed

stood at R375 million. The Bank had in its portfolio Treasury bills of 91-days and 365-days which

amounted to a total of R998 million in 2009 and available to be used in repo operations. Reverse

repurchase transactions were used intensively by the Central Bank for sterilisation purposes, mainly

following the Bank’s purchases of foreign exchange from banks.


- 8 -

2.1.6 Standing Facilities

Aside from the market operations, the Bank also introduced standing facilities to assist banks to

adequately and actively manage their short-term liquidity, primarily overnight. These were in the

form of an overnight deposit and lending facilities.

Access to these facilities is open to all banks on a daily basis at their own request within a specific

time window. As is the norm and with further development of the market, the pricing of these

facilities should establish the upper and lower limits of an interest rate corridor.

2.1.6.1 Standing Deposit Facility

The Standing Deposit Facility (SDF) was approved by the Bank’s Board in December 2009.

However, the facility was not used in the final weeks of 2009 which followed the approval. As a

facility the SDF allows banks to place their end of day excess funds in an overnight deposit for a

minimum return. This interest rate shall be determined by the Central Bank and set the floor of the

interest rate corridor.

2.1.6.2 Standing Credit Facility

In addition to the motives mentioned above, the Standing Credit Facility (SCF) introduced in June,

replaced the then existing CBS advances to the commercial banks. This represented a modernisation

of the lending facilities of the Bank. Through this new instrument, banks may borrow overnight from

the Central Bank when funding possibilities are unavailable elsewhere, notably interbank, so as to

meet their end-of-day settlement obligations. Operationally, this instrument mainly differs from the

previous lending arrangement in its intention to cover temporary deficits that arise as a result of the

daily settlement of payments, by providing collateralised overnight loans at a predetermined interest

rate. The rates are set higher than the interbank lending rate so as to allow the Central Bank to

exercise its lender of last resort function more efficiently, which is an essential requirement for an

active liquidity management and a smooth functioning of the payment system. The SCF also serves as

a key indicator of the liquidity stress in any bank or in the banking sector in respect of the maintenance

of reserve requirements.

Banks made use of the facility only in September 2009 following unanticipated large outflows on their

books as a result of large withdrawals by one major client. On average, the banks borrowed R50

million per night for four nights.

Prior to that banks borrowed through the previous lending arrangement. In April of the year there were

particularly large borrowings through CBS advances as their customers were investing large amount

of funds in Treasury Bills, at a time when T-bill yield were at an all time peak. As a result, lending to

commercial banks then averaged to R39 million per night for thirteen nights.


- 9 -

2.1.7 Emergency Lending Facility

Besides the standing facilities, the Bank also introduced an emergency liquidity support facility,

namely an Emergency Lending Facility (ELF) in June. This facility was put in place to assist banks in

the event that they would face severe and persistent liquidity problems which may result in the bank

becoming insolvent. As such, this facility would allow CBS to prevent possible bank runs. Like the

SCF, lending under this facility is collateralised and the maximum loan duration is 30 days. No bank

made use of this facility during the year.

2.2 Overview of the Monetary Sector in 2009

Developments in the monetary sector reflected very much the measures taken by both the Bank and

the government to achieve their end of quarter targets under the IMF-supported economic reform

programme.

As mentioned earlier, monetary policy was relaxed as of the second quarter following the rapid

disinflationary trend. This caused the overall level of liquidity in the financial system to rise

somewhat in 2009 compared to 2008. Such development was in spite of the active market operations

undertaken by the Bank during the year and was a phenomenon for most monetary aggregates. The

rate of growth of money was the fastest on record in the past five years.

As in the previous year, the key factor influencing liquidity growth in the system was net foreign

assets of the banking sector. On the other hand, total domestic assets contracted during the year

compared to 2008, as a result of a significant improvement in fiscal performance and also the low

levels of borrowing by the private sector given the relatively high interest rates that prevailed. Whilst

the yield on the 91-day Treasury bill, which was seen as the benchmark interest rate on the market, fell

rapidly from its peak of around 30.00 per cent in the beginning of the year to 1.26 per cent in early

December, this did little to influence growth in credit to the economy, mostly because commercial

banks’ lending rates remained relatively high, averaging 15.35 per cent for the year. By December

2009, despite treasury bills’ rate falling to an average of 3.85 per cent1, average effective commercial

lending rates stood at 13.49 per cent.

2.3 Net Foreign and Domestic Assets

As a result of certain measures and policies adopted under the reform programme, such as the

liberalisation of the foreign exchange market and inflows from multilateral institutions in support of

the program, which among other things resulted initially in a sharp depreciation of the rupee, the Net

Foreign Assets (NFA) position of the banking system improved considerably during the year. By end-

December 2009, measured in US dollar terms, the NFA had doubled the end-December 2008 level,

1 Considering all three maturities, namely 91-days, 182-days and 365 days T-bills.


- 10 -

rising from US$129 million to US$259 million (101 per cent). This remarkable development was

attributable to increases recorded in both the positions of the Central Bank (official reserves) and

commercial banks. In rupee terms, the growth was slower at 36 per cent due to the appreciation of the

local currency, representing a rise from R2,143 million to R2,919 million.

The NFA of the commercial banks, in rupee terms, fell by 16 per cent by end 2009, from R1,093

million to R922 million. But in view of the appreciation of the rupee, in US dollar term such

component grew by 24 per cent or US$16 million in comparison to the end of the previous year. This

relatively lower NFA of the banks was to a great degree due to the fact that banks had to sell some of

their foreign exchange reserves in the first half of the year to be in conformity with the change in the

foreign currency exposure ratio limit set by the Central Bank in mid 2009. As per this new regulation

the mandatory ceiling on banks long position was brought down from 100 per cent in February to 30

per cent in July.

As for the net external reserves of the Central Bank in US dollar terms, by end-2009 had almost tripled

its end-2008 position, with a growth rate of 180 per cent. The absolute increase was from US$63

million to US$177 million. In rupee terms, the improvement was slower at a rate of 90 per cent; from

R1,050 million to R1,997 million. This improvement reflected a combination of grants/loans to

Government from the European Union and African Development Bank, (totalling US$22.7 million],

and Central Bank’s purchases from banks (US$24 million). Central Bank payments fell significantly

from the previous year, contrary to the previous years when the Bank had to sell foreign exchange to

various parastatals in addition to meeting Government’s needs. In 2009, however, debt repayments

were kept to a minimum and payments government’s health service requirements and educational

needs.

Chart 2.1: Net Foreign Assets and Domestic Assets (2000-2009)

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Years

R m

illio

n

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

Perc

enta

ge

Net Foreign Assets Domestic Assets % Change in Total Assets



- 11 -

Net domestic asset (NDA) contracted by 18 per cent to R4,889 million during 2009, which represented

a reversal of the trend over the previous two years. This declining trend which was apparent as early

as in the first quarter of the year is reflective of a drop in demand for credit, which in turn was

associated with the prevailing high market interest rates on banks’ lending. For the remainder of the

year, the amount of extended credit remained low, as bank lending rates remained high. Credit to both

the private and public sectors declined. However, the major factor was the fall of R711 million in the

net claims on government following an improved fiscal outcome.

Table 2.2 Monetary Survey;1,2 2005 - 2009

2005 2006 2007 2008 2009

(R million) Net Foreign Assets 3 -273.7 538.8 431.6 2142.9 2919.3

Central Bank -85.7 653.3 322.5 1049.8 1997.2 Commercial Banks -188.0 -114.5 109.0 1093.1 922.1

Domestic Assets 5223.0 4869.7 5272.5 5978.9 4885.7

Claims on private sector 1247.3 1320.3 1752.6 2587.8 2346.9 Claims on public entities 296.8 240.1 340.9 535.2 396.5 Claims on government (net) 3678.8 3309.3 3179.0 2855.9 2142.3

Money Supply, M3 4442.5 4659.7 4549.9 5936.2 6400.9

Money Supply, M2(p) 4196.2 4341.8 3906.4 4023.4 4791.0 Money Supply, M2 3697.9 3957.9 3814.4 4018.6 4791.0

Money Supply, M1 1397.0 1392.0 1602.0 1832.0 2162.6 Currency with public 325.7 392.8 407.8 430.4 500.3 Transferable deposits 1071.4 999.2 1194.2 1401.6 1662.3

(of which public entities) 264.6 192.7 130.5 86.9 326.2

Quasi Money 2300.9 2565.9 2212.4 2186.6 2628.4 Fixed Term deposits 1452.9 1613.3 1168.1 1150.6 1517.2

(of which public entities) 152.8 312.5 330.7 330.8 98.9 Savings deposits 847.9 952.6 1044.3 1036.1 1111.1

Pipeline deposits 498.4 383.9 92.0 4.8 0.0

Foreign Currency Deposits 246.2 317.9 643.5 1912.8 1610.0 Other items, net 506.9 748.8 1154.2 2185.6 1404.0 Figures do not necessarily add up due to rounding off 1 End of period 2 Changes in 2008 figures are due to revisions 3 Excludes government balances Source: Central Bank of Seychelles


- 12 -

2.4 Money Supply

As mentioned above, the gradual easing of monetary policy throughout the year resulted in an

expansion of liquidity in the system coupled by the reduction of domestic debt by government. The

broadest monetary aggregate, M3 increased by 7.8 per cent to stand just above R6.0 billion for the first

time, at R6,401 million. When taking into account only the broad monetary aggregate, M2(p), which

excludes foreign currency deposits, the expansion was faster than that posted for M3, at a rate of 19

per cent. This was the fastest growth recorded in this money component in the past five years. The

difference in the growth rates of M3 and M2(p) was principally on account of the significant

appreciation of the rupee which affected the rupee value of the foreign currency deposits, and thus M3.

In foreign currency terms, foreign currency deposits grew by 24 per cent by end-2009. This

development was to some extent a sign of improved confidence in the banking system, following the

liberalisation of the foreign exchange market. However, in rupee terms foreign currency deposits

recorded a contraction of 16 per cent.

Chart 2.2: Money Supply (2000 – 2009)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

R m

illio

n

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Perc

enta

ge

Transferable deposits Fixed Term depositsSavings deposits Pipeline depositsForeign Currency Deposits Currency with public% Change in M3


It is worth noting that an expansion in the money supply was observed in the second half of the year

and this was most evident in the last quarter. The prime factor was the net maturities of government

Treasury bills that were not sterilised by the Central Bank.

The most significant annual change in money aggregates was observed under the least liquid

component of the money supply, namely quasi money. By the end of the year, quasi money had risen


- 13 -

by 20 per cent (R442 million) in relation to end of the previous year. This development was primarily

driven by the increase of R367 million in the stock of fixed-term deposits compared to savings

deposits which had risen by only R75 million, notwithstanding a reduction in yield on these deposits

experienced throughout the year. The rise in fixed-term deposits in the second half of the year was a

reversal of the trend early in the year and this was due to a movement of funds toward investments in

government papers as the returns on these securities rose sharply following the financial liberalisation.

However, as government borrowing slowed down and yield on government securities fell gradually in

the second half of the year, an important share of depositors’ funds were reinvested with banks in the

form of fixed-term deposits.

There was also an increase in the most liquid money component, M1, albeit by a smaller amount of

R331 million. This was largely attributed to the rise of R261 million (19 per cent) in transferable

deposits compared to R70 million (16 per cent) in the amount of cash with the public. As for the

pipeline deposits - which were funds placed with banks awaiting conversion into foreign currency

during the previous years of foreign exchange shortage - banks managed to clear all the outstanding

balance of R45 thousand by July.

2.5 Reserve Money

Under the new monetary policy framework, reserve money is the operational target of the Central

Bank. This component of money sometimes referred to as base or high-powered money comprises of

the amount of currency in circulation and commercial banks’ deposits with the Central Bank. The

Bank has fixed quarterly ceilings on reserve money.

During the course of 2009 the Bank used its market operation instruments to allow it to achieve its

reserve money target. Aside from the government’s weekly Treasury-bills auction which assisted in

mopping up liquidity in the system, the Bank conducted deposit auctions and reverse repo operations

with the banks using its existing portfolio of Treasury bills.

The Central Bank managed to attain all its end-of-quarter reserve money targets. (See table below).

Table 2.3 Reserve Money 2008 – 2009

(R million) Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009

Actual Target Actual Target Actual Target Actual Target Actual Target

Reserve Money 1119.9 1151.0 1050.9 1146.0 1119.3 1265.9 1169.3 1311.0 1295.9 1480.0 Currency in Circulation 477.6 457.9 475.4 481.7 555.0 Other Depository Corporations' reserves 642.3 593.0 643.9 687.6 740.9



- 14 -

Chart 2.3: Reserve Money (2009)

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

1,600.00

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

R m

illio

n

Reserve Money Targets


Currency in circulation, which is part of Reserve Money, at year’s end amounted to R555 million, an

increase of 16 per cent relative to the figure of R478 million in end 2008, of which notes in circulation

accounted for 17 per cent of the rise with coins in circulation rising by 6.2 per cent.

The increase in currency circulation can be theoretically explained by the inflationary trend brought

about by the November 2008 reforms. Thus a greater volume of currency is required to conduct daily

transactions within the economy due to sudden rises in price levels in addition to the fact t that the

majority of transactions as in cash.

Table 2.4 Circulation of Notes and Coins1; 2005 – 2009

(R million) 2005 2006 2007 2008 2009 Total 344.8 417.2 450.6 477.6 555.0 Notes 322.3 393.8 425.4 450.6 526.5 Coins 22.5 23.4 25.2 26.9 28.6 % Change in Total Currency in Circulation 10 21 8 6 16 Share 'Notes 93.5 94.4 94.4 94.3 94.9 'Coins 6.5 5.6 5.6 5.7 5.1 1End of period data Source: Central Bank Of Seychelles


- 15 -

Chart 2.4: Notes and coins in circulation (2000 - 2009)

0.0

100.0

200.0

300.0

400.0

500.0

600.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

R m

illio

n

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

Perc

enta

ge

Notes Coins % Change in Total Currency in Circulation


2.6 Domestic Credit

2.6.1 Central Bank and Commercial Bank

In line with expectations the slowdown in economic activity was influenced to a large extent by the

high interest rate environment which proved a disincentive for potential investments. This was

reflected in the level of outstanding domestic credit at end 2009, which fell by a considerable amount

to R5,530 million. This represented a turnaround from the acceleration in credit creation posted in the

previous year.

Early in the year, government reduced its outstanding amount of credit with the Central Bank by 12

per cent or R141 million. The change was purely on account of the repayment of its outstanding

short-term advances in January 2009. Following this development, the remaining R998 million of

government debt with the Bank was entirely in the form of securities namely, Treasury Bills of

maturities 91-days and 365 days. This portfolio of government securities held by the Bank was used

as part of its open market operations as security for its reverse repurchase agreements.

Consistent with the overall objective to reduce public debt and owing to the good fiscal performance,

the government was able to bring down its outstanding domestic debt with the commercial banks. It

reduced its stock of domestic commercial bank debt by R519 million, to R1,789 million.


- 16 -

Table 2.5

Credit; 1/2/3 2005 - 2009

2005 2006 2007 2008 2009 (R million)

Total Credit 5523.5 5302.7 5548.8 6569.5 5530.5 Commercial banks 4182.7 4191.7 4409.8 5430.8 4532.4

Claims on private sector 1247.3 1320.3 1752.6 2587.8 2346.9 Claims on parastal sector 296.8 240.1 340.9 535.2 396.5 Claims on government 2638.5 2631.3 2316.3 2307.8 1789.0 of which:

Dev. fund stocks (147.1) (147.1) (147.1) (147.1) (97.1) Treasury bonds (1095.0) (1342.4) (1052.4) (747.1) - Treasury bills (1302.2) (1132.8) (1092.6) (1231.1) (1496.8)

Central Bank 1340.8 1111.1 1139.0 1138.7 998.1

Claims on government 1340.8 1111.1 1139.0 1138.7 998.1 of which:

Advances (0.0) (0.0) (86.4) (140.6) - Treasury bonds (1340.8) (1111.1) (1052.6) (747.1) - Treasury bills (0.0) (0.0) (0.0) (251.0) (998.1)

Figures do not necessarily add up due to rounding off 1 End of period 2 All figures for stocks, bonds and bills are at cost value 3 Changes in 2008 figures are due to revisions Source: Central Bank of Seychelles

Chart 2.5: Total Domestic Credit (2000 - 2009)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

R m

illio

n

-20.0

-15.0

-10.0

-5.0

0.05.0

10.0

15.0

20.0

25.0Pe

rcen

tage

Commercial Banks Central Bank % Change in Total Domestic Credit



- 17 -

Whilst the fall in government credit was due to government’s net debt repayment in 2009, the stagnant

demand of credit by the private sector and parastatals owed mostly to the high cost of borrowing

throughout the year. For the year under review, commercial banks’ claims on the private and

parastatal sectors declined by 9.3 per cent (R241 million) and 26 per cent (R139 million), respectively.

Following these developments, the overall commercial banks’ loan portfolio for the year contracted by

16 per cent (R898 million).

However, the decline in the overall banking system loan portfolio in the three main sectors did not

bring about much change in the loan composition. Government remained the prime borrower with a

share or 50 per cent by end 2009 though this represented a reduction in the market share from 52 per

cent by end 2008. It is worth noting that the declining trend in government’s share of total credit has

been a sustained trend since 2003 when it stood at 82 per cent. Likewise, the proportion of the

parastatal credit fell from 9.9 per cent to 8.7 per cent. As such, the share of private sector credit

relative to overall lending increased from 48 per cent to 52 per cent.

2.6.2 Sectoral Allocation of Credit to Private Sector and Parastatals

Given no major structural development in credit allocation, the share of most economic sectors in the

overall credit portfolio with the commercial banks remained more or less unchanged in 2009. The

tourist sector continued to be the main beneficiary of the banks’ credit with a share of 40 per cent.

However, in view of the less favourable performance of tourism, mostly as a result of the global crisis,

and to a lesser extent the higher interest rates, new investments in tourism fell. This sector’s

outstanding loan with the banks fell by R139 million or 14 per cent. The wholesale & retail trade

posted the largest decline of R263 million (48 per cent). This owed mostly to the reduced purchasing

power of households following the sharp one-off increase in the overall price level - 63 percent - in

November 2008 following the floating of the Seychelles rupee earlier that month, which caused the

local currency to depreciate sharply in the few months that followed. The construction sector and non-

profit organisations were the only two categories which recorded a rise in their loan portfolios with the

commercial makes. These increases were R20 million (20 per cent) and R17 million (5.1 per cent)

respectively.


- 18 -

Table 2.6 Commercial Banks - Loans and Advances

To Non-Government Sector by Economic Sectors; 1/2 2005 – 2009

2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 (R million) (Percent) Total Advances 1544.2 1561.8 2093.5 2562.5 2075.1 100.0 100.0 100.0 100.0 100.0

of which: Foreign Currency Loan 222.1 338.0 652.1 1505.6 888.8 14.4 21.6 31.1 58.8 42.8

Agriculture and Fisheries 10.4 12.8 14.8 11.5 10.8 0.7 0.8 0.7 0.4 0.5 of which:

Manufacturing 7.0 12.2 14.6 29.7 28.9 0.5 0.8 0.7 1.2 1.4 Construction 85.9 80.5 86.6 97.8 117.5 5.6 5.2 4.1 3.8 5.7 Transportation 5.1 9.1 53.7 176.0 115.9 0.3 0.6 2.6 6.9 5.6 Tourists Facilities 438.1 424.0 739.0 966.8 827.7 28.4 27.1 35.3 37.7 39.9 Wholesale & Retail trade 104.3 183.5 241.2 551.3 288.1 6.8 11.7 11.5 21.5 13.9 Other businesss 511.0 437.4 451.8 407.1 347.4 33.1 28.0 21.6 15.9 16.7 Private households & Non profit organisaiton 382.4 402.3 491.8 322.3 338.8 24.8 25.8 23.5 12.6 16.3

of which: Mortgage loans 217.5 199.1 204.9 221.3 244.2 14.1 12.7 9.8 8.6 11.8

Figures do not necessarily add up due to rounding off 1 End of period 2 Changes in figures for 2008 are due to revisions Source: Central Bank of Seychelles

Chart 2.6: Commercial Banks’ Loans and Advances to Non-Government Sectors (2000-2009)

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

R m

illio

n

Agriculture and horticulture Building and construction Financial InstitutionsFishing Manufacturing Real EstateTourism Trade TransportOthers Private Households



- 19 -

2.6.3 Development Bank’s Credit2

In 2009, the Development Bank of Seychelles (DBS) which provides advances across economic

sectors, in spite of the recessionary tendencies, the amount of credit it extended to the economy grew

by R39 million or 14 per cent in contrast to the contraction posted in the year before. This was an

unexpected outcome - especially in view of the higher interest rates environment and the global crisis -

and was driven by the fishing sector followed by tourism. The fishing industry benefited from an

additional R18 million in the year. All the remaining sectors posted increases in their loan portfolios.

Table 2.7 Loans by Development Bank by Economic Sectors; 1 2005 - 2009

2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 (R million) (Percent)

Total Advances 327.1 330.8 293.9 278.7 317.6 100.0 100.0 100.0 100.0 100.0 Agriculture 12.9 12.4 8.3 8.0 25.5 3.9 3.7 2.8 2.9 8.0 Fishing 22.4 17.5 15.0 12.3 13.1 6.8 5.3 5.1 4.4 4.1 Industry 17.5 17.6 15.8 11.0 14.4 5.4 5.3 5.4 4.0 4.5 Tourism 106.3 101.5 81.0 74.6 83.6 32.5 30.7 27.6 26.8 26.3 Other services 168.0 181.8 173.8 172.8 181.0 51.4 55.0 59.1 62.0 57.0 Figures do not necessarily add up due to rounding off 1 End of period Source: Development Bank of Seychelles

Chart 2.7: Loans by Development Bank by Economic Sectors (2000-2009)

020406080

100120140160180200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

R m

illio

n

Agriculture Fishing Industry Tourism Other services

Source: Central Bank of Seychelles 2 Development Bank of Seychelles (DBS) was established in 1977 under Decree No. 21 as a development financing institution with a specific mandate to assist in the economic development of Seychelles. DBS finances new modernization and expansion projects in the fields of agriculture, fishery, industry, service and tourism as well as construction of commercial and residential complex. To qualify, the applicant must be a Seychellois citizen or a company incorporated in Seychelles with at least 51 per cent Seychellois ownership. Currently, DBS charges 15 per cent per annum on all loans and requires applicants to make a minimum personal contribution of 25 per cent of the total project cost. The Development Bank of Seychelles does not provide credit for working capital by itself.


- 20 -

2.7 Liquidity of the commercial banks By end-2009, the overall liquidity position of the commercial banks had increased on account of the reduction in the minimum reserve requirement ratio, the abolishment of the local asset ratio, low credit creation, the strategy of the government to reduce its domestic debt stock, the gradual placement of the MRR on foreign currency deposits in foreign currency. The growth in liquidity occurred mainly in the last three quarters of the year. Rather notable is that liquidity of the banks increased even at year end, when higher consumption related to end-of-year festive season have traditionally had a tendency to bring it down. In addition, the fact that banks remained highly liquid in these last nine months was also largely due to the low intake of Treasury-bills by the government compared to the maturities. Thus, during that period, even though the lending facility offered by the Central Bank remained open, banks made little use of it. The exceptions occurred in April and September when, on average banks borrowed R41 million per night, for seventeen nights. Thus, by the end of the year, the banks had no outstanding credit amount with the Central Bank.

Table 2.8 Central Bank Advances to Commercial Banks

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

R million

Advances 485.4 254.7 82.5 354.5 1032.5 280.0 34.0 157.0 190.0 705.0 Repayments 463.4 276.7 82.5 341.5 915.5 410.0 34.0 157.0 190.0 705.0

Stock of Credit1 22.0 0.0 0.0 13.0 130.0 0.0 0.0 0.0 0.0 0.0 1 End-of-period data Source: Central Bank of Seychelles

As a group, the banks ended the year with a holding of R274 million as excess reserves with the

Central Bank.

Chart 2.8: Central Bank Advances to Commercial Banks (2000-2009)

0

200

400

600

800

1,000

1,200

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

R m

illion

Advances Repayments



- 21 -

2.8 Interest rates

Interest rate determination was liberalised in late 2008. This immediately caused the market interest

rates to rise considerably by the end of that year. The same trend was observed in the first few months

of 2009, with the benchmark interest rates, namely the 91-day Treasury bill standing at relatively high

levels.

However, the step taken by the government to reduce its debt burden greatly influenced the pace at

which market interest rates fell from their peaks. The rate of returns on government 91-day Treasury-

bills which almost reached 30.00 per cent in January fell to 1.26 per cent in early December, although

this picked up slightly to end the year at 4.3 per cent. Rates on 182-day and 365-day also followed a

similar pattern falling from 16.87 per cent in May to 5.5 per cent by end-December, and 13.27 per cent

in July to 6.40 per cent by end-December, respectively.

Table 2.9 Interest Rates 1/6

Percentage 2005 2006 2007 2008 2009 Minimum Deposit Rate 2 2.50 2.50 3.50 - - Volume-weighted average deposits Savings Rate 2.97 2.78 3.50 9.67 1.85 Fixed Term deposits rate 2.90 3.28 3.16 6.09 5.64

<= 7 days 2.07 3.28 2.53 3.62 2.07> 7 days <= 3 months 3.07 3.12 3.77 7.82 5.50> 3 months <= 6 months 3.31 3.29 3.46 5.73 5.27> 6 months < =12 months 3.02 3.23 3.32 7.47 6.34> 12 months 3.01 3.48 2.72 5.83 9.04

Volume-weighted Average lending rate 9.87 10.50 11.26 16.19 13.4991-day treasury bill rate 3 2.93 3.79 3.98 25.95 4.29182-day treasury bill rate 4 - - - - 5.50365-day treasury bill rate 5 4.24 4.12 4.89 27.98 6.401 Average of quarterly data, compiled on an end-of-period basis, whereas that of the 91-day bill 2 Minimum deposit rate was set by CBS and is no longer applicable since 1st December 2008. rate is the average of monthly data, compiled on an end-of-period basis. 3 With effect from January 13, 2004, new 91-day bills were issued on tender 4 With effect from May 2009, 182-day Treasury bills were issued on tender 5 With effect from December 20, 2004, new issues of 365-day bills were issued on tender 6 Changes in figures for 2008 are due to revisions


- 22 -

The declines in market interest rates were more or less reflected in the rates set by the commercial

banks. As per the table above, the average savings rate fell from 9.67 per cent to 1.85 per cent,

representing a loss of 7.82 percentage points. Returns on most fixed-term deposits followed the same

trend with the maturity from 7 days to 3 months posting the largest reduction of 2.31 percentage

points. On the other hand, banks’ customers which had funds on fixed-term deposits with maturities

greater than 12 months benefited from an additional 2.70 percentage points, on average, on their

returns to 9.04 per cent.

As for the effective lending rate, the declining trend that was observed was on average slower than the

fall in the average savings rate. Thus, in spite of the reduction, the cost of borrowing remained

relatively high and this could be explained by the high premiums that continued to be imposed by the

banks in the year. On average, clients of commercial banks benefited from a reduction of 2.70

percentage points on borrowing costs, with a reduction in average effective lending rate from 16.19

percent by end 2008 to 13.49 per cent by end 2009. In view of the faster decline in savings rates, the

spread between the savings rate and effective lending rate which stood at from 6.52 per cent as at end

2008 increased to 11.65 per cent by end 2009.

Chart 2.9: Interest Rates (2000-2009)

-4.0

0.0

4.0

8.0

12.0

16.0

20.0

24.0

28.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

Perc

enta

ge

Minimum Deposit rateTime deposits rate: <= 7daysTime Deposit Rate: > 6 months < =12 monthsAverage lending rate91-day treasury bill rate


SECTION THREE

Government Finance

3. Overview

The fiscal performance in 2009 was very encouraging. All fiscal targets set out under the programme

were met. In addition the government continued to implement further fiscal policy and structural

reforms, in line with its commitments under the IMF-supported reform programme launched in

November 2008, and this enabled it to continue the shift in its role from that of an active business

partner to one of facilitator. In this regard, further privatisation of public enterprises took place, such

as certain processing plants which operated under the former Seychelles Marketing Board (SMB),

which led to a further reduction in the size of the public sector.

The savings realized through the downsizing of the public service, along with further measures to

improve revenue collection, contributed to an over-performance with regard to the primary fiscal

surplus. This in turn has allowed for an improvement in the performance of the fiscal accounts and

subsequently allowed the government to reduce its domestic debt burden. On a broader scale the

fiscal space provided by the improved budget performance allowed the government to better execute

its social programmes and minimize the adverse impacts of the economic reforms on the more

vulnerable population.

The structural reform was also generally successful, with most of the structural benchmarks met. A

Treasury Single Account (TSA) was introduced to consolidate government cash balances, and the

Public Enterprise Monitoring Control Act was approved by Parliament to better monitor the

performance of state-owned companies. External audits of the seven largest public enterprises were

completed and the recommendations of these audits are being implemented.

Revenue performance in 2009 surpassed expectations, notably in the broad areas of business tax,

dividends from parastatals, and other non-tax revenue. One of the key contributors to the higher than

expected revenue was the large repayment made by SEYPEC for a financing facility, made by

- 23 -

Annual Report 2009 Government Finance

- 24 -

government in late 2008. Overall expenditure remained well below forecast, despite some unforeseen

circumstances, such as the threat of piracy, for which government had to request for supplementary

budgetary resources from the National Assembly.

One of the key areas of interest in 2009 was the restructuring of government’s external debt, so as to

bring the country’s debt level on a sustainable path. Major success in negotiations between Seychelles

and its external creditors led to the successful re-scheduling of an important share of the country’s

external debt. This brought the debt burden to a more sustainable level. By end-2009, the country’s

public debt reached 140 per cent of GDP. The country also received debt relief from the Paris Club

under the Evian approach in April. By the end of the year, negotiations were still ongoing with other

creditors with a view to restructure the remaining external debt. The reduction of the domestic debt

was however facilitated by the large fiscal over performance.

3.1 Policy changes

In line with its policy for better public finance management, the Ministry of Finance took further steps

to reinforce financial and governance control of public enterprises under the new Public Enterprise

Monitoring and Control Act, which became effective in September 2009. Under the new Act, all

parastatal organisations are closely monitored to ensure effectiveness in the provision of essential

services and that the government gains optimal returns on its investment. The new Public Enterprise

Monitoring Division is also coordinating strategic assessments of selected public entities, as well as

external financial audits and management audits of major public enterprises.

One of the positive results of the reforms of public entities was the reduced dependence on public

funding and financial risks of parastatal companies toward the state. Furthermore, the public finance

management framework has been consolidated through the introduction of the Treasury Single

Account (TSA), which captures transactions of all ministerial and parastatal institutions’. The TSA

should also strengthen and optimise the use of government cash balances.

Further reforms, encompassing amendments in taxation, the financial sector, public sector

administration, public finance and public enterprise were announced at the presentation of the 2010

Budget in the National Assembly in December. These second-generation reforms will be implemented

in the context of the macroeconomic programme, supported by the IMF’s Extended Fund Facility,

which was approved by the Fund’s Board in late 2009. This new programme aims at consolidating the

macroeconomic stabilisation going forward. Measures envisaged include enhancing revenue collection


- 25 -

and reinforcing control of public expenditure to render the public finance more efficient and

transparent. In addition, policies were put in place to strengthen public finance management.

A key element of government’s fiscal policy is the modernisation of the tax regime. This includes

moving from the previous tax system of diverse tax rates, relatively high business tax rates, and a large

number of exemptions, notably for the tourism and fishing sectors. The new tax reforms will have

three key components, namely, (i) reform of the business tax regime, including reduction in rates; (i)

introduction of a personal income tax (PIT) to replace the current social security contributions; and

(iii) introduction of value added tax (VAT) to replace the general sales tax (GST). Regarding business

tax, the objective is to widen the tax base gradually, eliminate sectoral preferences and exemptions,

harmonise tax rates and remove distortions and inefficiencies. As announced in the 2010 budget, the

rates on business tax will be reduced from 40 per cent to 33 per cent. This should help improve the

environment for businesses. The PIT will come into effect as of July 2010; with the current employer

and employee contribution of 20 per cent and 2.5 per cent respectively, to be replaced by a flat PIT

rate of 18.75 per cent.

3.2 External Debt

Seychelles made remarkable progress in its debt restructuring strategy during 2009. In April, the Paris

Club granted an exclusive debt treatment to Seychelles under the Evian approach. Arrears worth of

US$104 million were regularised and an agreement was reached to reduce the consolidated debt stock

by 45 per cent in nominal terms, over a one-year period. The first cancellation of 22.5 per cent of the

total agreed write-off of 45 per cent became effective in July 2009. The second part of the

cancellation is scheduled after completion of the first review of the EFF, expected in mid-2010. The

remaining balances were re-scheduled over 18 years, inclusive of 5 years grace period. In that context,

repayment of the re-scheduled debt will be done over a longer term and at lower interest rates.

3.3 Outcome for 2009

The highly favourable fiscal outcome for 2009 reflected the country’s strong commitment to the

achievement of the targets set out in the MEFP. Compared to a projected primary surplus of 12.6 per

cent of GDP the outturn stood at 13.4 per cent for the year. As noted above, the higher than budgeted

surplus reflected a combination of higher than expected revenue against lower than budgeted

expenditure. Revenue surpassed the forecast mostly because of enhanced compliance. Besides, the

country received more grants than anticipated during the course of the year.


- 26 -

Chart 3.1: Government Finance Outcome (2000-2009)

0

500

1000

1500

2000

2500

3000

3500

4000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

R m

illio

n

-800

-600

-400

-200

0

200

400

600

800

Total Receipts Total Outlays Overall Balance

Source: Ministry of Finance

3.4 Revenue

In 2009, revenue more or less remained on track, mainly due to the rapid repayment of a financing

facility for the national oil company, SEYPEC, granted in 2008. In addition grants were higher than

programmed, with actual grants totalling R316 million, exceeding the budget by a significant R297

million. In support of the reform programme, many development and bilateral partners offered

assistance through general budget support facilities.

Subsequent to more efficient compliance measures, tax collection by the Seychelles Revenue

Commission (SRC) exceeded the budgeted level by R249 million or 7 per cent, amounting to R3.8

billion. Overall tax collection stood at R3.3 billion compared to the forecasted R3.2 billion. Current

receipts stood at R3.8 billion, of which goods and services tax (GST) accounted for the largest share,

at R1.3 billion. Business tax and ‘other tax’ revenues also exceeded their respective targets. Business

tax totalled R800 million, representing a surplus of R250 million whilst a total amount of R350

million was collected in the ‘other tax’ category, exceeding the budget amount by 55 per cent.

With regards to non-tax revenue, the actual fees and charges of R182 million surpassed the budgeted

level by R17 million or 10 per cent. Dividends collected from parastatals exceeded the anticipated

level by R148 million. For most parastatal entities actual dividends exceeded expectations with the

exception of those received from the Seychelles Civil Aviation Authority (SCAA), which fell 25 per

cent short of the budgeted R35 million.


- 27 -

Table 3.1 Government Budget; 2009

Summary ( R’000)

2009 2009 2010 Budget Actual 1 Budget

Total revenue and grants 3,575,786 4,109,565 3,722,550 Total revenue 3,555,786 3,792,754 3,405,376

of which: Tax 3,145,329 3,319,181 3,066,912 Personal Income Tax - - 196,633

Social Security Tax 352,000 383,900 229,568 Trade tax 575,001 437,097 490,890 GST 1,442,000 1,347,775 1,281,989 Business tax 551,000 800,889 599,074 Other Tax 225,328 349,520 268,758 Non-tax 410,457 473,574 338,464 Fee and charges 165,100 181,924 167,413 Dividends from parastatals 123,000 148,016 100,172 Other non-tax 122,356 143,634 70,879 Grants 20,000 316,811 317,174 Expenditure and net lending 4,160,296 3,441,682 3,626,536 Current expenditure 3,502,342 3,202,002 3,109,036 Primary Current Expenditure 2,279,851 2,287,571 2,431,036 Interest due 1,222,491 914,431 678,000 Transfers 896,593 787,437 944,881 Capital expenditure 357,955 608,406 747,500 Net lending - (371,526) (330,000) Contingency 300,000 2,800 100,000 Primary balance, Accrual basis (GFS) Including grants 637,980 1,582,314 774,014 In percent of GDP 6.2% 15.3% 7.0% Excluding grants 617,980 1,265,503 456,840 In percent of GDP 5.99% 0.12 4.1% Overall balance, Accrual basis (GFS) (584,511) 667,884 96,014 In percent of GDP -5.7% 6.5% 0.9%

Change in Arrears (196,078) 20,943

(100,000) External Interest - 245,337 -

Budget (196,078) (224,394)

(100,000)

Overall balance, cash basis (after grants) (780,589) 688,827

(3,985) Financing 780,589 (688,827) 3,985

Foreign Financing (accrual basis, net) (820,154) (602,906)

(246,354) Domestic Financing , net 1,275,239 (1,105,605) 98,038

Bank Financing 1,211,477 (650,750) 83,991 Non-Bank Financing 63,762 47,844 14,047

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. 3 Series shows 2009 and 2010 figures only due to change in format of presentation of Government Finance Statistics to be in line with international standards. Source: Ministry of Finance


- 28 -

Chart 3.2: Major Revenue Flows in Current Receipts (2000-2009)


3.5 Expenditure

One of the significant factors that explained the higher than expected primary fiscal surplus in 2009

was the tight control over expenditure. The primary surplus of 13.4 per cent of GDP created fiscal

space for priority expenditure, including spending not envisaged in the original 2010 budget such as

those associated with piracy activities in the Seychelles territorial waters.

3.5.1 Current Outlays

Total current expenditure for the year amounted to R3.2 billion, approximately R311 million or 9 per

cent below budget. Thorough analysis of expenditure showed that actual spending in most of the

components classified under current expenditures was under budget. An important source of saving

was interest payments, which amounted to R914 million for the whole of 2009 compared to the

budgeted R1.2 billion. The lower interest payments was mainly due to the faster redemption of

government securities than anticipated as government rolled over less securities than programmed,

which in turn mirrored the more favourable revenue outcome. As discussed earlier in this Report,

yields of government short term financing instruments declined at a fast pace from its peak early in the

year.

Despite the overall spending shortfalls, overruns were observed in some categories of spending, such

as capital subscriptions to international organisations, which was R6.8 million over budget, totalling

R8.0 million. This was felt necessary as Seychelles moved to regularize arrears to international

organizations. Slight overspending was also incurred under ‘wages and salaries’,

0

500

1000

1500

2000

2500

3000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Years

R m

illio

n

Transfers from SSF Trades Tax Income / business tax Other Indirect Taxes Fees and Fines Rents and Royalties


- 29 -

‘ministries/departments’, and ‘goods and services’, in the order of 13 per cent, 5 per cent, and 1 per

cent, respectively.

3.5.2 Capital Outlays

Capital outlays for the year stood at R608 million, 70 per cent above the budget. A total of R481

million was used up for capital projects, exceeding the budget by R201 million or 71 per cent.

Expenses toward development grants were 78 per cent in excess of the budgeted R68 million. The

largest share of R120.5 million was allotted to the Public Utilities Corporation (PUC), to finance the

restructuring of the energy company. In contrast, capital grants to the ‘Social Security Fund (SSF)

were well below the budget by 55 per cent, standing at R2.1 million. Likewise, the cost associated

with the ‘compensation for land acquisition’ was R294 million or 6 per cent lower than the

corresponding planned capital expenditure.

Another impressive development was in relation to the Contingency Fund, whereby only R2.8 million

out of R300 million allocated was used throughout 2009. This amount was voted for in the budget

largely in anticipation of possible need for recapitalization of publicly-owned financial institutions

following the liberalization of interest rates and exchange rate regime at end-2008. Initial stress tests

suggested that these institutions could face serious problems following liberalization. However, this

did not happen as these institutions adjusted, such as by passing on the interest increases to clients to

protect their balance sheets. The use of only R2.8 million indicates that the state-owned financial

institutions were very successful in withstanding the shock of the country’s economic reforms and that

of the global financial crisis.

Chart 3.3: Government Capital Expenditure (2000-2009)


0

100

200

300

400

500

600

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

R m

illio

n

-100

-50

0

50

100

150

Perc

enta

ge

Capital outlays % Change


- 30 -

3.6 Public Sector Capital Project Expenditure

Capital project expenditure for the year totalled R481 million, which was well above the budgeted

amount of R280.6 million.

Table 3.2

Public Sector Capital Expenditure; 2005-2009

2005 2006 2007 2008 2009 (R ‘000)

Total 223,002 372,121 343,499 265,329 481,148 Economic Sectors 1,869 4,054 4,382 3,256 142,758 Agriculture 921 1,449 2,882 1,240 2,491 Fisheries 822 2,593 1,500 2,016 140,267 Tourism 127 12 - - - Outer island development - - - - Craft & home industries - - - - - Trade & Commerce - - - - -

Infrastructure and Utilities 20,411 43,420 22,185 12870 30595

Transport 8,711 33,581 16,422 8,005 10,330 Electricity, Water supply & sanitation 4,572 313 315 209 769 Communications 1,035 3 10 - - Land Reclamation - - - - - Land Bank 6,093 9,523 5,439 4,656 19,496

Services 200,722 324,647 316,932 249,203 307,794 Education 22,824 1,662 1,518 956 71,653 Health 5,418 17,728 13,043 13,898 23,480 Housing 79,552 117,185 156,484 126,039 66,782 Social development 31,842 99,273 34,624 18,330 57,823 Culture 1,607 3,777 3,524 4,847 1,305 Youth & Sports 7,812 2,996 11,388 8,209 12,559 Information & media 30 34,623 17,866 7,673 1,877 Internal affairs 1,951 242 2,666 2,924 1,221 Public sector management 43,947 36,774 68,808 59,840 29,907 Environment 5,739 10,388 7,010 6,487 41,187


3.6.1 Economic Sectors

Spending on economic sectors totalled R142.8 million as opposed to only R3.3 million in the previous

year. Similar to 2008, only two sectors of the economy, namely, ‘agriculture ‘and ‘fisheries,’ received

funding from the government for capital projects. ‘Fisheries’ received the largest share of the total,

amounting to R140 million, which went mostly towards the construction of the new artisanal port.

3.6.2 Infrastructure and Utilities

The portion of capital expenditure allotted to infrastructure and utilities was increased to R30 million

as compared to only R13 million in the preceding year. Of that, 64 per cent were spent on ‘Land

bank’ to finance a site clearance survey equivalent to R19 million. The year saw an overall increase in


- 31 -

funds given for ‘land bank’ (76 per cent), ‘electricity, water supply and sanitation’ (73 per cent) and

‘transports’ (23 per cent).

3.6.3 Services

As has been the trend over the past few years, services accounted for the bulk of financing on capital

projects standing at R308 million. The sum allocated for funding of services exceeded the 2008 level

by approximately R57 million or 23 per cent.

‘Education’ received the largest share of financing for services, with R71.7 million as opposed to only

approximately R1 million in the previous year. This was mainly to finance the construction of new

primary schools at Baie Lazare and Au Cap, along with the Maritime Training Centre. Funds spent on

‘housing’ fell by almost 59 per cent to R66.8 million.

A number of sub-categories namely, ‘housing’, ‘culture’, ‘information and media’, ‘public sector

management’ and ‘internal affairs’ recorded lower amount of funds in contrast to that of the preceding

year. The latter received the lowest portion of funds.

3.7 Net Lending

Net lending are short-term lending to public sector entities for which repayment are due in full by the

end of the year. As at December 2009, the actual net lending amounted to negative R372 million,

which indicates that there was a net repayment of net lending, which reflected two factors; first, the

fact that government lending fell in 2009; and secondly there was a large net repayment by a major

parastatal (SEPEC) during the course of the year.

3.8 Financing

The overall budgetary surplus is reflected through the decline in the stock of domestic debt.

Chart 3.4: Stock of Domestic Debt (Jan – Dec 2009)

Source: Ministry of Finance/Central Bank of Seychelles

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0


Months

R m

illio

n


- 32 -

As at end-December 2009, the total stock of domestic debt stood at R3.9 billion, accounting for almost

40 per cent of the total public debt. This represents a reduction of 11 per cent in the total domestic

debt outstanding when compared to the level at the end of the preceding year.

3.8.1 Treasury Bills

In view of the need to diversify the instruments on offer on the market, as well as the strategy to

lengthen the maturity profile of government securities, 182-day and 365-day treasury bills were

introduced in May and July 2009 respectively, adding to the existing issue of 91-day treasury bills.

Treasury bills auctions were conducted on a weekly basis, compared to once every month prior to the

reform programme. Replacing shorter term debt with longer term debt has enabled a more effective

management of interest rate risk and also reduced the roll-over risk.

Table 3.3 Treasury Bills; 2005 - 2009 1/2/3/

(R’000) 2005 2006 2007 2008 2009 Stock outstanding 1/3/ 1,336.7 1,185.8 1,130.5 1,401.2 1,699.6 91-day bills (tender issue) 1,144.8 1,089.7 1,035.2 1,323.1 338.0 182-day bills (tender issue) - 780.8 365-day bills (tender issue) 191.9 96.1 95.3 78.1 580.8 Stock outstanding 2/3/ 1,353.2 1,200.0 1,145.0 1,458.8 1,802.7 91-day bills (tender issue) 1,153.2 1,100.0 1,045.0 1,358.8 341.5 182-day bills (tender issue) 820.5 365-day bills (tender issue) 200.0 100.0 100.0 100.0 640.7 Held by 3/ -0.1 Commercial banks 1,315.7 1,143.0 1,102.7 1,233.0 1,551.5 Other financial institutions 0.0 0.0 0.0 25.5 45.5 Others 37.5 57.0 42.3 100.3 205.7 1/ At cost value. 2/ At face value. 3/ End of period data. Source: Central Bank of Seychelles

Similar to past years, commercial banks remained the most active participants in the primary auction,

with the Barclays Bank (Sey) Ltd and SIMBC being the main subscribers. Nonetheless, commercial

banks’ holdings have been significantly reduced, from 93 per cent in 2008 to about 57 per cent at end-

2009. The issue of 91-day bills dropped significantly during September-October 2009 which

coincided with the introduction of 182 and 365-day bills.


- 33 -

Rates on all three maturities, namely, 91-day, 182-day and 365-day have gradually dropped since the

third quarter of the year, as government accelerated the repayment of its domestic debt. At the end of

the year interest rate on 91-day, 182-day and 365-day Treasury bills stood at 4.29%, 5.5% and 6.4%

respectively.

Chart 3.5: End of period Treasury Bills average yield (Jan – Dec 2009)

0

5

10

15

20

25

30


End of period

Per

cent

age

91 days 182 days 365 days


3.8.2 Treasury Bonds

No Treasury bonds were issued in the course of 2009 with total outstanding bonds issued prior to that

amounting to R813 million. During 2009 total maturity of these bonds amounted to R641 million,

with R75 million in the 3 year 8% bond, R141 million in 5 year 10% bond and R500 million in the 3

year 12% bond. It is worth noting that the interest rate on treasury bonds was double the level at the

beginning of the year following the liberalization of exchange rates, and to compensate for a sharp

increase in inflation, and also following similar trends in bank deposits.

Also in 2009 the Central Bank and the Ministry of Finance concluded an agreement that allowed the

Central Bank to convert its stock of the 20-year bond into two sets of marketable securities, namely

R500 million into 91days and R497 million into 365 days. This was a very useful development for the

central bank since it provided the institution with shorter term securities that increased its possibilities

for intervention in the market for liquidity management purposes.


- 34 -

Table 3.4 Treasury Bonds; 2005 -2009 1/

2005 2006 2007 2008 2009

(R million)

Stock outstanding 1/ 1,765.6 2,077.9 1,826.2 1,571.7 813.44.0%, 3-yr 776.7 410.4 35.4 18.7 - 5.0%, 5-yr 490.9 490.9 490.9 189.7 - 14%, 7-yr (7%) 183.0 183.0 183.0 183.0 183.016%, 10-yr (8%) 291.5 293.6 293.6 293.6 293.616.5%, Esmeralda II (8.25%) 23.5 150.0 150.0 150.0 150.0 6.0%,3-yr - 500.0 500.0 500.0 - 10.0%,3-yr - 50.0 50.0 50.0 - 20%,5-yr (10%) - - 100.0 100.0 100.0 12%,3-yr (6%) - - 23.3 86.8 86.8Held by : 1/ Commercial banks 1,094.5 1,341.8 1,052.4 841.0 160.0 Other financial institutions 94.7 402.8 405.2 352.9 353.1 Others 576.4 333.3 368.6 376.8 299.2 CBS 1.01/ End of period data. With effect from June 2005 there was the issue of a new Esmeralda II bond yielding 8.25% compounded. With effect from July 2006 there were new issues of bonds; 6.0%,3-yr; and 10.0%,3-yr. In May 2007 there was the issue of 10.0%, 5-yr bond. In November 2007 there was the issue of 6.0%, 3-yr bond. With effect from January 01 2009 all interest on Government Treasury Bond have been double Source: Central Bank of Seychelles

3.8.3 Government Stocks

With regards to government stocks, R50 million was redeemed in the course of 2009, which brought

the stock outstanding at the end of the year to R100 million. Government stocks will over time be

phased out.

Table 3.5Government Stocks;1/ 2/ 2005 – 2009

2005 2006 2007 2008 2009

(R million) Stock outstanding 1/ 150 150 150.0 150.0 100.0 8.00%, 2009 50.0 50.0 50.0 50.0 - 8.50%, 2005/07 30.0 30.0 - - - 8.50%, 2014 70.0 70.0 70.0 70.0 70.0 8.50%, 2017 - - 30.0 30.0 30.0

Held by Commercial banks 2/ 147.1 147.1 147.1 147.1 97.1 Others 2.9 2.9 2.9 2.9 2.9

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

SECTION FOUR

The External Sector

4. Overview

Following a turbulent 2008 when the global economy and financial markets faced serious challenges,

the year 2009 showed gradual signs of stabilisation. Across the globe, policymakers went to great

lengths to stimulate enough demand to prevent a prolonged recession. As such, the year closed on a

more positive note than anticipated, with the world economy contracting by an estimated 1.1 per cent.

The global recovery is expected to be stronger in 2010 as the world output rises by approximately 4

per cent, mainly on account of robust activities in many emerging and developing economies.

On the domestic front, the impact of the macroeconomic reform programme was felt harshly during

the first few months following its introduction in November 2008. For instance, the liberalisation of

the foreign exchange market and the float of the rupee resulted in unprecedented levels of inflation,

given the high pass through effect. Imports dropped significantly, which whilst on the one hand

contributed to a decline in economic growth, on the other hand positively impacted on the country’s

Balance of Payments (BOP).

Provisional BOP statistics show a current account deficit of R3,685 million (US$271 million) or 35

per cent of GDP for the year 2009, a commendable improvement when compared to the huge deficit of

50 percent of GDP in 2008. This reflected a gradual decline in general price levels internationally

combined with the effects of the devaluation of the rupee which led to a decline in the demand for

imports.

Whilst the overall balance showed a surplus of R2,419 million (US$178 million) compared to the

deficit of R2,252 million (or US$239 million) in 2008, the BOP was partly financed from the non-

repayment of external loans pending the outcomes of negotiations with respective creditors. In April

2009, the authorities concluded negotiations with the Paris Club creditors which resulted in an

agreement to grant Seychelles a 45 per cent debt cancellation of its Paris Club debt, to be provided in

- 35 -

Annual Report 2009 The External Sector

- 36 -

two phases3. The remaining amount will be rescheduled over an 18 year period with a 5 year grace

period. Paris Club cancellation requires comparable treatment by all other creditors. By-end 2009 the

Seychelles authorities’ had made substantial progress in negotiations with other creditors, having

secured agreements with at least one bilateral creditor (Malaysia), and one commercial creditor.

Furthermore, progress with bondholders and amortization note holders - who made up the largest

share of government debt with private creditors - had advanced well, aided substantially by the support

of the African Development Bank (AfDB) who indicated their intentions to provide a partial guarantee

on the proposed new bond exchange issue, to replace these two former instruments. It must be noted

though that under the reform programme, Seychelles must remain up to date with its obligations

towards multilateral agencies.

Chart 4.1: The overall balance, current account and capital and financial account of the BOP from 2000 to 2009

-5,250-4,500

-3,750

-3,000

-2,250

-1,500

-7500

750

1,5002,250

3,000

3,750

4,500

5,250

6,0006,750

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

R m

illio

n

CURRENT ACCOUNT CAPITAL AND FINANCIAL ACCOUNT OVERALL BALANCE


With the change in foreign exchange regime toward the end of 2008, the Seychelles Interbank Foreign

Exchange Market (SIFXM) was launched in March 2009 as there was a need to assist the market in

the price discovery process. Through this platform, banks can buy and sell US dollars (other

currencies will be considered as the market develops) at quoted spot rates. In due course new

instruments, such as swaps and forwards, will be introduced to cater for the deepening of the foreign

exchange market.

3 These were two phases of 22.5 percent, the first which was granted in July 2009, and the second expected in July, 2010.


- 37 -

Following the sharp depreciation in the value of the Seychelles rupee toward the end of 2008, the

situation turned around in 2009, with a steady appreciation of the rupee against the world’s main

trading currencies. This resulted from a constant increase in the supply of hard currencies in the

system as the market settled down, coupled with slow demand for imports. This helped to bring down

inflation. The availability of hard currency in Seychelles would have considerably improved the

standard of living of the average Seychellois compared to recent years when the economy was plagued

by chronic shortages of foreign exchange and the occasional lack of certain categories of goods and

raw materials.

The country’s external reserves improved significantly during 2009. This was achieved through a

combination of factors, notably purchases from the domestic banking sector, receipts from

international organisations in terms of grants and budget support loans.

In terms of institutional reforms, in July 2009, the Foreign Exchange Act, 2009 (FEA) came into

effect, repealing and replacing the previous Exchange Control Act, 1954 and its subsequent

amendments. Unlike its predecessor, the new Act is more regulatory as opposed to restricting

activities in the foreign exchange market and aims to prevent illegal activities which flourished under

the previous law. The main objective is to consolidate the status of the Seychelles rupee as the legal

domestic tender. The rupee cannot be refused when offered as a means of payment in Seychelles.

However, where stipulated by law, payments may be made in foreign currency. The FEA also

eliminated all restrictions on current and capital payments.

4.1 Current account

Although the current account remained in deficit, it showed vast improvement relative to the previous

year. In 2009, the country’s current account deficit amounted to R3,685 million (or US$271 million),

representing approximately 35 per cent of GDP, compared to R4,362 million (US$462 million) or 50

per cent of GDP in 2008. The outcome reflected the better performance of both the “goods” and

“services” accounts compared to previous years.

One factor which had a direct impact on the country’s balance of payments was the devaluation of the

domestic currency in November 2008. Movements in exchange rates were reflected in the retail prices

of goods and services, thus leading to a drop in demand for imported consumer goods and raw

materials.


- 38 -

4.1.1 Trade in goods

The declining prices internationally during 2009 brought some respite to the global markets. In the

aftermath of excessively high fuel and commodity prices and the collapse of numerous financial

institutions, this was a welcomed development. Although they have not returned to their pre-crisis

level, the lower prices and slowly restoring consumer confidence have gone a long way towards global

economic stabilisation.

Chart 4.2: Trade in Goods (2000 – 2009)

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

R m

illio

n

Merchandise exports (f.o.b.) Merchandise imports (f.o.b.) Merchandise, Net


Despite remaining in deficit (R4,309 million), the net value of the “goods account” recovered by R884

million (17 per cent) relative to 2008. Even though receipts were superior to that of the previous year,

outflows were also higher. In terms of merchandise trade, this heading recorded a deficit of R5,942

million in 2009 against R6,649 million a year earlier. This represented an improvement of R707

million or 11 per cent over that period and was mainly due to increased income from exports (f.o.b.),

which rose from R2,188 million to R3,272 million. The value of imports f.o.b. was approximately 4.3

per cent higher than that of 2008.

Whilst the weaker rupee improved the competitiveness of local products on the international markets,

it also meant more expensive imports for domestic consumers. Demand for certain categories of basic

goods, such as food, beverages, tobacco and even mineral fuels, dropped. On the other hand increases

were recorded in categories associated with the construction and tourism sectors.


- 39 -

Table 4.1 Seychelles Balance of Payments;1/2 2005 to 2009

2005 2006 2007 2008 2009 Prov. (R million)

CURRENT ACCOUNT -481.5 -740.3 -1445.4 -4362.4 -3684.6 Goods, -1170.3 -1602.7 -2366.6 -5193.3 -4308.9 Credits (of which:) 1930.0 2319.2 2648.0 4653.1 5837.9 Merchandise exports (f.o.b.) 1165.1 1215.5 1346.5 2187.7 3272.0 Debits (of which:) 3100.3 3921.9 5014.9 9846.5 10146.8 Merchandise imports (f.o.b.) 2958.7 3644.7 4630.9 8836.5 9213.5

Services 737.5 862.0 1182.5 1168.7 1325.2 Credits (of which:) 2028.2 2375.6 3216.2 4331.1 5469.9 Tourism Earnings 1050.5 1251.7 1901.2 2437.8 2841.4 Debits 1290.7 1513.6 2033.8 3162.4 4144.7

Income -220.4 -242.2 -482.2 -1044.3 -1507.7 Compensation of employees -31.8 -40.8 -67.2 -115.1 -187.3 Credit 1.0 1.0 5.4 8.3 11.5 Debit 32.8 41.8 72.6 123.4 198.8 Investment income -188.6 -201.4 -415.0 -929.3 -1320.3 Credits 52.9 56.1 64.0 79.9 101.1 Debits 241.5 257.5 479.0 1009.1 1421.4

Current transfers 171.7 242.6 221.2 706.6 806.8 General government 128.2 127.0 65.9 531.9 776.9 Credits 129.9 129.0 68.4 535.6 782.3 Fishing licence fees 52.4 66.2 21.8 158.3 240.8 Other grants 77.5 62.8 46.6 377.3 541.6 Debits 1.7 2.0 2.5 3.7 5.5 Other sectors 43.6 115.6 155.3 174.7 29.9 Credits 65.5 169.4 227.9 280.2 161.7 Debits 22.0 53.8 72.5 105.5 131.8

CAPITAL AND FINANCIAL ACCOUNT 400.2 1313.8 1697.9 2074.5 6089.8 CAPITAL ACCOUNT 164.3 73.0 50.4 13.8 689.6 FINANCIAL ACCOUNT 235.9 1240.8 1647.5 2060.7 5400.1

Direct investment 288.5 759.6 1382.3 2097.3 3046.4 Abroad 183.8 44.2 196.4 285.7 111.7 In Seychelles 472.3 803.8 1578.7 2383.1 3158.1

Portfolio investment 5.6 1105.4 892.0 -690.7 12.8 Assets -0.2 -0.3 -0.2 -701.8 -1.2 Liabilities 5.8 1105.7 892.3 11.1 14.0

Other investment -58.2 -624.3 -626.8 654.1 2341.0 Assets 52.9 48.4 414.1 -34.0 -2069.5 Liabilities -5.3 -575.9 -212.8 620.1 271.4

Net errors and omissions -2.7 9.5 14.4 36.0 14.2

OVERALL BALANCE -84.1 583.0 266.9 -2251.9 2419.4

Financing of overall balance 84.1 -583.0 -266.9 2251.9 -2419.4 Reserve assets(1) -120.9 -344.6 330.8 -884.6 -1590.0 Arrears 204.9 -238.4 -597.7 3136.5 -829.5

Memorandum items: Current account (percentage of GDP) -9.5 -13.2 -21.0 -49.8 -35.4 Trade Balance (f.o.b.) (merchandise exports less imports)

-1793.6

-2429.2

-3284.4

-6648.8

-5941.6

Stock of Reserves (Gross) (R million) 308.7 653.3 322.5 1207.1 1906.7 Stock of Reserves (Gross) (Weeks of cif imports) 6.4 11.0 4.3 8.4 12.7 Exchange Rate (Rupee/US$; period average) 5.5 5.5 6.7 9.4 13.6

Notes (1) Contrary to the exchange record, this series is recorded on an accruals basis. (2) Data series may differ from previous publications due to revisions (3) (-) sign indicates increase in reserves


- 40 -

Repair works undertaken on aircrafts and ships during the year, showed that the country continued to

spend significant amounts on their maintenance abroad compared to what is earned when foreign

vessels and planes are repaired in Seychelles. On the other hand, statistics showed a favourable

outcome under the category “goods procured in ports”, indicating that the value of goods - mostly fuel

- sold to foreign vessels were higher than those procured by Seychelles’ vessels and aircrafts overseas.

4.1.2 Merchandise exports

The country’s economic base is not any different to what it has been for many years, although

recently, there has been some effort toward diversification. Seychelles continued to export mostly fish

and fish products to its established markets. The total value of exports (f.o.b.) stood at R3,272 million,

representing a growth of R1,084 million or 50 per cent compared to 2008. Even in dollar terms,

receipt from exports grew from US$232 million in 2008 to US$241 million in 2009.

As has been the case over the past several years, canned tuna remained the country’s main export. This

item brought in a total of R2,974 million and accounted for 91 per cent of total exports. It is worth

noting though that the performance of the industrial fishing sector occurred against a background of

significant challenges. The threat of piracy forced some foreign fishing vessels to leave Port Victoria,

whilst others that stayed did not dare venture too far out, thus, resulting in much lower catch levels.

Table 4.2

Domestic Exports;2005-2009 2005 2006 2007 2008 2009

(R million)

Total 1165.1 1,215.52 1,346.5 2,187.7 3,272.0 Copra 0.0 0.0 0.0 0.0 0.0 Cinnamon bark 0.5 0.8 0.7 0.7 0.0 Frozen and fresh fish 16.5 14.5 13.9 29.0 52.6 Canned tuna 969.6 1031.4 1237.7 2,038.7 2974.0 Other Processed fish 10.2 3.1 10.9 9.3 0.0 Crustaceans 31.8 46.1 17.3 23.0 5.0 Other exports 136.4 119.7 66.0 87.1 240.3 Source: National Statistics Bureau


- 41 -

Chart 4.3: Exports 2009

Canned tuna90.9%

Frozen and fresh fish1.6%

Other exports7.3%

Crustaceans0.2%

4.1.3 Merchandise imports

The slight increase in the country’s import bill reflected in part the effect of the weaker rupee. Total

imports (f.o.b.) for 2009 stood at R9,214 million, an expansion of R377 million compared to 2008.

However, in dollar terms, total imports (f.o.b.) fell from US$937 million in 2008 to US$678 million in

2009. The main import components were “manufactured goods and miscellaneous manufactured

articles,” “machinery and transport equipment,” “mineral fuels” and “food, live animals and vegetable

oils.”

Despite the general decline in domestic economic activity during 2009, some capital projects in the

tourism sector continued to be implemented. One of the major projects was the Ephelia Resort and

Spa at Port Launay, though it postponed its opening from end-2009 to early 2010. Nevertheless some

other small tourism institutions opened their doors during the course of the year. This partially

explains the increase in “manufactured goods and miscellaneous manufactured articles,” which rose

by around 80 per cent compared to 2008.

The value of imported “mineral fuels” for 2009 stood at approximately R2,063 million, a decrease of

24 per cent from R2,705 million in 2008. This showed the slightly lower, but volatile, fuel prices

internationally.


- 42 -

Table 4.3

Imports (c.i.f)- by HS1 Sections; 2005-2009

2005 2006 2007 2008 2009

(R million) Description Total Imports 3,846.0 4,216.2 4,671.7 10,275.7 10,806.3 Food, live animals & vegetable oils 808.8 1004.6 1229.8 2,618.3 2,206.2 Beverages and tobacco 45.9 60.4 66.9 175.5 137.5 Mineral fuels 872.4 1113.8 1223.1 3,182.8 2,427.4 Chemicals 238.4 191.8 212.8 352.5 479.5 Manufactured goods & misc. manufactured articles 661.0 944.8 971.1 1,608.4 2,904.4 Machinery and transport equipment* 1045.2 814.5 849.6 2,163.6 2,420.0 Other commodities 174.4 86.3 118.4 174.6 231.3 Notes: 1 Harmonised System

Imports under “machineries and transport equipment” also included the cost of the small tanker,

Seychelles Paradise worth 11 million euro, which SEPEC invested in to serve the inter-island (Mahe –

Praslin) route. The tanker began operation towards the end of 2009.

Chart 4.4: Imports (f.o.b.) 2009

Food, live animals & vegetable oils

20.4%

Beverages and tobacco1.3%

Mineral fuels22.4%

Machinery and transport equipment

22.6%

Chemicals4.4%

Other commodities2.0%

Other unrecorded shipment (shuttle trade)

0.1%

Manufactured goods & misc. manufactured

articles26.8%


- 43 -

4.1.4 Goods procured in ports by carriers

This category recorded a surplus of R1,801 million or an increase of around 10 per cent relative to

2008. Both the credit and debit sides of the account recorded more favourable outcomes than in the

previous year. Total credit was R93 million more than the previous year, while total debit was R77

million less. In general, most sub-headings under “goods procured in ports by carriers” remained

more or less the same. The debit side accounts for goods purchased by the national airline and the

tanker Seychelles Pride while abroad. The other tankers are not accounted for in Seychelles’ BOP as

they are indirectly held by SEPEC through an offshore company, Victoria Navigation, registered in the

Isle of Man and thus considered as part of the latter’s BOP.

Table 4.4 Goods procured in Ports; 2005-2009

2005 2006 2007 2008 2009

(R Million)

Goods procured in ports, net 650.1 869.1 1028.3 1631.7 1801.0

Credits 760.5 1098.8 1294.6 2457.6 2550.1 Petrol 736.2 1070.9 1266.3 2362.2 2466.3 Food and beverages 9.5 11.1 12.5 43.1 16.5 Others 14.9 16.7 17.1 52.3 67.2

Debits 110.5 229.7 266.4 825.9 749.1 Petrol 96.7 217.7 272.3 786.7 691.1 Food and beverages 13.8 12.0 13.1 39.2 58.0

Source: National Statistics Bureau & Central Bank of Seychelles

4.1.5 Repairs on goods Whilst the amount spent on maintenance and repair of national aircrafts and vessels abroad remained the same as last year, an increase was observed in receipts from the maintenance of foreign vessels in Seychelles. However, due to the higher expenses incurred by the domestic carriers, the account remained in deficit standing at R168 million compared to R176 million a year earlier. 4.2 Services Services continued to be a major component of the country’s balance of payments. In spite of the economic difficulties which the country faced in 2009, the net value of services grew by approximately 13 per cent relative to 2008. This was due to better performance of most sub-headings. According to provisional statistics, tourism alone contributed around 27 per cent of GDP. It is worth noting that by the end of the first quarter of 2009 the tourism sector looked to be heading for serious trouble as arrivals had fallen by 14 percent relative to the same period in 2008. However, due to the quick and targeted response of the tourism industry - spearheaded by the Seychelles Tourism Board - this allowed for a remarkable recovery, which eventually resulted in a drop of only 1 percent in arrivals by year-end. Nevertheless, tourism earnings, which stood at R2,841 million (US$209 million) in 2009 and accounted for 52 per cent of gross service inflows, fell by 17 per cent compared to 2008.


- 44 -

Table 4.5Services; 1 2005-2009

2005 2006 2007 2008 2009

(R million)

SERVICES, NET 737.6 862.0 1182.5 1168.7 1325.2

Transportation 140.9 239.8 121.2 -199.3 108.3Passenger 313.8 412.4 388.3 563.3 885.3 Credit 425.0 525.0 591.0 836.3 1161.0 Debit (tickets to foreign airlines by residents) 111.2 112.6 202.7 273.1 275.7 Freight -266.6 -358.2 -464.3 -963.1 -915.2 Credit 138.4 167.6 189.3 317.9 433.8 Debit 405.0 525.8 653.6 1281.0 1349.0

Other transportation services 93.8 185.6 197.3 200.6 138.2 Credit 170.7 251.7 316.8 454.4 669.1 Marine and port charges 39.3 40.7 42.4 50.6 81.0 Income from stevedoring 65.5 69.2 82.4 82.6 200.8 Agency service income 23.0 28.6 32.6 28.2 18.4 Others 42.9 113.1 159.3 293.0 368.9

Debit 76.9 66.1 119.5 253.8 530.9

Travel 843.8 1059.0 1638.9 2093.9 2411.1Credit (of which) 1056.5 1257.4 1907.8 2443.9 2844.1 Tourism earnings 1050.5 1251.7 1901.2 2437.8 2841.4 Others 6.0 5.6 6.6 6.0 2.8Debit (of which) 212.7 198.3 268.9 350.0 433.0 Foreign travel expenditure 137.1 121.4 167.8 192.6 270.5 Training of residents abroad 42.9 43.1 65.1 105.7 80.3 Health services 32.7 33.8 36.0 51.7 82.2

Insurance, net -91.6 -135.1 -139.8 -290.8 -337.5

Royalty debits -3.0 -3.0 -3.6 -4.6 -6.3

Financial and Business services -183.2 -184.4 -235.6 -100.6 -402.4Credit (of which) 97.8 104.8 115.9 181.4 251.6Debit 281.0 289.3 351.5 282.0 654.0

Construction -70.6 -129.7 -258.1 -397.7 -473.3

Government services 100.2 107.0 132.9 188.9 293.1Credit (of which) 119.1 155.9 157.1 209.5 367.7 Foreign embassies in Seychelles 2.7 2.8 3.4 4.5 8.3 Licenses and other fees 116.4 153.1 153.7 205.0 359.4 Immigration fees and stamps* 33.2 33.4 37.5 27.5 19.1 Passenger Service Fee 15.9 17.4 20.2 28.8 40.5 Radio broadcasing license fees 29.0 38.6 10.4 12.8 10.7 Flight Information Region (FIR) 30.4 55.8 76.6 125.0 162.8 IBCs and trusts licenses fees 7.9 7.8 9.1 10.9 12.8

Debit 18.9 48.8 24.2 20.6 74.6 Expenses by Seychelles embassies 3.4 2.6 3.2 8.4 32.7 Tourism promotion 11.0 6.0 7.6 11.8 33.5 Government others 4.6 40.2 13.4 0.4 8.4

Notes 1 Tourism earnings include tourism income as per banks' records and an estimate of earnings not captured by the banking system



- 45 -

A notable increase was recorded under “transportation”, with a net total surplus of R108 million in

2009 compared to a deficit of R199 million the previous year. The three main components under this

sub-heading are:

- The “passenger account” which showed a surplus R885 million or a growth of 57 per cent

compared to 2008. This was mainly due to an increase of around 40 per cent in ticket sales to

non-residents, while payments by residents to foreign airlines remained almost unchanged.

- The “freight” account recorded a slight recovery of 5.0 per cent from a deficit of R963 million

in 2008 to R915 million during the year under review. This was on account of higher receipts

in comparison to 2008.

- “Other transportation services” recorded a net surplus of R138 million in 2009 relative to

R200 million in 2008. This reflected the significantly higher charges, which more than

doubled the amount paid by the domestic carriers as landing fees and ground handling charges

abroad.

Construction services, insurance and government services balances deteriorated over the one year

period under review. On the other hand, royalties and license fees collected rose slightly.

4.2.1 Income

The income account continued to record significant outflows in terms of benefits paid to non-

residents. The sub-headings “compensation of employees” and “investment income” deteriorated by

R72 million and R391 million respectively. The liberalisation of the banking sector and float of the

rupee caused increased outflows in terms of dividends paid to non-resident shareholders and also led

to the weaker value of the rupee. This also reflected an increase in the number of foreign employees

in Seychelles. Whilst in the past, certain administrative restrictions existed on such transactions,

effective November 2008 all impediments to current and financial account transactions have been

lifted.

4.2.2 Transfers

As Seychelles embarked on the macroeconomic reform programme, many bilateral and multilateral

partners came forward in support of the initiative to redress the country’s ailing economy. Grants

received from such partners amounted to R542 million in 2009 or R164 million more than the

previous year. Receipts in terms of fishing license fees stood at R241 million or R83 million superior

to 2008. This increase also reflected the outcome of re-negotiated fishing license fees and

compensation for under-reporting of catches by EU fishing vessels.


- 46 -

4.3 Capital and financial account

In 2009, the balance under “capital and financial account” showed a surplus of R6,090 million,

representing a growth of R4,015 million or almost double the amount registered in 2008. This was

mainly due to the debt re-scheduling exercise undertaken in the context of the reform programme to

place the country’s public debt on a sustainable path.

4.3.1 Capital account

The capital account stood at R690 million compared to R14 million in 2008. Out of this amount, debt

forgiveness accounted for a total of R538 million. Aside from the Paris Club members, who agreed to

grant Seychelles 45 per cent debt cancellation, at least one non-Paris Club creditor also provided debt

rescheduling on similar terms, as did one of the commercial banks. It is expected that other external

creditors, including private bondholders, will agree to provide comparable treatment, especially as this

is one of the key condition for the Paris Club agreement to be fully in force.

4.3.2 Financial account

Provisional statistics showed a surplus of R5,400 million under the financial account. This

represented an increase of R3,339 million or 162 per cent compared to the previous year. The main

factor for this outcome was the level of Foreign Direct Investment (FDI) flowing into the economy

and also the non-repayment of external debt. These have been put on hold pending the conclusion of

negotiations with the country’s external creditors.

A total of R3,046 million or US$224 million was recorded as net direct investment into the Seychelles

economy. In dollar terms, this was almost the same amount as in 2008 (US$222 million), but given

the devalued rupee, the equivalent in domestic currency was significantly higher at R3,046 million in

2009 relative to R2,097 million in 2008. Inward FDI amounted to approximately R3,158 million,

whilst it is estimated that residents invested around R112 million in the form of equity and re-invested

earnings abroad.

FDI flows into equity capital and re-invested earnings stood at R2,966 million and R189 million

respectively. The latter was lower than the amount re-invested in 2008, given that shareholders could,

since end-2008, repatriate their dividends. Privatised government assets brought in the equivalent of

R2.7 million in FDI.

“Portfolio investment” recorded a surplus of approximately R14 million and “other investment” a total

of R2,341 million. As noted earlier, during most of the year government was engaged in intensive

negotiations pertaining to its external debt portfolio. Thus, Seychelles still continued to accumulate

arrears, which appears as a financing instrument in the BOP.


- 47 -

4.4 External reserves

Accumulation of external reserves is a key objective of the reform programme. When the programme

was initiated toward the end of 2008 Seychelles had very limited external reserves; at end-2008 net

international reserves (NIR) stood at US$40.2 million. One year on (December 2009), the country’s

net international reserves stood at US$151 million. This was significantly higher than the target of

US$130 million set under the programme. Accumulation of reserves was achieved through a

combination of (i) receipts in terms of grants; (ii) budget support from multilateral and bilateral

partners; and (iii) purchases from the domestic banking sector by the Central Bank.

Gross official reserves stood at R1,907 million or US$169 million at the end of 2009, representing an

increase of R700 million over the one year period. In terms of imports, gross official reserves were

equivalent to 1.6 months of imports.

Table 4.6 External Reserves;1 2005-2009

2005 2006 2007 2008 2009

(R Million)

Gross official reserves 309.3 654.4 325.9 1057.8 2006.1 Central Bank 308.7 653.3 322.5 1049.8 1997.2 Government 0.6 1.1 3.4 8.0 8.9

Central Bank's short-term Borrowings 394.4 - - 140.6 -

Net official Reserves -85.1 654.4 325.9 917.2 2006.1

1 End of period data


4.5 Exchange rates

Throughout the year 2009, the Central Bank maintained its floating exchange rate regime. Exchange

rates are set exclusively by commercial banks and Bureaus de Changes as per the Foreign Exchange

Act, 2009. The rates published by the Central Bank are weighted averages of the daily wholesale

trading by the above-mentioned institutions.

In the aftermath of the float in November 2008, the domestic currency plunged to an average of

16.7469 to the US dollar in December 2008. However, it recovered during the course of 2009; in

January 2009, the rupee traded on average at 16.6958 to the dollar and continued to appreciate

gradually, stabilising just above R11 against the dollar by December 2009. Despite this relative


- 48 -

stability, during the course of the year some periods of sharp appreciation were observed, which

proved quite challenging for the Central Bank. For instance, by October 2009 the rupee appreciated to

an average of R10.3346 per US dollar. The yearly average of the rupee stood at 13.5814 to the US

dollar.

When compared to the value of the rupee at the end of October 2008 (prior to the float), the domestic

currency had weakened by 27 per cent at the end of December 2009. However, it appreciated by 32

per cent during the one year period between the end of December 2008 to end December 2009.

On average, the rupee appreciated against all three major currencies during 2009. From a monthly

average of 22.2102 to the euro and 24.0641 to the pound sterling in January 2009, the rupee

strengthened to 16.3563 and 18.1953 against the euro and pound sterling respectively, in December

2009.

The relatively strong appreciation in the value of the domestic currency reflected higher supply than

demand in the banking system. This situation is expected to level out as economic activity in the

domestic economy picks up further. The effect of the exchange rate on the general price level was

also noticeable during 2009, as the rate of inflation also dropped from a peak of 63 per cent in

December 2008 to 0.4 per cent at the end of 2009.

Table 4.7

Exchange Rates;1 2005-2009 2005 2006 2007 2008 2009

(Seychelles Rupees per currency unit) Euro 6.8483 6.9300 9.2317 13.5934 18.6794 US Dollar 5.5000 5.5190 6.7102 9.4357 13.5814 Pound Sterling 10.0118 10.1692 13.4515 16.9645 21.0775 Japanese Yen 0.0501 0.0475 0.0572 0.0925 0.1451 South African Rand 0.8661 0.8211 0.9552 1.1232 1.6061 Singapore Dollar 3.3047 3.4748 4.4648 6.5990 9.3131 1 Period Averages



- 49 -

Chart 4.5: Exchange rate movements of the three main currencies (2000 – 2009)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

SCR

Euro US Dollar Pound Sterling

10

4.6 Offshore developments

The offshore sector continued to flourish in spite of the global economic slowdown and the challenge

of enhanced scrutiny by world regulatory bodies such as the Organisation for Economic Co-operation

and Development (OECD), Financial Action Task Force (FATF) on money laundering,, etc. The

Seychelles International Business Authority (SIBA) registered 12,408 new International Business

Companies (IBC) in 2009, bringing the total number of IBC to 69,608. However, this was 1,343

companies less than in 2008. There was also an increase in the number of businesses incorporated as

Companies Special Licenses (CSL). At the end of 2009, SIBA had 209 CSL on its register.

The year 2009 was a good one for the Seychelles offshore jurisdiction. Given the performance of the

industry and based on earnings generated from the services it provided, SIBA paid around US$4.1

million (R56 million) in terms of dividends to the government for the year under review.

4.7 International Relations

In 2009, the country’s presence on the international arena was primarily driven by the economic

reform programme that is being supported the IMF, as well as other development and bilateral

partners. The Central Bank of Seychelles was one of the key players in the reform process, with the

responsibility of ensuring that monetary and financial-related targets (official external reserves

accumulation and the reserve money) were met, as well as driving structural and institutional reforms

in the financial sector.


- 50 -

In the context of the reforms, important milestones were achieved during the course of 2009, including

the re-engagement of key institutions like the World Bank and the African Development Bank (AfDB)

through budget support following years of inactivity. Through technical assistance and financial

support, these multilateral institutions have helped Seychelles in attaining its reform programme

objectives.

Following the country’s re-engagement in the WTO accession process in 2008, a Memorandum on the

Foreign Trade Regime (MOFTR) along with all trade-related legislations were submitted to the WTO

secretariat. Furthermore, the Government settled part of its outstanding arrears to the organisation.

With regards to bilateral relations, 2009 was an eventful year as many of Seychelles’ bilateral partners

showed their support to the reform programme by making various donations to help the country meet

its financing needs or through technical assistance programmes aimed at capacity building. The year

also saw the country enhance its economic ties with its bilateral partners by the signing of a range of

agreements. This included the European Union, which also re-engaged through budget support

programmes.

As noted above, the Seychelles authorities were heavily engaged in negotiation with bilateral and

multilateral creditors abroad on the restructuring of the debts to bring it to a sustainable level. The

successful completion of debt restructuring negotiations with the Paris Club provided an important

boost to the reform process.

Even though the primary focus was on the economic reform programme, the country has not neglected

its regional commitments. Seychelles was actively involved in regional integration initiatives and

honoured its regional obligations through its participation in two of such regional blocs, namely the

South African Development Community (SADC) and the Common Market for Eastern and Southern

Africa (COMESA). This highlights the government’s conviction that regional integration is vital to

the enhancement of the country’s economic growth and the welfare of its people.

4.7.1 Multilateral Institutions

The year 2009 witnessed a renaissance of cordial relationships between Seychelles and its multilateral

partners. Following years of inactivity, both the World Bank and the African Development Bank

(AfDB) re-engaged with Seychelles. Approval by their executive boards and the issue of their

respective interim strategy notes outlined their re-engagement strategy with the country.


- 51 -

In addition to their regular missions, the Executive Director of the IMF undertook an official visit to

the Seychelles in order to witness first-hand the effect of the economic reform programme and express

support for the initiative. His AfDB counterpart also undertook a similar visit.

4.7.1.1 International Monetary Fund (IMF)

Seychelles’ macroeconomic performance under the Stand-by Arrangement (SBA) has been very

encouraging thus far and continues to be implemented with a high degree of government ownership

and broad public support. The liberalisation of the exchange rate regime, a strong fiscal adjustment

and prudential monetary policies, have enhanced the macroeconomic stability of the country. In view

of their nature as drivers of monetary and fiscal policies, respectively, the Central Bank of Seychelles

and the Ministry of Finance have played pivotal roles in ensuring the timely implementation of the

reforms and the attainment of set objectives.

In view of the fact that macroeconomic stabilization was achieved within a relatively short time frame,

the Seychelles government requested an early cancellation of the SBA in December 2009, which was

replaced by an Extended Fund Facility (EFF). The EFF is considered a more appropriate instrument

for the next phase of Seychelles’ economic reforms given that these would now be more long-term and

policy-oriented. The EFF was approved by the IMF Board on December 18, 2009. The new

framework aims broadly at preserving macroeconomic stability, achieving external sustainability,

improving economic efficiency and durably raises growth through implementation of a second

generation of structural reforms.

During the course of 2009, the IMF also provided intensive technical assistance and training to staff of

various institutions as part of the reform programme. The main institutions that benefited were the

Central Bank of Seychelles and the Ministry of Finance. Staff members were given specialised

training in various areas, including monetary framework, banking supervision, payment system, and

central bank governance, including internal audit and control systems.

4.7.1.2 African Development Bank (AfDB)

The AfDB has also been one of the key donors supporting the economic reform programme. In August

2009, the Board of the AfDB approved a budget support package of €15 million for Seychelles.

Moreover, in support of the debt restructuring process, AfBD also agreed to provide a partial

guarantee on interest payment due on the new bonds that will be issued as part of the country’s

external debt exchange offer. Holders of the country’s Eurobonds due in 2011 will be invited to

tender their instruments for new bonds with different terms. This partial guarantee, a first to the

AfDB, will provide the extra comfort to creditors affected by the exchange offer and thus make it

relatively more attractive.


- 52 -

4.7.1.3 World Bank

During the course of 2009, the World Bank provided assistance to Seychelles in a number of fields.

The Bank conducted and published the findings of the first Public Expenditure Review (PER)

exercise, focusing on three main sectors namely health, education and public administration. As a

result of the PER exercise, a number of gaps necessitating government attention were identified and

the latter is doing the necessary to address these deficiencies in the second generation of reforms.

With the introduction of the reforms, the valorisation of accurate and reliable statistics has been

enhanced. As part of its capacity building programme, the World Bank has pledged to support the

National Statistics Bureau (NSB) with a grant of US$376, 200.

In November 2009, the Board of the World Bank also approved a development policy loan for a sum

of €6.4 million to assist Seychelles in the implementation of its economic reform programme. As with

the AfDB budget support facility, this will be disbursed in two annual instalments.

4.7.1.4 World Trade Organisation (WTO)

The Seychelles government, through the Ministry of Finance, resumed its process of re-engagement in

WTO accession in 2008. Consequently, the necessary negotiating platform was put in place, namely

the election of a Chief Negotiator and the setting up of a National WTO Working Group. A

Memorandum on the Foreign Trade Regime (MOFTR) along with all trade-related Legislations was

submitted to the WTO secretariat for their queries and feedback in June. During the same month,

Seychelles partly settled its arrears with the WTO thus allowing the country to normalise its observer

status with this multilateral organisation.

The WTO has helped Seychelles to set up a WTO Reference Centre, which is expected to be available

to the public and provide access to WTO documents such as books and internet resources. The centre

is expected to be fully operational in 2010 and will be located at the Trade Division offices in the

Ministry of Finance.

4.8 Bilateral Relations

The year 2009 also witnessed a remarkable strengthening of relations between Seychelles and its

bilateral partners. In May, the country organised the first “Seychelles Forum” which brought together

most of these partners along with representatives of some multilateral institutions. ‘Paving the way

towards a sustainable economy’ was the chosen theme for the forum whose primary objective was to

provide a platform for the exchange of views and sharing of experiences amongst delegates on the

Seychelles economic reform programme. The forum concluded with calls from both Seychelles’

government and its partners for further support toward its reform programme.


- 53 -

During the course of the year, bilateral partners extended support in a number of ways, namely

through grants, debt relief, budgetary supports and technical assistance. Amongst those bilateral

partners, a special mention to United Arab Emirates (UAE), China and India is required given their

substantial contribution. Their support has helped the country to improve its budgetary position,

continue to implement social programmes, put in place key infrastructures, build up its international

reserves and provide debt relief.

The UAE Government through the Abu Dhabi Fund for Development has pledged US$30 million over

10 years (US$3 million per year) to help Seychelles’ socio-economic development. The UAE

government also donated a surveillance aircraft to the SPDF to help the country better protect its

exclusive economic zone especially in light of recent Somali pirates’ attacks in Seychelles waters.

Over the years, the Chinese government has been one of the biggest donors to Seychelles and 2009

was not an exception. In 2009, the People’s Republic of China donated over US$6.0 million in

development assistance, particularly geared towards infrastructural developments, namely schools,

hospitals and the Judiciary building.

The government of India provided development assistance which focused mainly on military

cooperation. Due to continuing piracy activities in the Indian Ocean region, throughout 2009, India

has deployed a number of naval ships to patrol the Seychelles’ exclusive economic zone in

collaboration with the latter’s coast guard. In addition, the Indian military has also provided its

Seychellois counterparts with military training and equipments. It is to be noted that the Indian

government also offered assistance in other field such as information technology and health.

4.8.1 European Union

4.8.1.1 Budget Support

In 2009, the European Union, through the European Development Fund (EDF), made available a sum

of €7.5 million in budget support to Seychelles. This will be disbursed in three annual instalments

between 2010 and 2012. In addition, the European Commission also provided a sum of €9 million

from the Vulnerability Flex (V-Flex) Fund facility as budget support, to assist the country in bridging

its financing gap.

4.8.1.2 Economic Partnership Agreement (EPA)

For over five years, Seychelles along with other member states of the African, Caribbean and Pacific

(ACP) grouping across the globe have been negotiating reciprocal and non-discriminatory trade

regimes under the EPA. The EPA will replace all trade preferences which have been established

between the European Union (EU) and the ACP countries since 1975 under the Lomé Agreements, as

well as progressively remove trade barriers between the partners.


- 54 -

An interim Economic Partnership Agreement extending reciprocal preferential trade terms to

Seychelles from the European Commission (EC) was signed in August. EPA negotiations with the EC

are expected to continue throughout 2010 in order to complete a full agreement covering not only

trade in goods but also other areas of commerce namely services.

4.9 Double Taxation Avoidance Agreements (DTAA)

In 2009 the Seychelles government concluded two new double taxation avoidance and exchange of

information agreements; with the Principality of Monaco and Malaysia. This means that by end-2009

Seychelles had signed a total of 13 double taxation avoidance agreements, whilst some others await

either signing or ratification.

Seychelles has cooperated with the Organisation for Economic Cooperation and Development

(OECD) with regard to meeting international standards on tax transparency, financial regulation and

financial crime and is on the OECD’s white list of offshore centres. This is an indication that the

country has substantially implemented the international standard on exchange of information as

amended by the OECD in 2008. Seychelles expects to sign tax information exchange agreements with

the European Union in 2010.

4.10 Debt Restructuring

Another important aspect of the reform programme has been negotiations to restructure the country’s

public external debts. Debt restructuring is a key component of the overall strategy of the government

to reduce public debt to a sustainable level, which is critical for economic recovery and growth.

4.10.1 Paris Club

In April 2009, the government reached an agreement with the Paris Club creditors, whereby 45 per

cent of the country’s debt with the grouping (including arrears) would be cancelled and the remaining

balance repaid over a period of 18 years. The agreement covers about US$140 million in bilateral

debts owed to eight countries that are party to the Club and amounts to around a quarter of Seychelles’

total outstanding debt. The successful conclusion of this agreement is a milestone in the country’s

endeavour to attain a sustainable debt level.

4.10.2 Malaysia

Seychelles has also concluded debt restructuring negotiation with the EXIM Bank of Malaysia on

similar terms to that of the Paris Club. An agreement was reached to cancel 45 per cent (equivalent to

US$5.5 million) of the total debt of US$12.1 million.


- 55 -

4.10.3 Commercial Creditors

Following the conclusion of a number of bilateral debt reduction agreements, the government’s focus

turned towards the re-scheduling of its commercial debts. Subsequent to intensive negotiations by the

government and its financial advisors, an exchange offer for its 9.125 per cent US$230 million

government bonds were distributed to the relevant creditors in December 2009. It is anticipated that

most creditors would agree to the exchange offer.

The government has also held debt restructuring talks with the Barclays Bank PLC London. The Bank

has agreed to a buy-back agreement whereby Seychelles would repay only 30 per cent of all this debt

owed whilst the other 70 per cent would be written-off.

4.11 Regional Integration

The Central Bank of Seychelles actively participated in a number of regional meetings, workshops and

surveys organized by both SADC and COMESA.

4.11.1 SADC Harmonisation Programme

On 17th August 2008, Seychelles was readmitted into SADC after having reluctantly withdrawn from

the regional bloc in June 2003 due to financial constraints. With the country’s readmission into the

organisation, 2009 saw the active participation of the Central Bank of Seychelles in SADC’s

programmes and meetings, including the macroeconomic convergence programme and the Committee

of Central Banks Governors (CCBG) respectively. The latter is a high-level meeting regrouping

central bank governors of the region whilst the macroeconomic convergence programme of the CCBG

is aimed at harmonising key economic targets and at achieving and maintaining macroeconomic

stability.

The SADC regional bloc promotes regional cooperation in a number of cross-cutting fields; social,

economics and political. Despite substantial progress being made across the various areas of

cooperation, the initiative to integrate regional trade within the bloc has been one of the key focus

areas of the organisation in recent years. It is anticipated that the aforementioned project will have a

positive impact across the social, economic and political spheres. The launching of the SADC Free

Trade Area (FTA) in August 2008 and the planned launching of the of SADC custom union in 2010,

are some of the core programmes of the organisation.

In order to actively participate in the trade-related programmes of SADC, however, it is vital that the

country undertakes the necessary steps to sign and ratify the SADC trade protocol. The latter is a pre-

requisite if the country wishes to join the SADC FTA, thus essentially benefiting from zero tariff on


- 56 -

most goods traded between the members of the bloc. So far, out of 15 member states, only 2 countries

are yet to join the SADC FTA, namely Seychelles and the Democratic Republic of Congo (DRC).

The country plans to become party to the SADC trade protocol in 2010 and thereafter accede to the

SADC FTA in the coming years.

4.11.2 COMESA Integration Programme

Since becoming a member of the Common Market for Eastern and Southern Africa (COMESA) in

1998, Seychelles has been undertaking a number of reforms to harmonise its economy with the other

member states of the regional bloc and align itself to international best practices. In June 2009,

Seychelles attained a milestone in its relation with COMESA as it joined the COMESA FTA.

The COMESA FTA was launched on the October 31, 2000 and currently has 14 members including

Seychelles.

The regional bloc launched its Custom Union during the Heads of State Summit held at Victoria Falls,

Zimbabwe on June 8, 2009. It is to be noted that Seychelles is not party to the COMESA Custom

Union. Nevertheless, as per the recommendation of the Tripartite Summit held in Kampala, Uganda

on October 22, 2008 negotiations are on-going between COMESA, SADC and East African

Community (EAC) to set up a single Free Trade Area and eventually a single Custom Union

encompassing all three regional blocs.

Despite being a COMESA member for over a decade, 2009 saw the first ever participation of a

Governor of the Central Bank of Seychelles in a meeting of the COMESA Committee of Central Bank

Governors (CCBG). As stated above the latter is a high-level meeting regrouping all the central bank

governors of the COMESA region. The Governor’s participation in the fourteenth meeting of the

CCBG which was held in Mauritius showed the Bank’s readiness to engage with its counterparts in the

region so as to share experiences and best practices to the benefit of all parties. Similar to the SADC

region, the main project of the CCBG relates to the macroeconomic convergence programme which

aims at achieving and maintaining macroeconomic stability.

SECTION FIVE

The Real Sector: Production, Labour and Prices 5. Overview – Domestic Income and Production

The year 2009 started with a large degree of uncertainty in view of the expected adverse impact on the

domestic economy of the economic reform programme, launched only two months earlier, and the

global crisis. As expected, liberalization of the economy in late 2008 was followed by large

adjustments in the economic fundamentals, notably a sharp, one-time increase of over 60 percent in

inflation, a sharp devaluation of the exchange rate - up to 94 per cent against the US dollar by early

January - and a sharp increase in interest rates; the 91-day Treasury bill rate rose to a peak of just

under 30 per cent in the early part of the year.

Given the country’s high dependency on imports, it was inevitable that the sharp devaluation of the

rupee would be translated into sudden inflationary pressures, which impacted negatively on the

purchasing power of consumers. On their part, businesses faced sudden sharp increases in cost of

production as well as labour cost as the private sector sought to match the salary increase granted by

the government in the aftermath of the liberalization. To add to that, banks reacted to the sharp rise in

Treasury bill rates by hiking up their own deposit and lending rates, causing yet more strain on

businesses, as well as households, through higher interest costs.

Under such environment, real sector activity, as expected, was generally depressed during 2009. The

difficult domestic business environment was exacerbated by a sharp contraction in tourism activities in

the first quarter of 2009 as the global crisis took its toll on tourism. By end-March, tourism arrivals

were down 14 per cent over the same period in 2008, and at that point gross domestic product (GDP)

was projected to contract by 11 per cent. However, thanks to the major promotional efforts from the

tourism industry, spearheaded by the Seychelles Tourism Board, tourism activities picked up strongly

in the second half of the year, and arrivals ended the year only 1 per cent below the 2008 level, though

yield fell by 19 per cent given the major discounting by operators.

- 57 -

Annual Report 2009 The Real Sector: Production, Labour and Prices

- 58 -

Table 5.1

Gross Domestic Product by kind of Economic Activity; 2005-2009 at constant market prices

2005 2006 20071 20081 20092 (R million)

GDP at 2006 constant market prices 5115.5 5600.2 6135.9 6059.0 6100.2 Change 6.7% 9.5% 9.6% -1.3% 0.7%

Agriculture 95.2 95.9 94.1 92.3 91.3 Fishing 75.1 66.4 69.0 78.7 49.3 Manufacture of food 198.1 191.5 172.4 144.0 128.3 Manufacture of beverages and tobacco 132.0 153.1 161.4 126.6 98.8 Manufacture of concrete, rock products, glass etc. 39.7 51.1 50.3 56.0 47.3 Manufacturing, other 124.5 114.3 142.0 134.6 135.6 Electricity, gas, steam and air conditioning supply 53.2 58.0 62.5 62.3 63.7 Water supply; sewerage, waste management and remediation activities 45.4 45.6 47.7 48.4 50.4 Construction 263.1 304.6 334.9 373.1 354.7 Wholesale and retail trade; repair of motor vehicles and motorcycles 328.3 355.7 429.0 371.5 395.7 Transportation and storage 515.8 565.3 593.8 673.3 696.7 Accommodation and communication 478.9 558.7 673.0 613.3 621.7 Information and communication 239.0 246.6 266.7 274.7 298.5 Financial and insurance activities 283.0 326.3 375.3 335.5 394.5 Real estate activities 77.2 107.9 143.9 190.5 298.2 Owner Occupied dwellings 453.4 474.5 496.5 517.4 529.3 Professional, scientific and technical activities 75.3 101.7 117.4 109.8 94.4

Administrative and support service activities 111.1 127.4 148.6 153.2 159.9 Public administration and defence; compulsory social security 451.6 518.4 529.2 536.1 468.8 Education 205.6 212.0 214.5 207.7 212.7 Human health and social work activities 144.8 149.8 153.0 149.4 135.8 Arts, entertainment and recreation 43.6 44.9 45.6 36.2 38.5 Other service activities 32.0 34.1 35.3 29.8 33.9

Allocation of FISIM to Nominal Sector -175.4 -202.2 -232.6 -207.9 -244.5

Taxes less subsidies 825.0 898.8 1012.4 952.6 946.7 1 Provisional Estimates. 2 Indicative Estimates.

Source: National Statistics Bureau

The slower than expected decline in GDP owed largely to a faster stabilization of the economy than

had been feared, resulted from marked improvement in some key indicators. Notably inflation, which

on an end-of-period basis, fell to -2.5 per cent in December 2009, compared to 63 per cent at end-

2008. Moreover, interest rates, also fell sharply, with the 91-day treasury-bill rate falling to 4.29 per

cent at end-2009 from the peak of 30 per cent in the early part of the year. The sharp decline in

inflation largely due to the early stabilisation of the domestic currency, which following the

overshooting in late 2008, appreciated strongly thereafter, eventually settling around R11 per US$ by


- 59 -

end-December 2009. Externally, there were signs of an early recovery of the global economy. In

view of the improved economic landscape, the projected contraction in GDP was instead revised to an

estimated growth of 0.7 per cent for the year.

The improvement in the macro-economic environment was complemented by progress in

implementation of structural reforms by the government. This included institutional reforms in the

financial sector, including in the conduct of monetary policy by the Central Bank. Continuing its

policy immediately after the launch of the programme, in the early part of 2009 the Bank kept

monetary policy tight, however, as things stabilized, it was able to loosen its monetary policy stance.

This implied, among other things, an increase in available liquidity in the banking system, which

increased the pool of funds available for lending. Nevertheless, the private sector failed to gain from

the benefits of lower interest rates on borrowing as commercial banks have kept lending rates

relatively high.

The high interest environment domestically, coupled with the drying up of credit on the international

market in the aftermath of the financial crisis, led to a decline in major investment projects in the

domestic economy from a year earlier. In particular, foreign direct investment which had been on an

impressive upward trend in recent years, declined during the year under review mostly due to the

global financial crisis and the associated credit crunch abroad. The downgrading of Seychelles

“Selective Default” by [Standard & Poor’s] in late 2008 would have contributed to this development,

though the rapid stabilisation of the domestic economy and the normalization of relations with

creditors were expected to result in an upgrading in early 2010. Nonetheless, in the case of some

institutions, data showed increased interest to invest and some renewed sense of business confidence.

For instance, the Development Bank of Seychelles (DBS) registered an increase in credit in 2009

compared to a year earlier.

Tourism remained the country’s main sector in terms of investment, foreign exchange generation,

employment creation and fiscal revenue in 2009. Whilst the overall number of visitors to the country

was down by only 1.0 percentage point, earnings declined more significantly. The encouraging

numbers, amidst the global downturn, were boosted by the efforts of the Seychelles Tourism Board to

tap into new potential markets like Asia and the Middle East. Moreover, with the local airline

company expanding its fleet during the year, this provided greater scope to introduce new routes and

charter operations. Should these efforts be sustained, a positive outlook can be expected for tourism in

2010. Recovery of the global economy would inevitably be important.


- 60 -

Table 5.2

Gross Domestic Product by kind of Economic Activity; 2005-2009 at current market prices

2005 2006 20071 20081 20092 (R million)

GDP at 2006 current market prices 5104.6 5600.2 6823.8 8709.9 10725.8

Change 7.4% 9.7% 21.8% 27.6% 23.1%

Agriculture 92.3 95.9 106.6 130.5 172.0 Fishing 68.0 66.4 78.1 88.9 78.4 Manufacture of food 159.4 191.5 270.6 307.2 417.4 Manufacture of beverages and tobacco 109.9 153.1 170.2 171.1 198.7 Manufacture of concrete, rock products, glass etc. 41.4 51.1 51.2 70.7 80.2 Manufacturing, other 133.2 114.3 166.2 201.0 152.6 Electricity, gas, steam and air conditioning supply 34.0 58.0 36.3 28.5 69.7 Water supply; sewerage, waste management and remediation activities 41.8 45.6 53.8 64.9 74.5 Construction 311.0 304.6 360.6 486.2 568.5 Wholesale and retail trade; repair of motor vehicles and motorcycles 310.4 355.7 522.2 762.6 1000.7 Transportation and storage 467.1 565.3 674.7 778.8 865.2 Accommodation and communication 464.9 558.7 1001.2 1501.0 1954.7 Information and communication 224.7 246.6 231.2 275.9 347.6 Financial and insurance activities 271.0 326.3 414.9 448.8 720.6 Real estate activities 70.0 107.9 156.3 314.7 556.2 Owner Occupied dwellings 455.0 474.5 494.6 592.8 697.4 Professional, scientific and technical activities 48.6 101.7 121.5 155.0 164.5

Administrative and support service activities 105.9 127.4 177.2 211.5 310.1 Public administration and defence; compulsory social security 433.8 518.4 558.6 587.3 553.0 Education 210.1 212.0 231.4 257.8 246.0 Human health and social work activities 158.3 149.8 177.0 191.5 181.9 Arts, entertainment and recreation 44.0 44.9 46.7 55.6 65.3 Other service activities 30.5 34.1 36.7 37.3 55.8

Allocation of FISIM to Nominal Sector -174.7 -202.2 -280.6 -321.0 -477.6

Taxes less subsidies 993.9 898.8 966.5 1311.1 1672.6 1 Provisional Estimates. 2 Indicative Estimates. Source: National Statistics Bureau

The performance of other sectors was comparatively sluggish. The Agriculture and Fisheries sectors

suffered from higher operating costs resulting from a depreciated rupee and the annulment of several

tax incentives. In regards to the Fisheries sector, catch and other activity levels slumped considerably,

due largely to increased piracy activities in Seychelles waters. However, the level of generated gross

revenue rose by about 41 per cent principally due to the depreciation of the rupee against the main

traded currencies. Contrarily, for agriculture, despite reorganization of the sector through the newly

formed Farmers Cooperative, and the transfer of the previously government-owed animal feed factory


- 61 -

to the cooperative production fell. Besides the removal of subsidies the situation was exacerbated by

fierce competition from imports, especially when the rupee appreciated. Whilst it is the Seychelles’

government’s objective of attaining self-sufficiency in agriculture and livestock, significant challenges

remain before this can be achieved.

5.1 Primary Sector

This sector’s production declined in 2009 as it faced staunch challenges. For the Fisheries sector,

rampant piracy activities in Seychelles’ waters destabilised the industry as it severely restricted

activities. However, due to the depreciated domestic currency, the industry recorded a 41 per cent

increase in gross inflow in rupee terms. On the Agriculture side, the Farmers’ Cooperative brought

about renewed optimism and determination to farmers as it aims to improve coordination among

farmers so as to boost profits and move toward attainment of self-sufficiency in most agricultural

produce. To the extent possible, the authorities have worked with stakeholders in the sector such that

domestic as well as external pressures are mitigated which in turn prevented the primary sector from

suffering an overwhelming slump in performance.

5.1.1 Fisheries

In 2009, the sector’s performance began on a promising note, posting an increased turnover in rupee

terms. This was a consequence of the depreciated domestic currency which, in turn strengthened the

competitiveness of the country’s fish products’ abroad. However from other angles, notably catch as

well as revenue figures in dollar terms, showed a drastic underperformance. Industrial tuna fishing,

the sector’s principal revenue source suffered badly from the effect of piracy attacks, which diverted

the operations of many vessels away from Seychelles’ North Eastern regions further to the south.

Purse seiners’ catch levels were down around 13 per cent, from 279,000 metric tonnes to 242,000

metric tonnes year-on-year. The drop was due to the departure of nine purse seiners from the Indian

Ocean waters. Fish processing dropped by 11 percentage points relative to the preceding year.

Moreover, with fishing vessels slithering further south, the recorded landing and transhipment volume

also slipped by around 22 per cent. This in turn faltered the receipts from landing fees. Overall, Port

Victoria registered a 40 per cent reduction in fishing-related activities.

A number of other factors affected performance of the fisheries sector in 2009, including a gradual

upsurge in fuel price, the doubling of local landing fees, as well as a tightening on concession

vouchers for fishermen to prevent abuse. As for the impact of adverse weather conditions on catch

level, this was relatively trivial to that of 2008.


- 62 -

Table 5.3

Estimates of Fish Landed 2005 2006 2007 2008 (1) 2009

(Metric tonnes) Artisanal method 4,583 4,050 3,651 5,036 Semi - industrial (long line) 251 260 270 190 332 Industrial method - Caught 389,256 389,936 246,657 279,000 242,000 - Transhipped 338,271 371,087 212,000 250,000 195,000 Sources: Seychelles Fishing Authority Notes: (1) Actual figures only for the first nine months added up with projections for the last quarter

Overall, the local price of fresh fish and fish products rose throughout the year, emanating from the

effects of the factors mentioned. Despite these challenges the outlook for the fisheries sector remained

positive, as evidenced by an increase in investment to R43 million, from the 2008 level of R32.6

million. Loans extended towards the fisheries sector by the Development Bank of Seychelles (DBS)

and the Concessionary Credit Agency for the year totalled to R5.5 million, a 140 per cent rise from

2008.

In respect to ongoing and prospective projects, the Seychelles Fishing Authority (SFA) with the aid of

the Japanese Government has embarked on the construction of several port infrastructures. The Zone

6 port at the Providence industrial estate together added with a new port at Bel Ombre are both

expected to be completed early 2010. These projects are estimated to cost US$11 million.

Additionally, following destructions incurred by the 2004 Tsunami, the Japanese government has

again pledged to provide aid towards the rehabilitation project of the Fish Processing Quay in Victoria.

Among new initiatives to boost production there is a Mari-culture project which is still in the planning

phase. Moreover, there are plans to strengthen promotions for investment in the long line fishing

sector, venturing into value-added products such as fish burgers and fish balls as well as the

processing of by-catches from industrial tuna fishing vessels.

5.1.2 Agriculture

Despite also facing major challenges the agricultural sector performed rather well in 2009. As

mentioned above, the establishment of the Seychelles’ Farmers Marketing Cooperative brought about

a better organization of the sector. In early 2009 the Cooperative acquired the animal feed factory,

abattoir and hatchery previously owned by the government, as the latter moved out of production, in

line with its objectives. This move to hand these activities to the private sector should improve


- 63 -

efficiency of these units. Another major challenge that the agricultural sector, as others, faced in 2009,

was the sharply rising prices caused by (i) the devaluation of the rupee, and (ii) the removal of

subsidies. The establishment of the cooperative helped to alleviate some of those hardships as it was

able to bring down animal feed prices through reorganisation of the factory, though this could not fully

outweigh the price increase.

The influx of imported agricultural items as a result of the increased supply of foreign exchange was

also a major challenge. Local agricultural produce faced rigid competition from cheap imports and

staggering farmers’ supply amidst the rising domestic production costs, which reduced the

competitiveness of local agricultural produce. The government has been in consultation with various

stakeholders in the sector to improve conditions, and bolster production.

On the investment front, the Farmers’ Cooperative also plans to construct a bigger, more modernised

abattoir and animal feed factories in the near future. To expand the control of their operations, it

intends to construct its own retail shop to deter the ongoing perceptions of present excessive price

extortions by some retailers.

5.2 Industries

Domestic industries faced a tough time in 2009. Production was constrained by several factors,

including rising price of imported inputs associated with the depreciation of the rupee, and rising

domestic operational costs following the liberalization of the economy, and structural policy changes

introduced by the government. This included more liberalised trade policies which meant that local

industries were faced with increased competition from import substitutes. This created a dilemma for

the authorities, which nonetheless have shown all indications that it is committed to keeping to the

newly liberalized environment and its move away from protectionism.

5.2.1 Construction

In 2009, construction activities dropped considerably relative to levels attained during the boom

periods of 2007 and early 2008. This development is explained by a number of reasons. From the

government side, the tight fiscal stance has meant a postponement in the implementation of

government projects. As for the private sector, the decline is attributed to the overall higher cost of

construction materials and that of other goods as well as the increased cost of borrowing. With

regards to FDI-related construction projects, the decrease is owed to the drying up of funds on

international markets on account of the global financial crisis and associated credit crunch.

Companies involved in the production of construction materials recorded an increase in inventory.

This was particularly apparent during the first three quarters based on projections prior to the


- 64 -

liberalization of the economy in late 2008, with producers having doubled the supply on expectations

of high demand in 2009. However, with changing economic conditions, demand dropped drastically as

the implementations of many projects were delayed. Moreover, with rising fuel price, utility and other

costs associated with the removal of subsidies and exchange rate devaluation, this caused prices of

construction materials to also rise sharply, in the process dampening sales and further adding to the

already high inventories.

In 2008, the level of outstanding loans from all commercial banks in relation to “Building and

Construction” stood at around R97.41 million. In 2009 this figure rose slightly to stand at R117.46

million.

5.2.2 Manufacturing

Similar to construction activities, preliminary indicators suggest that manufacturing activities declined

considerably relative to 2008. Once again, elevated costs of production experienced at the start of the

year were major contributing factors. The decline in production was widespread with few examples of

exceptions such as canned tuna production and soap manufacturing which remained fairly constant

during the year. In the case of production of canned tuna, one of the main manufacturing activities in

Seychelles, production jumped from 28,907 tonnes in 2008 to 29,110 tonnes in 2009. This was

despite a significant drop in total industrial catch for the year associated with piracy activities in the

Indian Ocean.

Another major manufacturing entity, the Seychelles Breweries Limited, registered a marked decline in

output, as it trimmed down production of most of its items. Beer and Stout production shrank from

around 6,057KLtrs in 2008 to 4,218KLtrs, matching the trend for the recorded soft drinks’ output of

4,716KLtrs, which receded by 23.45 per cent relative to the preceding year. Decreased production

level was also a feature of the output of other products such as jams and sauces. The increased

production cost, sluggish demand arising from lower domestic purchasing power, and increased

competition from imported products, all contributed to Seybrew’s decline in production. On a positive

note, the marked decrease in inflationary pressures experienced towards the end of the year allowed

Seybrew to lower its prices which in turn resulted in a pick up in sales.

5.3 Services

The tertiary sector’s performance started on a relatively sluggish note in contrast to that of the

preceding year. This was mainly due to a slowdown in tourism activities which were hindered by the

challenging global economic conditions. As the situation improved in the latter half of the year, the

sector was given some boost as visitor arrival numbers recovered. Notwithstanding the difficulties

faced by tourism, the service sector overall saw an improvement in output.


- 65 -

5.3.1 Tourism

The tourism industry remains one of the most important sectors of the Seychelles’ economy in terms

of its value added, direct foreign exchange contribution, tax revenue and employment creation.

During 2009, the vulnerability of the sector was tested by the fragile economic conditions in

Seychelles’ main markets.

As mentioned above, the sector struggled in the first half of the year, as a sharp drop was observed in

the number of tourists to Seychelles. In January, visitor arrivals dropped by 18 per cent which

prompted an end of year forecasted decline of around 25 per cent.

Table 5.4 Tourism

2005 2006 2007 2008 2009(1)(2)

Visitors arrivals 128,653 140,627 161,273 158,952 157,541 Average length of stay ( nights) 9.69 9.82 10.20 10.15 10.20Tourism Foreign Exchange Earnings -R million 1051 1251 1901 2438 2841.4Average expenditure per diem - Rupees 842.9 906.2 1155.8 1511.0 1768.2 Memorandum Hotel bed occupancy rate (%) 49 57 56 57 59 1 Hotel bed occupancy rate for 2009 is up to October 2 Tourism Foreign Exchange Earnings for 2009 is CBS estimate Sources: National Statistics Bureau (expect tourism foreign exchange earnings which are from CBS

Against this backdrop, the stakeholders in the industry, in conjunction with the STB launched an

aggressive marketing campaign under the theme “An Affordable Seychelles”. As part of this

campaign most partners in the industry, namely hotels, restaurants, airlines, tour operators and other

tourism-related agencies trimmed down prices of most of their products and services by around 25 per

cent on average. Special packages were also introduced to target new markets in an effort to diversify

Seychelles’ tourist structure.

The success of this campaign reflected the strength of the private sector in marketing their products.

Up until 2008 tourism marketing had been led by the government. However, as part of government’s

strategy to be a facilitator while the private sector drives the economy, the STB was revamped in early

2009. A new private sector-led Board was put in place. The role of Managing Director was also

handed to the private sector. The result has been a dynamic organization that can take most of the

credit for the impressive turnaround that the tourism industry witnessed in 2009.


- 66 -

STB’s aggressive promotions included tapping into new promising markets like Asia, Middle East,

South Africa and Kenya. Joint marketing programmes such as the twin centre option were introduced

to allow visitors to combine multiple destinations in a single trip. Amidst staunch challenges faced to

maintain arrivals from niche markets, increases in arrivals were recorded from several less prominent

ones, such as Russia, Switzerland, Reunion and Singapore.

Stiff competition on the international scene also forced the local airline to introduce several

promotional schemes such as discounting of services. In 2009, Air Seychelles added two more planes

to its fleet of three, with the aim of alleviating potential losses incurred from delayed flights due to

technical problems. This also widened the scope for the company to expand its charter operations and

increase income. Strategically, the company receded from foreign competition in certain destinations

during the year while correspondingly amplified operations in prominent markets.

Chart 5.1: Visitor Arrivals (2000 – 2009)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Years

Num

ber

of v

isito

rs

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

Perc

enta

ge

Visitors Arrivals % Change

In terms of numbers, for the year as a whole, the number of tourists to Seychelles amounted to 157,541, representing a drop of only 1.0 per cent compared to 158,952 posted in 2008. Europe remained the most important market despite observing a drop in arrivals of 11 per cent. France, the country’s best performing market contributed to the lowering of European visitors. The same trend was observed for other important European markets such as Italy and Germany. Faced with these declining trends, in addition to the marketing campaign alluded to above there were other moves to strengthen the country’s position in Europe, including proposals to re-open STB’s office in the UK. In regards to tourism-related investments, the highlight was the opening, early in 2009, of a 5-Star establishment, Four Seasons Resort, which contributed towards a further increase in the total number

of beds. In addition, there were around 30 small hotels which opened towards the end of the year. Nonetheless, a number of tourism construction projects were put on hold or delayed. These include


- 67 -

Ephelia Resort and Spa village, Dhevatara Beach resort of Grand Anse Praslin and the Round Island Exclusive Resort and Spa on Round Island. However, in regards to the Ephelia Resort and Spa village, its official opening is programmed to take place early 2010 instead of December 2009 as initially programmed.

The tourism industry remains an important source of employment. With the government’s policies aimed at streamlining the public service, great emphasis has been placed on providing adequate training to ex-public servants for their subsequently enrolment into the industry. Throughout the year,

the Seychelles Tourism Academy (STA) conducted a series of short courses as an access route. In return, a rise in the proportion of local workers relative to expatriate workers within the industry should be observed in the near future. The provision of value-for-money products to visitors remains vitally important and is upheld through the Seychelles Secrets portfolio. In 2010 tourism operators have forecasted arrivals to grow by 5 to 6 per cent.

5.3.2 Telecommunication As most sectors, the telecommunication industry also felt the adverse effects of the economic reforms on its activities, and ultimately, on its profit margins. Average revenue declined as a consequence of lower consumer spending power. The first quarter of 2009 was highlighted by continued revisions in service rates as companies relentlessly tried to mitigate losses from a sudden rise in operating costs. New innovations were introduced to diversify the range of products on offer and also widen market dominance for certain products. One area where growth was registered in 2009 was in internet services. This was made possible as operators were able to restructure their packages to strike the balance between price and usage. In contrast a notable drop occurred in revenue from roaming services due among other things to the drop in tourist arrivals, especially during the first half of the year. Despite these challenges the

telecommunication continued to invest during 2009. In a move to bolster the speed and quality of internet services in Seychelles, the two local telecom operators as well as other service providers, have pledged active participation to contribute towards

the installation of a marine fibre optic system. Through this project, Seychelles would use the submarine cable primarily for internet usage, and thus diverge away from the current satellite-based internet signal. In addition, to improving services for local individuals, a major improvement in the

quality of service is viewed as critical for the development of business in Seychelles, notably financial services, as well as for business tourism.


- 68 -

5.4 Labour market The government’s policy of streamlining public institutions in the context of the reform programme was implemented with vigour, especially during the first quarter of 2009. Through a combination of voluntary departures and early retirement, the government took a step closer to its ultimate objective

of being the facilitator rather than actively participating in economic activities. The privatisation of government-owned entities and streamlining the size of the public sector offered workers the choice to enrol onto a Voluntary Departure Scheme (VDS) which granted the employee three consecutive months pay following termination of duty. Exiting the public sector through VDS provides reasonable

time for the relieved employees to seek alternative employment while still being remunerated. Several government programmes such as the Unemployment Relief Scheme (URS) were abolished, while others, such as home carer scheme underwent restructuring in their operations. Whilst the newly established welfare agency had been well prepared to respond to the expected requests for assistance in the aftermath of the VDS, initially there were fears that the agency could also face extra pressure from lay-offs caused by the general decline in economic activities, notably the tourism sector. However, in the event, the rise in unemployment was minimal due the fast recovery of tourism and the economy in general.

Whilst the further expansion of the tourism sector continues to create new employment opportunities, in certain specialized areas the domestic labour market continues to find it difficult to fill these positions with Seychellois.

5.4.1 Employment Against expectations, provisional data showed that the employment level rose only slightly in 2009,

even though unemployment increased. This anomaly is somewhat difficult to explain without detailed

information, especially during a year when a significant number of workers left the public service, and

the overall decline in the economy’s real output. One plausible explanation could be in relation to the

rise in the labour force. This was underlined by the gradual revitalisation of construction, tourism and

manufacturing sectors beginning the latter half of the year following improved local and international

conditions.

In line with the VDS, the public administration shrank by 15 per cent as the government strengthened

their stance to increase efficiency and maintain a leaner work force. However, in general, the

prevalence of a skill mismatch hampered the ease of alleviating unemployment.

Expatriate employment in some sectors remains imperative for the country’s economic growth.

Despite the observed reduction in the number of foreign employees in public sector, the construction

and tourism industries continued to show strong dependence on foreign labour. The aggregate number


- 69 -

of Gainful Occupation Permit (GOP) issued in 2009 was around 10,000, inclusive of renewals and

new issues. As part of a long-term plan to lessen this dependency, the government announced plans to

restructure the education system to gradually boost domestic expertise in the local-labour defiant

sectors. The opening of the University of Seychelles in September 2009 is an important stepping stone

in bolstering the volume of local tertiary-level professionals.

5.4.2 Unemployment

On average, the unemployment rate for the year rose by more than 3 percentage points, settling around

4.5 per cent. This outcome was sourced from several factors namely; difficultly for school leavers to

get employment due to lack of experience; government’s policy of streamlining the public sector and

the lack of local expertise to cater for the rapidly expanding sectors. Since the vast majority of

jobseekers lack appropriate skills, moves to equip them are underway through training programmes

being initiated by several institutions. Coupling these factors with the general state of economic

uncertainty throughout the year, the local labour demand was strained in most sectors as organisations

strived to improve their economic performance. Overall, the estimated number of new vacancies in

2009 was 2,500 relative to around 7,100 recorded in the preceding year.

Going forward, the government plans to remove almost all “non-core” employment within public

offices beginning 2010. Those affected were given the option to either enrol on a re-training scheme

to acquire necessary skills and subsequently fill up available vacancies, or proceed in seeking

alternative employment opportunities as they exited in December 2009. Those ex-employees who

chose the first option will benefit from retaining their present salary as an allowance. Another group of

employees will either be absorbed into newly formed agencies or individually contracted by the

government as an external party to provide their services.

Table 5.5 Employment and Unemployment Rate; 2005 – 2009

2005 2006 2007 2008 2009

(end - of - year)

Total Employment 34,542 38,826 39,571 41,342 43,199 Private Sector 18,595 20,017 22,417 24,833 28,976 Parastatals 5,931 6,036 6,136 5,596 4,939 Government 10,015 12,773 11,018 10,913 9,284

Unemployment Rate (%) 3.6 2.6 1.9 1.0 4.5 (1) Average Employment figures for 2007 and 2008 has been revised (2) Average employment figures for 2009 up to November, however unemployment rate data is for the whole year Source: Employment Division - Ministry of Economic Planning and Employment


- 70 -

5.4.3 Earnings

Earnings rose across all sectors. The average monthly earnings in the government, parastatal and

private sectors increased in 2009. Both government and private sector average earnings rose by 36 per

cent, while for parastatals, earnings grew by 28 per cent. The faster growth in earnings during 2009

compared to recent years was driven by the government increase that was awarded during the year to

mitigate the effect of the currency devaluation toward the end of 2008 (see below). Traditionally

private sector reaction to government’s wage increases has been slower than what was observed in

2009.

As in previous years, and despite the faster growth in government and private sector earnings,

parastatals’ earnings remains highest of the three categories. This relatively high aggregate

remuneration is attributed to the fact that the sector comprises of top earning industries, in the likes of

“Transport, Storage and Communication” and “Financial Intermediation”, where in many cases

institutions are headed by expatriates, who command higher packages.

Table 5.6 Average Monthly Earnings ; 2005 - 2009

2005 2006 2007 2008 2009 (1)

(Rupee – current prices)

All Sectors 3,750 3,817 4,015 4,645 5,960

Private Sector 3,469 3,566 3,669 4,387 5,948 Parastatals 4,072 4,528 4,920 5,781 7,378 Government 4,081 3,891 4,216 4,650 5,281 (1) Figures up to September 2009

Sources: National Statistics Bureau

To ease the effects of the rise in cost of living, a salary increase between R300 and R500 for public servants depending on positions were granted to public sector employees in 2009. Consistent with the government’s ultimate goal of further suppressing the impact of inflatory pressures on purchasing power, a plan was initiated to radically revise the structure of public sector wage and salaries with the aid of technical assistance from the Commonwealth. Starting 2010 the proposed minimum wage level will be increased from R15.50 per hour to R16.50 while public sector salaries will rise by an average of 4.3 per cent across the board. A new tax regime will also be put in place next year, whereby a personal income tax system will be introduced. 6. Prices Inflation data was among those most closely monitored in 2009, given the newly adopted free market policies, which meant that price controls had been eliminated. Moreover, the direction of inflation


- 71 -

would be a test of how successful monetary policies would be, given that price stability is the Central Bank’s primary objective. In late 2008, immediately following the launch of the reform programme, a sharp increase in the price level was observed. However, following a one-off, [61 per cent] jump in year-on-year inflation in November 2008 that was followed by a further [2 per cent] increase in December 2008, the inflation remained close to zero, on a month-on-month basis, throughout 2009 as inflationary pressures were eased against a backdrop of an appreciating exchange rate. Given that Seychelles is a net importer, the depreciated exchange rate in late 2008 and early 2009 had raised fears of further inflation in 2009. However, in addition to the turnaround which saw the currency appreciate after the first quarter, the government also played an important role in brining down inflation by anchoring prices of basic commodities primarily through the public owned Seychelles Trading Company (STC). To ease the effects of escalating costs on consumers, STC adopted a policy to absorb a portion of these costs, which allowed it to halt the increase in prices of those basic goods through quarterly downward revision in the price of important commodities such as food items.

Chart 5.2: Price Movements (2000 - 2009)

-25.0-15.0-5.05.0

15.025.035.045.055.065.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Years

Perc

ent

Average Inflation Rate End of Year Inflation

A relatively high volatility was observed within underlying factors which significantly influenced the

country’s CPI. On a year-on-year basis, inflation was -2.5 per cent in 2009, reflecting the

disinflationary trend observed since early in the year. There were mixed movement in the various

categories of prices, reflecting varying trends in the factors affecting inflation. Distinctively, fish price

rose sharply in 2009 due, among other things, to the rise in meat prices which in turn reflected the

rupee devaluation, as well as the removal of subsidies on animal feed. Prices of food items excluding

fish fell by 7.7 per cent, geared principally by the drop in price of “milk, cheese and eggs”, and “Oils

and fats of 21.4 per cent and 36.3 per cent respectively. Regarding the non-food category, despite

increases in the price of tobacco and transport costs, this category still recorded a year-on-year decline

of 1.8 percent. This was explained by a decline in the price of “Alcoholic Beverages” by 7.2

percentage points and that of “Housing, water, electricity and gas” by 7.7 per cent.


- 72 -

Table 5.7 Inflation Rates; 2005 – 2009

2005 2006 2007 2008 2009

Weights 2007 (percentage change)

Annual Average All Items 100 0.9 -0.4 5.3 37.0 31.8

Fish 3.3 5.4 11.5 5.9 10.2 1.6

Other Food Items 25.5 0.6 2.8 8.7 41.8 0.0

Non-Food Items 71.1 0.8 -1.8 4.1 36.4 0.5

Year-on-Year

All Items 100 -0.7 2.3 16.7 63.3 -2.5

Fish 3.3 27.8 -3.5 19.4 11.4 48.0

Other Food Items 25.5 -0.5 7.0 25.7 74.3 -7.7

Non-Food Items 71.1 -1.6 1.0 3.8 61.1 -1.8 Source: National Statistics Bureau

SECTION SIX

Operations and Administration of the Central Bank

6. Overview

During the course of 2009 the Bank focused on meeting its targets under the IMF-supported

macroeconomic reform programme, which consisted of quantitative as well as structural targets.

Evident was the dynamic manner in which monetary policy was conducted in the more market-driven

environment, which was complemented by an enhanced supervisory framework.

Through technical assistance (TA) from the IMF, which started in February 2008, the Bank managed

to put in place various structures and policies that allowed it to effectively implement the elements of

the reform programme that were under its responsibility. By the end of the year, the Bank had put in

place a new monetary policy framework, including operational guidelines which were approved by the

Board of Directors in December. These guidelines allow for the conduct of monetary policy as per

rules set out therein and policy instruments designed to implement these policies aimed at attaining the

Bank’s objectives.

The Bank also published its first Bank Supervision Report which highlighted the outcomes for the

year 2008. In addition to these two major milestones, the Bank beefed up the capacity of its staff in

terms of knowledge in monetary and external policy formulation, supervisory functions and

accounting standards, namely in International Financial Reporting System (IFRS). The Bank also

successfully implemented most of the recommendations of the 2008 IMF Safeguard Assessment

Mission.

The additional functions associated with the new monetary policy approaches required some re-

organisation within and between divisions of the Bank to improve efficiency and bring about clearer

segregation of duties. This also allowed for the standardisation of the Bank’s procedures and policies

as well as incorporating international standards of best practices. Moreover, to cope with the demands

of the ever changing working environment, the Bank endeavoured to boost its human resource

development, with both domestic and overseas training. These were supported by in-house training,

including the IMF TA programme, which proved an invaluable training support as it allowed more

staff to benefit from the experiences of the consultants.

- 73 -

Annual Report 2009 Operations and Administration of the Central Bank

- 74 -

One key area of restructuring was the upgrade of the Information Technology (IT) Unit to a full-

fledged Division now named as the Technical Services Division (TSD). This functional upgrade was

seen necessary to support the Bank’s IT needs, and in the process assist in minimising risks associated

with the increasing volume of processes now being undertaken.

There was the re-organisation of the Financial Services Supervision Division (FSSD) to reflect the

added responsibility and regulatory roles under the new Foreign Exchange Act. There was also a

change of name of the Monetary Analysis and Statistics Division (MASD) to Policy, Market

Operations and Statistics Division (PMOSD). The change was deemed a necessity following a higher

content of policy oriented work being undertaken as well as absorbing the process of market

operations from Banking Services Division. The Banking Services Division (BSD), which despite

remaining unchanged structurally, continued in its development towards becoming a modern banker to

all parties concerned. Of key significance is the work done towards the implementation of Core

Banking System as well as the modernisation of the payment system.

Besides the divisional changes, the Bank also set up two new committees, namely the Investment

Committee and the Operational Risk Committee. The former is tasked with the mandate for the

oversight of the foreign reserves management whilst the latter has the responsibility for assessing risks

that may arise, and to advise on appropriate remedies.

These changes occurred smoothly despite the challenges posed by the uncertain economic

environment that prevailed, more predominantly at the start of the year given the extent of economic

adjustments domestically, coupled with a gloomy global economy.

From a legal perspective, the amended regulations and statutes initiated in late 2008 have during the

year ensured the smooth transition into a more liberalised financial system. Together with a new

market-based approach to monetary policy, these changes meant that the Central Bank is now better

equipped to follow developments in the financial system. However, there is still more work to be done

as the current financial market remains small and there remains more scope for a broader range of

services.

An integral policy change was the transition from the legislative Exchange Control Act (1954) to the

regulative in nature Foreign Exchange Act (2009) (FEA 2009) following the repeal of the former

legislation in June 2009. The FEA 2009 has the primary aim of ensuring that payment in Seychelles

Rupees is never refused so as to promote convertibility of the local currency and allows for free

movement of capital both within the domestic economy as well as the rest of the world.


- 75 -

However, to safeguard the financial system, prudential measures in the form of a foreign exchange

exposure limit under the Financial Institutions (Foreign Currency Exposure) Regulations on

commercial banks were established in February. Initially the limits were set at 100 per cent for long

positions and 20 per cent for short positions. These were reduced to 30 per cent for long and 30 per

cent for short positions, respectively, in July 2009, to bring these limits closer to international norms.

With the supervisory role of the Bank greatly enhanced during the year, the portfolio of institutions

under the supervision of the Bank was increased. In addition to the six commercial banks, one

offshore bank and the Credit Union, supervisory oversight was given for Development Bank of

Seychelles (DBS), Housing Finance Company (HFC) and the Concessional Credit Agency (CCA),

which were previously under the purview of the Ministry of Finance. In addition, the number of

Bureau De Changes also increased further, boosting competition in the foreign exchange market.

6.1 Administration and Human Resources

With new recruits joining the Bank throughout the year, the number of staff employed by the Bank

reached 106 by end of December 2009. This reflected an increase in the number of new posts established

following restructuring of Divisions that expanded the workforce to meet new functional demands of the

bank and enhance existing services. Whilst 21 new appointees joined the Bank, 3 members of staff

resigned.

In 2009, for the first time, staff retreats were held where Management met with staff away from the office

to better understand and respond to concerns raised by the staff, and proposals to improve the work

environment as well as issues related to staff welfare. These retreats will now be annual events.

To enable staff to strive for excellence, the Bank gave full support to a wide range of central banking

courses both locally and overseas to serve the training and development needs of the staff. A total of 21

members of staff had the opportunity to attend short courses/seminars abroad throughout the year. Staff

also attended a number of other programmes covering a variety of topics such as Performance

Management, General Banking, Foreign Direct Investment statistics workshop, and Compliance. In light

of staff members’ tight work schedules, the Bank also encouraged staff to pursue on–line courses. To

further enhance the skills and knowledge of the frontline staff who serve the Bank’s valued customers,

customer service and complaint handling courses were also provided.

The Division has completed the procedures manual for Administrative issues and has also reviewed the

salaries of all staff. Additionally, based on the outcome of a recent Security Audit carried out at the Bank,

it has been found necessary to tighten the security controls and adopt certain measures/procedures to

ensure the safety of staff at the Bank. The measures undertaken are aimed at achieving better results in

security protocols and higher safety levels for all members of staff and bring the CBS security functions


- 76 -

closer to best international practices.

6.2 Banking Services Division

With the establishment of the National Payment System (NPS) Unit in June 2008 and the ongoing

technical support from the IMF Regional Payment System Advisor, the National Payment System

project continues to develop towards its reform and modernisation strategy.

The National Clearing and Settlement System Bill, the legislation guiding and supporting the

establishment of the National Payment System is still undergoing drafting with several ratifications

made to the original document to ensure compliance with best contemporary practices. Among the

ratifications undertaken include those relating to Framework and Strategy as well as Standards for

Cheques in July, with further revisions to the Clearing House Rules, scheduled for completion in 2010.

Complementary to the National Payment System, several steps are being undertaken to improve

overall efficiency and gradual progress towards a real time gross settlement system (RTGS). The

settlement facility of ATM/POS is now undertaken on a daily basis directly through the General

Ledger of the Central Bank of Seychelles whilst the Electronic Clearing House (ECH) Requirements

Definition has been drafted and the ECH Focus Group has been formed to review the draft document.

Furthermore, the Immediate Transfer Service has been introduced to all Commercial Banks and

Government. The Bank has also imposed a maximum cheque value cap of R0.1 million on all inter-

bank cheque payments with a future consideration of potential caps to further improve efficiency.

As regard clearing house activities itself, the average daily figures increased substantially in 2009 both

in terms of quantity and volume relative to that of the previous year. The average number of clearing

items increased by 9.1 per cent and the associated average amount rose by a substantial 44.7 per cent.

Table 6.1: Bankers' Clearing House Activities; 2005-2009

2005 2006 2007 2008 2009

(Total) Number of items cleared 587,552 596,638 629,724 658,603 718,314 Amount (R'000) 2,192,623 2,339,696 2,382,069 2,652,751 3,838,803

(Daily average) Number of items cleared 2,341 2,416 2,519 2,624 2,898 Amount (R'000) 8,736 9,472 9,528 10,569 15,539


The Division has also undertaken new rupee settlement transactions directly in the General Ledger of

the Central Bank. Several of these changes have come as a result of the gradual move towards a


- 77 -

Treasury Single Account (TSA), a structural benchmark under the IMF-supported SBA and others as a

result of the move towards an active inter-bank market. These include monthly Government salaries

and Pension Fund transfers as well as government securities redemption, interest payment of all

Commercial Banks and direct transfers to client’s Bank account at their respective commercial banks.

Inter-bank activities, including foreign exchange transactions of the Seychelles Inter-bank Foreign

Exchange Market (SIFXM) also fell under the General Ledger of the Bank.

6.2.1 Public Debt Unit

Being part of Banking Services, the Unit continued its operations as the government’s domestic debt

management agent as well as the registrar for government securities. Work in that area intensified

during the year in view that auction of government securities increased in frequency. Following the

weekly auctions of 91-day Treasury bill in 2008, the same frequency was introduced for 182-day and

365-day, the former starting in May and the latter in July. This addition was seen necessary to help

further develop the money market by having choices in the maturities which provided for a

diversification for the investors. The Unit was also involved in implementing a portion of the market

operation functions for monetary policy in terms of the oversight of repo (and reverse repo) operations

which began in May.

6.3 Financial Services Supervision Division

The year saw the Financial Services Supervision Division (FSSD) enhance its monitoring of financial

institutions given higher risks associated with the changing market fundamentals. This corresponded

to the ongoing improvement of its supervisory functions as supported by technical assistance from the

Monetary and Capital Markets (MCM) division of the IMF, tabled by an action plan which spans from

January 2009 to June 20104. As part of the action plan, the year saw the review of Financial

Institutions Act (FIA) 2004, with the objective of modernising and making it relevant to prevailing

industry condition. The FSSD also had under its administration a new legislation; the Foreign

Exchange Act (FEA) 2009 which replaced the Exchange Control Act, 1954.

Similar to 2008, the Division had 7 banks and 1 credit union under its supervision with the Ministry of

Finance also delegating certain sections of the Development Bank of Seychelles Decree (1978) to the

Central Bank and consequently the Bank became the prudential supervisor of the institution.

Moreover, the Housing Finance Company (HFC), a company incorporated under the Companies Act

1972, was also added to FSSD’s portfolio of supervised institutions. In December 2009, the Board of

the Bank approved the Application of Act Order which set out sections of the FIA applicable to these

institutions.

4 Initially the action plan stretched from January 2008 to June 2009.


- 78 -

To foster competition in the foreign exchange market, the licensing requirements for bureaux de

change (BDCs) was simplified in line with the government’s initiative to foster competition in the

foreign exchange market. A total of 15 new BDCs were licensed, bringing the total to 24, out of

which 19 were operational by the end of the year. As such, compared to 2008, when there were only 2

BDCs in operation, the division’s supervision increased significantly in 2009 to ensure compliance

with legislative requirements. In addition to onsite supervision of the BDCs, the division also

conducted onsite examinations of BMI Offshore Bank and Barclays Bank (Seychelles) Ltd. In these

examinations the risk-based approach in conformity with the CAMELS system, which assesses a

bank’s Capital adequacy, Asset quality, Management, Earnings, Liquidity and Sensitivity to market

risk, was further developed.

The aforementioned tabled TA action plan also includes the formulation of internal procedural

manuals to establish step-by-step guidelines on different procedures for the purpose of promoting

consistency and objectivity. Thus, procedural manuals were devised on Capital, Management,

Earnings and Liquidity components5 which were used by the Bank’s staff during the on-site

examinations. Furthermore, issues raised were closely monitored to ensure compliance with

recommended corrective measures in line with the manual on prompt corrective action, approved by

the Board in 2009, which sets out the Bank’s policy with regards to implementing its authority to take

remedial measures against unsafe practices. A procedural manual was also developed for acquisition

of substantial interest (10 per cent and above) in financial institutions detailing an applicant’s fit and

proper test to hold substantial interest in a financial institution with, an application pack for the test

produced.

Regulations on liquidity risk management were issued whilst those on foreign currency exposure

issued in 2008 were amended and three others were approved by the Board in December. These were

namely regulations on loan classification and provisioning, capital adequacy and bank licence fees.

The regulations on liquidity risk management, issued in March, require that a bank maintains 20 per

cent of its total assets in liquid form. The purpose of these regulations is to ensure that a bank’s needs

for funds, including maintaining the required level of liquidity and meeting expected and contingent

cash needs can be regularly met at a reasonable cost.

The loan classification and provisioning regulations and capital adequacy regulations were drafted in

such a way so as to be consistent with the amendments to the FIA, which for instance, redefines

5 Procedural manuals on Asset Quality and Sensitivity to market risk are expected to be delivered in 2010.


- 79 -

capital used to calculate their prudential ratios. Furthermore, the minimum paid-up capital was raised6

and is contained in the capital adequacy regulations. In addition, banks’ licence fees were revised

upwards during the year as prescribed in the bank licence fees regulations. The licence fees are based

on the total assets of a specified bank, with banks under the R300 million threshold paying R0.25

million. Those above the R300 million threshold but less than R1,000 million would pay R 0.5

million. Any bank with total assets of above R1,000 million but below R5,000 million would now

have to pay R0.75 million, whilst above the latter limit, the amount payable is R1.0 million.

FSSD increased its scope of inspection to include bodies affected by the FEA such as tourism

establishments and car hires to ascertain compliance with the Act. FSSD staff was also actively

involved in the organisation of public meetings in order to sensitise the public about the FEA.

With regards to procedures, the Division formalised the way that it approves appointment for external

auditors of financial institutions by introducing a form that external auditors need to complete with

details relating to their experience, qualifications and competency on the basis of which approval is

granted. The circular on abandoned property was also revised to include safe deposit boxes and to

clarify and bring more consistency in the timeframes within which abandoned property is to be

published, reported and transferred.

A highlight for FSSD in terms of information dissemination was the introduction of its first

Supervision Report, a key Structural Benchmark which adopts a simplistic approach with the idea of

introducing the public with a basic concept of the financial sector, setting the pace for more in-depth

representation and analysis of the sector going forward. The report enhances the Central Bank’s

efforts to promote transparency. With that same purpose, FSSD also initiated the publication of

banks’ comparative fees and charges, which is updated on a quarterly basis by the banks.

With regards to divisional structure the Board approved for the division to be structured into four

sections, namely onsite supervision, offsite supervision, policy and foreign exchange section with the

aim of attaining organisational efficiency. Training remained a divisional strategy for the year in order

to keep staff up to date. During 2009, staff attended trainings held by the SBI on general banking and

complaints handling. As regards to overseas training, these covered issues including financial

stability, banking, finance and implementation of Basel II.

6.4 Internal Audit Unit

6 Minimum paid-up capital for banking business has doubled from R10 million to R20 million with a phase-in period of 3 years. That of offshore banks remains unchanged at US$2 million.


- 80 -

Following the reinstitution of the internal audit function at the Central Bank in the third quarter of

2008, an Internal Audit Charter and an Audit Committee Charter were approved by the Board during

the year. An Audit Programme was also prepared and approved by the Audit Committee which met

quarterly.

Tender for the conduct of a risk analysis was sent to five external auditors which were then short-listed

by the Operational Risk Committee to two, namely Ernst and Young and PricewaterhouseCoopers

(PWC). The two firms submitted their tenders specifically with regard to business, operational and

reputation risks. By the end of December 2009, the Operational Risk Committee was analysing the

two tenders which will be followed by notification and appointment of their designated choice.

With regards to the appointed external auditors, PWC performed onsite and offsite reviews of the set

quantitative performance criteria, namely the Reserve Money and Net International Reserves targets,

on a quarterly basis. The reviews also included reports on audits carried out during the year as per the

Audit Programme, spot checks in the vault and also the quarterly submission to the Board as per the

CBS Act. As part of ongoing agreements, the IMF aided the Unit and will continue to do so with

technical assistance to strengthen the Internal Audit function.

Going forward, the Internal Audit Unit plans to recruit an Assistant to the Internal Auditor in 2010

who will concentrate on performing routine audits and spot checks as per the approved charter. This

will provide the Internal Auditor more time to concentrate on key issues such as the transition to IFRS

and the implementation, moving the internal audit functions toward a more risk-based framework and

understanding the workings of the Core Banking System among others. This will strengthen the

Internal Audit function as required by the CBS Act. A three-year audit plan has been drawn and

submitted to the Audit Committee.

6.5 Policy, Monetary Operations and Statistics Division (previously the Monetary Analysis

and Statistics Division)

Major developments happened within the Division throughout the year with the main focus being on

the development of the monetary policy framework for the Bank. Within this context, new indirect

instruments for monetary policy interventions were put in place to help the bank achieve its policy

objectives more effectively. These included the Credit Auction Arrangement (CAA),

Repurchase/Reverse Repurchase Agreements, Standing Facilities, Foreign Exchange Auction (FEA)

and Outright sales of government securities. The administration of the two direct instruments, namely

the Minimum Reserves Requirements and the Local Assets Ratio, which were previously under the

ambit of FSSD, was transferred to the Division in March.


- 81 -

Moreover, the Division also put in place, in collaboration with the FSSD, an Emergency Lending

Facility for commercial banks in severe liquidity difficulties. Information about all the instruments,

once approved by the Board, were disseminated to financial institutions and posted on the Bank’s

website as part of its policy for increased transparency. By the end of the year, the Monetary Policy

Framework as a final document was approved by the Board and this is the guiding tool for policy

decision making.

Underpinning the overall strategy for monetary policy was the setting up of a working group for

liquidity management, which is spearheaded by the Division and included staff from FSSD, BSD and

Ministry of Finance. This group meets on a weekly basis to discuss and analyse the various factors

affecting liquidity movements in the financial system. Based on the outcome of these meetings,

information is channelled to members of the Monetary Operations Committee for consideration in

policy interventions by the Bank.

In addition to the preparation of scheduled publications including monthly economic reviews and

weekly economic analysis, the Division also undertook a series of research work on monetary and

exchange rate issues so as to address immediate policy concerns and also provide better advice on

policy options in view of the more dynamic nature of the Bank’s role in the financial system.

Amongst the issues that were the subject of in-depth research were interest rates, exchange rate

spreads, and the real effective exchange rate.

From a statistical perspective, the Division saw its responsibility in this area increase significantly

throughout the year. The Statistics Unit, which has the bulk of the operations within the Division, is

responsible for compiling and disseminating data. One of the major challenges was to manage the

increasing flow of information in view that the frequency of reporting of the financial system had

increased from an average of monthly submissions to a much shorter timeline of daily and weekly

reporting. This was mainly for exchange rate data given the new foreign exchange regime being a

floating system as well as other data on liquidity positions and monitoring of interest rate.

The Unit also continuously assessed the quality of its statistics during the year and made

improvements on the identified deficiencies. An important activity in this regard was to conduct

seminars with compilers of the agencies concerned to ensure that they understood the concepts being

used. During the year under review, these seminars targeted mostly the financial sector, namely

commercial banks. The Division also had the visit of a Technical Assistance mission from the IMF

Statistics Department on external sector statistics in December. The objective of that mission was to

assess the quality of data of the external sector, namely in the field of Balance of Payments (BOP)

compilation. The mission was able to evaluate the current status and made recommendations for


- 82 -

improvement where necessary. The mission also discussed with the staff on the plan for the migration

of the BOP on the new definitions of the new manual, the Balance of Payments and International

Investment Position Manual (BPM6).

6.6 Securities and Financial Markets Division

The Securities and Financial Market (SFM) Division continued its development as guided by the

Insurance, Mutual Fund, and Securities Acts with the overall goal of providing sound financial

services via the channels of implementing regulations, monitoring market developments and

administration of licensed operators in accordance with the Acts.

The slowdown seen in world markets continued to adversely affect the goals set forth by the division.

Nevertheless, the division continued its regulatory tasks as well as adding new and updating existing

regulations with regards to the insurance markets.

However, in the second half of the year following an assessment of the role of the Division in the

Bank’s overall functions and in consultation with the government, a decision was taken to transfer the

supervision of Securities and Funds to the Seychelles International Business Authority (SIBA), and to

maintain insurance supervision, including offshore insurance at the CBS, as a function of the FSSD.

This would take effect from January 2010.

6.6.1 Securities and Mutual Fund Sections

The sections continued to provide sound financial services by enforcing the regulations, monitoring

market developments and continuously seeking improvements to remain up to date with the ever

changing securities supervisory practices and principles. The securities section had seen its first

glimpse of activity with applications for the Securities Exchange, Securities Dealers, Securities

Dealers Representatives and Clearing facilities licenses. However, none were yet licensed by end-

2009.

Despite the apparent easing of the global financial crisis in the latter half of 2009, the overall financial

environment was still not quite conducive to attract significant investments in the mutual funds sector.

Toward the end of the year, two unrestricted fund administrator applications were in the final stages of

being processed by the division. But no Fund was yet licensed by end-2009.

Nevertheless, the division continued to sensitise potential investors about the country’s mutual fund

industry by distributing leaflets, namely at the international airport, Seychelles Tourism Board and

Seychelles Investment Bureau, to name but a few. In light of the dynamic nature of the mutual fund


- 83 -

industry, work has started to revise the Mutual Fund Act 2008 to ensure that the legislation remains

current with international developments.

6.6.2 Insurance Section

In 2009, the insurance section in the Securities and Financial Markets Division continued with its

endeavour to promote a sound insurance supervision through its methodical licensing process of

domestic and non-domestic insurance companies, insurance brokers, insurance agents and insurance

sub-agents. The section concentrated on the off-site examinations of supervised institutions, through

enforcement of legislations and analysis of returns.

In August 2009, La Prudence Mauricienne Assurance Limitée, a Mauritius incorporated company was

licensed. Along with Sacos Insurance Company Limited, H. Savy Insurance Company Limited and

Sacos Life Assurance Company Limited, La Prudence Mauricienne became the fourth licensed

company in the Seychelles Insurance Market. Ten insurance brokers have been licensed under the

Insurance Act 2008.

In relation to on-going human resource development, the insurance officer was exposed to a three

week attachment at the Irish Financial Regulator in Dublin and other short courses, both locally and

internationally.

6.6.3 Compliance Section

With the increase in market activity from the three sections it supports, the compliance section has had

to enhance its standard and ensure that it is up to date with the continuous development of the

respective sections. There has been an enforcement of the standard to take account of these changes.

The section continued to pursue the alignment of domestic regulations with international best practices

as recommended by multilateral regulatory bodies, such as standards set by the International

Association of Insurance Supervisors (IAIS) and Offshore Group of Insurance Supervisors (OGIS) in

the insurance sector and the International Organisation of Securities Commissions (IOSCO) for

securities. Several amendments to the procedures were undertaken to accommodate new developments

that occurred during the year to increase effectiveness and efficiency. This has allowed more synergy

between the compliance section and other sections of the division.

6.7 Technical Services Division


- 84 -

The Information Technology Unit is responsible for technical support for the Bank as well as being

mandated with the operation of the CBS website. This implies it now has to play a far more strategic

and proactive role in supporting the Bank’s core functions. Thus, as part of the continuing wave of

reforms, the Board of Directors in August approved for what was formerly known as the IT Unit to

become a fully-fledged division: the Technical Services Division (TSD).

With the fundamental changes taking place in all aspects of the Banks’ duties and functions, this

required an overhaul of the resources of the division. This began with the recruitment of key personnel

which was accompanied by an increase in training of the new and existing staff. The new, more

dynamic TSD has allowed the banks to cope much better with a growing list of projects; starting with

an audit and re-organisation of the ICT infrastructure to solidify the foundation on which the other

software implementation projects will be executed in 2010. A major project on line for 2010

completion, for which the TSD will have to play a key role, will be the setting up of an integrated

banking system software.

6.8 Board of Directors

Following the resignation of Mr. Jean Weeling-Lee on April 30, 2009 from the Board, Mr Steve

Fanny, Chief Executive Officer of SIBA, was appointed in September 2009 as his replacement. There

were 12 meetings held during the year, four above the statutory requirement.

6.9 Appreciation

Despite the arduous workload under a new economic environment rife with uncertainty, staff members

have continued to discharge their responsibilities in a professional, ethical and exemplary manner as

befitting a central monetary institution. The year saw several new challenges arising, many dealing

with how the Bank must now function as a truly autonomous institution, the implications of having an

economy open to market forces and how fiscal retraction and rise in banking hegemony is to influence

the future of the nation.

Thus, the Board and management of the Central Bank wish to record their appreciation and

wholeheartedly congratulate all staff members of the Central Bank for their valuable contributions to

the operations of the Bank in 2009.

CENTRAL BANK OF SEYCHELLES FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2009

CENTRAL BANK OF SEYCHELLES FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2009 CONTENTS PAGES OPINION OF THE AUDITOR GENERAL 2 – 3 AUDITOR’S REPORT TO THE AUDITOR GENERAL 4 – 5 STATEMENT OF FINANCIAL POSITION 6 STATEMENT OF COMPREHENSIVE INCOME 7 STATEMENT OF CHANGES IN EQUITY 8 STATEMENT OF CASH FLOWS 9 NOTES TO THE FINANCIAL STATEMENTS 10 - 65

Orrrce 0FTHE Aunrron Gnxrnnr,P.O. Box 49 - VictoriqMahe Republic of SeychellesTelephone: (248) 610360 Fax: (248) 610365E-mail. auditgen@oag. sc

Please address all correspondence to the Auditor General

Page2

OPINION OF THE AUDITOR GENERAL ON THE ACCOUNTS OF THECENTRAL BANK OF SEYCHELLES

FOR THE YEAR ENDED 31 DECEMBER 2OO9

Scope

Pursuant to the powers conferred on me by Section 47 (3) of the Central Bank of Seychelles Act2004, I have caused PricewaterhouseCoopers to audit on my behalf the financial statements of theCentral Bank of Seychelles (the "Bank") for the year ended 31 December 2009 as set out on pages6 - 6 5 .

Responsibility of the Board of the Bank for the Financial Statements

The Board of the Bank is responsible for the preparation and fair presentation of these financiaistatements in accordance with International Financial Reporting Standards and in compliance withthe requirement of the provisions of the Central Bank of Seychelles Act, 2004, as amended in2009. This responsibility includes: designing, implementing and maintaining internal controlrelevant to the preparation and fair presentation of financial statements that are free from materialmisstatement, whether due to fraud, error; selecting and applying appropriate accounting policies;and making accounting estimates that are reasonable in the circumstances.

Responsibility of the Auditor General

My responsibility is to express an opinion on these financial statements based on my audit. Theaudit was conducted in accordance with the lnternational Standards on Auditing. Those standardsrequire that I comply with ethical requirements and plan and perform the audit to obtain reasonableassurance whether the financial statements are free from material misstatement. An audit involvesperforming procedures to obtain audit evidence about the amounts and disclosures in the financialstatements. The procedures selected depend on the auditor's judgement, including the assessmentof the risks of material misstatement of the financial statements. whether due to fraud or error. lnmaking those risk assessments, the auditor considers internal control relevant to the Bank'spreparation and fair presentation of the financial statements in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Bank's internal control. An audit also includes evaluating the appropriatenessof accounting policies used and the reasonableness of accounting estimates made by the Board,as well as evaluating the overall presentation of the financial statements.

I believe that the audit evidence I have obtained is sutficient and appropriate to provide a basis formy opinion.

Opinion

In my opinion,

(a) proper accounting records have been kept by the Bank as far as it appears from theexamination of those records; and

(b) the financial statements on pages 6 to 65 give a true and fair view of the financial positionof the Bank at December 31, 2009 and of its financial performance and cash flows for theyear then ended in accordance with International Financial Reporting Standards andcomply with the Central Bank of Seychelles Act, 2004, as amended in 2009.

Ntarc BenstrcngAuditor General

31 March 2010Victoria, Seychelles

futcryYnrssloys{mrrns @

Auditor's Report

Page 4

PricewaterhouseGoopers18 CyberCityEbdneRepublic of MauritiusTelephone +230 404 5000Facsimile +230 404 5088/89pwc.com/mu

To the Auditor General of the Central Bank of Seychelles

Report on the Financial Statements

1. We have audited the financial statements of the Central Bank of Seychelles (the "Bank") onpages 6 to 65 which comprise the Bank's statement of financial position at 31 December2009 and the statement of comprehensive income, statement of changes in equity andstatement of cash flows for the year then ended, and a summary of significant accountingpolicies and other explanatory notes.

Directors' Responsibility for the Financial Statements

2. The directors are responsible for the preparation and fair presentation of these financialstatements in accordance with International Financial Reporting Standards and incompliance with the requirements of the Central Bank of Seychelles Act2004, as amendedin 2009. This responsibility includes: designing, implementing and maintaining internalcontrol relevant to the preparation and fair presentation of financial statements that are freefrom material misstatement, whether due to fraud or error; selecting and applyingappropriate accounting policies; and making accounting estimates that are reasonable inthe circumstances.

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.We conducted our audit in accordance with International Standards on Auditing. ThoseStandards require that we comply with ethical requirements and plan and perform the auditto obtain reasonable assurance whether the financial statements are free from materialmisstatement.

An audit involves performing procedures to obtain audit evidence about the amounts anddisclosures in the financial statements. The procedures selected depend on the audito/sjudgement, including the assessment of the risks of material misstatement of the financialstatements, whether due to fraud or error. In making those risk assessments, the auditorconsiders internal control relevant to the entity's preparation and fair presentation of thefinancial statements in order to design audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on the effectiveness of theentity's internal control. An audit also includes evaluating the appropriateness of accountingpolicies used and the reasonableness of accounting estimates made by the directors, as wellas evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate toprovide a basis for our audit opinion.

"PricewaterhouseCoopers" refers to PricewaterhouseCoopers in Mauritius or, as the context requires, thePricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity.

3.

4.

5.

futcWfrrwous{mrcns @

Auditor's ReportPage 5

To the Auditor General of the Gentral Bank of Seychelles (continued)

Report on the Financial Statements (Continued)

Opinion

6. In our opinion, the financial statements on pages 6 to 65 give a true and fair view of the financialposition of the Bank at 31 December 2009 and of its financial performance and cash flows forthe year then ended in accordance with International Financial Reporting Standards and complywith the Central Bank of Seychelles Act2004, as amended in 2009.

Report on Other Legal and Regulatory Requirements

7. ln our opinion, proper accounting records have been kept by the Bank as far as appears fromour examination of those records.

Other matters

8. We do not, in giving this opinion, accept or assume responsibility for any other purpose or toany other person to whom this report is shown or into whose hands it may come save whereexpressly agreed by our prior consent in writing.

31 March 2010

CENTRAL BANK OF SEYCHETTES

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2OO9

Notes31 December 31

2009SCR

(6) 2,094,206,282(71 1 ,133,913,133

(8) 112,499,000(9) 11,305,894

(10) 4,380,762

(11) 52,778,098(121 32,522(13) 6,096,864

RestatedDecember

2008

Page 6

Restated01 January

2008

ASSETS

Cash and cash equivalentsInvestment securitiesLong term deposits withbanks

Loans and advancesCurrency replacement costsProperty, plant andequipment

lntangible assetsOther assets

Total assets

LIABILITIES

Currency in circulationDeposits from GovernmentDeposits from banksOther depositsOpen Market OperationsInternational Monetarv Fundobligations

Other l iabi l i t ies

Total liabilities

EQUITY

Capitaland ReservesAuthorised capitalGeneral reseryeRevaluation reserveRetained earnings

Total equity

Total equity and l iabi l i t ies

SCR

1,046,124,9371,001,404,747

206,005,000147,397,845

6,437,465

51,045,47357,244

5,075,539

SCR

322,549,5961 ,052,583,173

92,348,0013,825,429

32,461,076

6,875,059

3,415, ' ,1l2,555

(141 555,010,580(15) 381,034,564(16) 1 ,631,978,369(171 14,285,770(18) 375,000,000

(19) 356,096,926(20) 32,788,814

2,463,548,250 1,510,642,334

477,573,318259,069,766701,178,375448,533,450

168,033,660164,638,422

450,609,57126,526,930

662,443,74922,026,263

5,358,304188,306,386

3,346,195,023 2,219,026,991 1,355,271,203

(211(211(221

48,917,53220,000,000

1,000,00020,000,000

223,177,819343,440

1,000,00020,000,000

131,641,0422,730,089

68,917,532

3,415,112,555

244 521 259 155,371,131

2,463,548,250 1,510,642,334

These financial statements were approved and authorised for issue on 3,| March 2010

te.; L l x - -

W.JacksonDirector Director

By the undersigned:

J.Morel E.DiasDeputyGovernor Director

CENTRAL BANK OF SEYCHELLES STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2009 Restated Notes 2009 2008 SCR SCR Interest income (23) 235,608,679 85,637,169 Interest expense (24) ( 38,716,386) ( 23,085,803) Net interest income 196,892,293 62,551,366 Fees and commission income (25) 62,787,018 21,708,929 (Losses)/gains arising from dealings in foreign currency transactions (26) ( 23,078,922) 45,514,378

(Losses)/gains arising from revaluation of foreign currency monetary assets and liabilities (26) ( 440,696,498) 147,331,231

Other income 5,030,187 1,423,230 Staff costs (27) ( 23,490,133) ( 23,033,476) Currency expenses (28) ( 2,172,324) ( 2,077,078) Depreciation (11) ( 1,796,968) ( 1,598,250) Amortisation charge (12) ( 29,922) ( 28,622) Professional charges (29) ( 3,415,656) ( 5,600,601) Other operating expenses ( 10,922,760) ( 5,558,134)

Net (loss)/profit and total comprehensive (loss)/income for the year ( 240,893,685) 240,632,973

CENTRAL BANK OF SEYCHELLES STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2009

Authorised

CapitalGeneral Reserve

RevaluationReserve

RetainedEarnings

TotalEquity

SCR SCR SCR SCR SCR At 01 January 2008 1,000,000 20,000,000 131,641,042 2,730,089 155,371,131Net profit and total comprehensive income for the year - - - 240,632,973 240,632,973Unrealised foreign exchange differences transferred from retained earnings to revaluation reserve - - 147,331,231 ( 147,331,231) - Transfer to Government Consolidated Fund - - ( 55,794,455) ( 95,688,391) ( 151,482,846) At 31 December 2008 1,000,000 20,000,000 223,177,818 343,440* 244,521,258Revaluation reserve transferred from Government Consolidated Fund - - 55,794,455 - 55,794,455

Retained earnings transferred from Government Consolidated Fund - - - 28,706,518 28,706,518

Transfer to authorised capital 28,706,518 - - ( 28,706,518) - Net loss and total comprehensive loss for the year - - - ( 240,893,685) ( 240,893,685)Transfer from revaluation reserve - - ( 278,972,273) 278,972,273 - Transfer to authorised capital 19,211,014 - - ( 19,211,014) - Transfer to Government Consolidated Fund - - - ( 19,211,014) ( 19,211,014) At 31 December 2009 48,917,532 20,000,000 - - 68,917,532

*Retained earnings arising from transition to IFRS (Note 4.2.2 (xii))

CENTRAL BANK OF SEYCHELLES STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2009 Restated Note 2009 2008 SCR SCR Cash flows from operating activities Cash generated from operations (30) 559,611,417 662,120,874 Cash flows from investing activities Proceeds from cancellation of deposits with banks 40,273,000 - Payments for acquisition of property, plant and equipment ( 4,011,928) ( 20,753,082) Payments for acquisition of intangible assets ( 5,200) - Proceeds from disposal of property, plant And equipment 273,590 758,469 Proceeds from redemption of government securities 45,000 55,530,332 Net cash generated from investing activities 36,574,462 35,535,719 Cash flows from financing activities Increase in currency in circulation 77,437,262 26,963,747 Purchase of Government securities - ( 1,045,000) Open Market Operations 375,000,000 - Net cash generated from financing activities 452,437,262 25,918,747 Increase in cash and cash equivalents 1,048,081,345 723,575,340 Cash and cash equivalents at start of the year 1,046,124,937 322,549,597 Cash and cash equivalents at end of the year 2,094,206,282 1,046,124,937

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 1 GENERAL INFORMATION The Central Bank of Seychelles (the “Bank”) is established and domiciled in Seychelles. The address of its registered office is as follows: P. O. Box 701, Independence Avenue, Victoria, Mahe. The Bank is established by statute under Section 3 of the Central Bank of Seychelles Act 2004, as amended in 2009, hereafter referred to as the CBS Act. Section 3 of the CBS Act states; “there is hereby established the Central Bank of Seychelles which shall be a body corporate with perpetual succession and a common seal.” The financial statements for the year ended 31 December 2009 have been approved for issue by the Board of Directors on 31 March 2010. Neither the Bank nor the Goverment has the power to amend the financial statements after issue. The objectives of the Bank are: • to promote price stability; • to advise the Government of Seychelles (the “Government”) on banking, monetary and

financial matters, including the monetary implications of proposed fiscal, credit policies or operations of the Government; and

• to promote a sound financial system. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of the financial statements by the Bank are as follows: (a) Basis of preparation In accordance with Section 45(2) of the CBS Act, the financial statements of the Bank shall be maintained at all times in conformity with the applicable law, if any, and an internationally recognised financial reporting framework. The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention. The finanical statements comprise the statement of finanical position, the statement of comprehensive income, the statement of changes in equity, the statement of cash flow and the notes. IFRS 1, First-time adoption of IFRS, has been applied in preparing these financial statements which are the first set of financial statements of the Bank to be prepared in accordance with IFRS. The financial statements of the Bank until 31 December 2008 had been prepared in accordance with the Bank’s accounting policies (“GAAP”) and in conformity with the CBS Act. GAAP differs in certain respects from IFRS. When preparing the Bank’s financial statements, management has amended certain accounting and valuation policies, applied in the GAAP financial statements to comply with IFRS. The comparative figures in respect of 2008 were restated to reflect these adjustments. The Bank’s transition date is 01 January 2008.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (a) Basis of preparation (Continued) Reconciliations and descriptions of the effect of the transition from GAAP to IFRS on the Bank’s equity and its net income and cash flows are provided in Note 4. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Bank’s accounting policies. Changes in assumptions may have a significant impact on the financial statements in the period the assumptions changed. Management believes that the underlying assumptions are appropriate and that the Bank’s finanical statements therefore present the financial position and result fairly. The areas involving a higher degree of judgement or complexity or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3. • Standards issued but not yet effective

The following standard has been issued and is mandatory for the Bank’s accounting periods beginning on or after 01 January 2013 or later periods and is expected to be relevant to the Bank:

• IFRS 9 ‘Financial instruments part 1: Classification and measurement’

IFRS 9 was issued in November 2009 and replaces those parts of IAS 39 relating to the classification and measurement of financial assets. Key features are as follows:

- Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the Bank’s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument.

- An instrument is subsequently measured at amortised cost only if it is a debt instrument and both the objective of the Bank’s business model is to hold the asset and collect the contractual cash flows, and the asset’s contractual cash flows represent only payments of principal and interest (that is, it has only ‘basic loan features’). All other debt instruments are to be measured at fair value through profit or loss.

- All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable election can be made at initial recognition, to recognize unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. This election may be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent return on investment.

- While adoption of IFRS 9 is mandatory from 01 January 2013, earlier adoption is permitted.

The Bank is considering the implications of the standard, the impact on the Bank and the timing of adoption by the Bank.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

a) Basis of preparation (Continued) • Standards, amendements and interpretations to existing standards issued that are not yet

effective and not relevant to the Bank’s operations The following standards, amendments and interpretations to existing standards have been published and are mandatory for the Bank’s accounting periods ending 31 December 2010 and later periods but are not relevant for the Bank’s operations: Standard / amendment / interpretation

Improved structure without technical changes Applicable for financial year beginning on / after

IFRS 1 and IAS 27 Cost of an investment in a subsidiary, jointly-controlled entity or associate

01 July 2009

IFRS 3 (revised) Business combinations 01 July 2009IAS 27 (revised) Consolidated and separate financial statements 01 July 2009IAS 32 (amendment) Financial instruments: Presentation -

Classification of rights issue 01 February 2010

IAS 39 (amendment) Financial instruments: Recognition and measurement – eligible hedged items

01 July 2009

IFRS 1 Amendments to IFRS 1 - Additional exemptions for first-time adopters

01 July 2009

IFRS 2 (amendment) Amendments to IFRS 2 - Group cash-settled share-based payment transactions

01 January 2010

IFRIC 9 and IAS 39 Amendments to IFRIC 9 and IAS 39 Embedded derivatives

30 June 2009

IFRIC 17 Distribution of non-cash assets to owners 01 July 2009IFRIC 18 Transfers of assets form customers 01 July 2009IFRIC 19 Extinguishing Financial Liabilities with Equity

Instruments 01 July 2010

There are also amendments made as part of the IASB’s annual improvement project published in April 2009. The Board of Directors do not expect that any of these standards, amendments and interpretations to existing standards will have a significant impact on the Bank’s financial statements.

• Amendment early adopted by the Bank

Amendment to IAS 24 ‘Related party disclosures’ is effective for annual periods beginning on or after 01 January 2011, however earlier application is permitted. The Bank has early adopted the amendment during the year ended 31 December 2009. The amendment removes the disclosure of ‘all transactions for government-related entities to disclose details of all transactions with the government and other government-related entities. This will result in more simplified disclosures to be made restrospectively in respect of related parties in the financial statements.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (b) Foreign currency translation Functional and presentation currency Items included in the financial statements are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The financial statements are presented in Seychelles Rupees (“SCR”), which is the Bank’s functional and presentation currency. Transactions and balances Transactions denominated in foreign currencies are translated into SCR and recorded at the rates of exchange prevailing at the date of the transaction. Monetary items denominated in foreign currencies are translated into SCR at the mid exchange rates ruling on the reporting date. Foreign exchange differences resulting from the settlement of foreign currency transactions and from the translation at year end mid exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of comprehensive income. All foreign exchange gains and losses recognised in the statement of comprehensive income are presented net. Unrealised foreign exchange gains and losses are transferred from retained earnings to revaluation reserve, in accordance with the CBS Act, as these are not allowed for distribution. The exchange rate of the SCR is determined by the market and the rates applied on all foreign currency transactions are the weighted average trading exchange rates of all banks. The following rates of exchange were applied at 31 December 2009:

IMF Special Drawing Rights XDR 1 = SCR17.6364

United States Dollars USD 1 = SCR11.2499

British Pound Sterling GBP 1 = SCR18.2484

Euros EUR 1 = SCR16.2660 The XDR is defined in terms of a basket of currencies. Its value is determined as the weighted sum of exchange rates of the four major currencies (Euro, Japanese Yen, Great Britain Pound Sterling and US dollar). For accounting purposes, XDR is treated as a foreign currency. (c) Financial instruments

A financial instrument is defined as any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity. The Bank recognises all financial instruments on its statement of financial position when it becomes a party to the contractual provisions of the instrument. It also classifies its financial assets as Loans and Receivables and all its financial liabilities as financial liabilities at amortised cost.

The main classes of financial assets are: cash and cash equivalents, investment securities, long term deposits with banks, loans and advances and other assets. The main classes of financial liabilities are: currency in circulation, deposits from Government, deposits from banks, other deposits, Open Market Operations, International Monetary Fund obligations and other liabilities. Their sub classes are disclosed within the notes to each of these classes of financial assets and financial liabilities.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (c) Financial instruments (Continued) Financial assets – Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are initially recognised at fair value, which is the value of the consideration given for it including any transaction costs, and measured subsequently at amortised cost using the effective interest method. Interest on financial assets is included in the statement of comprehensive income and is reported as “Interest income”. The Bank uses trade date accounting for regular way contracts when recording financial asset transactions. Financial assets, consisting of investment securities, that are transferred to a third party but do not qualify for derecognition remain within investment securities but disclosed as “pledged as collateral”, if the transferee has the right to sell or repledge them. Financial liabilities – at amortised cost The Bank recognises all its financial liabilities (including borrowings from the IMF) initially at fair value, which is the value of the consideration received for it including transaction cost, and subsequently states them at amortised cost. Derecognition Financial assets are derecognised when the contractual rights to receive cash flows from these assets have ceased to exist or the assets have been transferred and substantially all the risks and rewards of ownership of the assets are also transferred (that is, if substantially all the risks and rewards of ownership have not been transferred, the Bank tests control to ensure that continuing involvement on the basis of any retained powers of control does not prevent derecognition). Financial liabilities are derecognised only when the obligation is discharged, cancelled or expired. Investment securities furnished by the Bank under standard reverse repurchase agreements or securities lending and borrowing transactions are not derecognised because the Bank retains substantially all the risks and rewards on the basis of the predetermined repurchase price, and the criteria for derecognition are therefore not met. (d) Repurchase agreements

In the course of its financial market operations, the Bank engages in repurchase agreements involving investment securities.

Securities sold and contracted for repurchase under reverse repurchase agreements (“reverse repos”) remain classified as “Investment securities” and are disclosed as pledged assets, when the transferee has the right by contract or custom to sell or repledge the collateral; the counterpart obligation to repurchase the securities is reported in the statement of financial position as “Open Market Operations” and carried at amortised cost. Securities purchased under agreements to resell (“repos”) are recorded as loans and advances. The difference between the sale and repurchase price is treated as interest and accrued over the term of the agreements using the effective interest method.


(e) Balances with International Monetary Fund

Receivables

Deposits with the International Monetary Fund (“IMF”) are included in cash and cash equivalent and represent the membership quota of the Sovereign Realm of Seychelles with the IMF. Special Drawing Rights (“XDR”) relates to the amounts with the IMF that are available for day-to-day operations of the Bank. The XDR is defined in terms of a basket of currencies. Its value is determined as the weighted sum of exchange rates of the four major currencies (Euro, Japanese Yen, Pound Sterling and US dollar). For accounting purposes, XDR are treated as a foreign currency.

Liabilities

Borrowings from the IMF are financial liabilities denominated in XDR and are included under the International Monetary Fund obligation in the statement of financial position. Borrowings from the general resources of the IMF bear interest at rates set by the IMF on a weekly basis and are repayable according to the repayment schedules of the agreements. The interest rate amounts to 1.23 percent as at 31 December 2009.

All borrowings from the IMF are guaranteed by promissory notes which are issued by the Government. Liabilities to the IMF are carried at amortised cost.

(f) Impairment of financial assets

The Bank assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include: (a) significant financial difficulty of the issuer or obligor; (b) a breach of contract, such as a default or delinquency in interest or principal payments; (c) the lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting

to the borrower a concession that the lender would not otherwise consider; (d) it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; (e) the disappearance of an active market for that financial asset because of financial difficulties;

or (f) observable data indicating that there is a measurable decrease in the estimated future cash

flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including:


(f) Impairment of financial assets (Continued)

(i) adverse changes in the payment status of borrowers in the portfolio; and (ii) national or local economic conditions that correlate with defaults on the assets in the

portfolio. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. The amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the statement of comprehensive income. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. Impairment charges relating to loans and advances to banks and customers are classified in “impairment charges” on the statement of comprehensive income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the statement of comprehensive income. (g) Offsetting financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously.

(h) Cash and cash equivalents Cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition, including foreign currency notes, balances held with banks abroad, holdings of Special Drawing Rights and Reserve Tranche with the International Monetary Fund (“IMF”). (i) Currency replacement cost Currency note printing and coin minting costs incurred are deferred and are charged to the statement of comprehensive income. Useful lives are currently estimated to be 5 years but this is reviewed at least annually. The unamortised cost of purchased bank notes in issue is included in Currency replacement cost in the statement of financial position. When notes and coins are returned to the Bank by the commercial banks, Government entities and the general public they are removed from currency in circulation and, depending on their condition or legal tender status, they are either sent for destruction or held for re-issue. CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED)

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (j) Property, plant and equipment Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Bank and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of comprehensive income during the financial year in which they are incurred. Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, as follows: – Buildings 50 years; – Office furniture and fittings 5 – 10 years; – Office machine and equipment 4 years; – Motor vehicles 5 years. Depreciation is charged on a pro-rata basis during the year for both acquisition and disposal of property plant and equipment. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use. No property, plant and equipment were impaired as at 31 December 2009 (2008 – Nil). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the statement of comprehensive income. (k) Intangible assets Intangible assets comprise computer software and their licences which are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives, of a maximum of 5 years. Amortisation expense is calculated on a pro-rata basis and is reported under “Amortisation charge” in the statement of comprehensive income. At each date of the statement of the financial position, intangible assets are reviewed for indications of impairment or changes in estimated future economic benefits. If such indications exist, the intangible assets are analysed to assess whether their carrying amount is fully recoverable. An impairment loss is recognised if the carrying amount exceeds the recoverable amount.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (l) Currency in Circulation Currency in circulation represents money released to the public for circulation. This represents an unserviced liability of the Bank and is recorded in the statement of financial position at its face value. (m) Deposits Deposits held by the Bank, whether SCR or foreign deposits are initially measured at fair value and carried at amortised cost in the statement of financial position. Whilst Government deposit earn no interest, commercial bank’s demand deposits earn interest only on their minimum reserve requirement (see note 16) . Both deposits are not normally allowed to be overdrawn. In the event of an overdraft on the Government general account and commercial bank’s demand deposit accounts, the Bank will grant temporary short term advances and this will be charged at the applicable interest rates. Foreign currency deposit accounts are revalued to reflect the market exchange rate at the reporting date. Long term deposits and deposit auction arrangements carry interest and are stated at cost. (n) Retirement benefit obligations The Bank operates various types of employee benefits. Defined benefit plan A defined benefit plan defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. Gratuities The Bank also provides for a payment of gratuity to permanent employees. Gratuities are paid every five years (except in the case of early retirement) as from January 2007, for continuous service. The amount provisioned every year is based on the number of years the employee has made. Both types of employee benefits have characteristics of a defined benefit plan. The liability recognised in the statement of financial position in respect of the defined benefit plan is the present value of the defined benefit obligation at the date of the statement of financial position less fair value of plan assets together with adjustments for unrecognised actuarial gains and losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method . The present value of the defined benefit obligation is determined by discounting the esitmated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10 percent of the value of plan assets or 10 percent of the defined benefit obligation are charged or credited to the profit or loss over the employees’ expected average remaining working lives. Past service costs are recognised immediately in the statement of comprehensive income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (n) Retirement benefit obligations (Continued) Defined contribution plan A defined contibution plan is a pension plan under which the Bank pays fixed contribution into a separate entity. The Bank has no further payment obligations once the contributions have been paid. The Bank contributes to the Seychelles Pension Fund (“SPF”) in accordance with the Seychelles Pension Fund Act. Payments to the SPF are charged as an expense as they fall due. (o) Provisions Provisions for legal claims are recognised when: the Bank has a present legal or constructive obligation as a result of past events; it is more likely than not than an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are made on present value basis. (p) Authorised capital The statutory capital of the Bank was established by the CBS Act. The Bank maintains the General Reserve to provide for events which are contingent and non-foreseeable, including covering losses from exceptionally large falls in the market value of its holdings of domestic and foreign securities that cannot be absorbed by its other resources. The initial authorised capital of the Bank was SCR 1 million and thereafter it shall be built to 3.33 percent of monetary liabilities by transferring from retained earnings. All capital stock of the Bank as and when issued shall be for the sole account of the Government and shall not be transferable or subject to encumbrances. As per CBS Act, all authorised capital shall be deemed to be fully paid up. (q) Revaluation Reserve The Bank also holds a Revaluation Reserve Account. Gains and losses arising from changes in the valuation of the Bank's assets and liabilities denominated in foreign currencies and other units of account as a result of alterations of parity of the SCR are credited or charged to the statement of comprehensive income and are subsequently transferred to the Revaluation Reserve Account, in accordance with Sections 45(5) and 45(6) of the CBS Act. (r) Interest income and expense Interest income and interest expense are recognised in the statement of comprehensive income for all financial instruments measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability and allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instruments to the net carrying amount of these instruments. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or group of similar financial assets have been written down as a result of an impairment loss, interest income is recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (s) Fees and commission income Commission on foreign exchange dealings are recognised on the dates of transactions. Fees and commissions are generally recognised on an accrual basis when the service has been provided. (t) Comparatives Except where a standard or an interpretation permits or require otherwise, all amounts are reported or disclosed with comparative information. Where IAS 8 applies, comparative figures have been restated or regrouped where necessary to conform with changes in presentation in the current year. 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The Bank’s financial statements and its financial result are influenced by accounting policies, assumptions, estimates and management judgement, which necessarily have to be made in the course of preparing the financial statements. The Bank makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. All estimates and assumptions required in comformity with IFRS are best estimates undertaken in accordance with the applicable standard. Estimates and judgements are evaluated on a continuous basis, and are based on past experience and other factors, including expectation of future events that are believed to be reasonable under the circumstances. Accounting policies and management’s judgements for the following are especially critical for the Bank’s results and financial situation due to its materiality. Employee benefits The present value of the employee benefits, consisting of gratuity and compensation, depends on a number of factors that are determined on an actuarial basis using a number of assumptions. Any changes in these assumptions will impact the carrying amount of the employee benefit obligations. The main assumptions used in determining the net cost/(income) for employee benefits is the discount rate. The Bank determines the appropriate discount rate at the end of each year. This is the interest rate that should be used to determine the present value of estimated future cash outflows expected to be required to settle the employee benefit obligations. In determining the appropriate discount rate, the Bank considers the interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related liability. Other key assumptions for the employee benefits obligations are based on current market conditions. The carrying amount of the defined benefit obligation at 31 December 2009 is SCR 1,287,000 (2008 – SCR 1,268,000). Details of the defined benefit obligation is disclosed in Note 20.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (Continued) Employee benefits (Continued) The financial assumptions used for purposes of these calculations are as follows: • Discount rate: 6.0 percent p.a. • Salary increase rate: 4.5 percent p.a. • It has been assumed that all employees will opt for retirement on reaching age 63. No allowance has been made for withdrawal from service or pre-retirement mortality as the benefits payable in such circumstances are not materially significant and the turnover ratio for cases other than death, retirement or dismissal is low. 4 TRANSITION TO IFRS

4.1 Basis of transition to IFRS

Application to IFRS 1

The Bank’s financial statements for the year ended 31 December 2009 will be the first annual financial statements that comply with IFRS. These financial statements have been prepared as described in Note 2. The Bank has applied IFRS 1 in preparing these financial statement.

The Bank’s transition date is 01 January 2008. The Bank prepared its opening IFRS statement of financial position at that date. The reporting date of these financial statements is 31 December 2009 and the Bank’s IFRS adoption date is 01 January 2009.

4.2 Reconciliation between IFRS and GAAP

The following reconciliations provide a quantification of the effect of the transition to IFRS. The first reconciliation provides an overview of the impact on equity of the transition at 01 January 2008 and 31 December 2008. The following four reconciliations provide details of the impact of the transition on:

- equity at 01 January 2008 (Note 4.2.1) - equity at 31 December 2008 (Note 4.2.2) - net income 31 December 2008 (Note 4.2.3) - cash flows 31 December 2008 (Note 4.2.4)

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 4 TRANSITION TO IFRS (Continued)

4.2.1 Reconciliation of equity at 01 January 2008

Effect of Correction of

prior year

GAAP

Effect of transition to

IFRS error Note IFRS SCR SCR SCR SCR Assets Cash and cash equivalents 322,507,904 41,692 - (i) 322,549,596 Investment securities 1,052,583,173 - - 1,052,583,173 Loans and advances 86,400,000 5,948,001 - (ii) 92,348,001 Long term deposits with banks - - -

-

Currency replacement costs 3,825,429 - - 3,825,429 Property, plant and equipment

34,861,175 -

( 2,400,099)

(iii) 32,461,076 Intangible assets

- -

- -

Other assets 10,464,653 ( 5,989,693) 2,400,099 (i),(ii),(iii) 6,875,059 Total assets 1,510,642,334 - - 1,510,642,334 Liabilities Currency in circulation 450,609,571 - - 450,609,571 Deposits from Government 26,526,930 - - 26,526,930 Deposits from banks 662,443,749 - - 662,443,749 Other deposits 22,026,263 - - 22,026,263 International Monetary Fund obligations 5,358,304 - -

5,358,304

Other liabilities 191,036,475 ( 2,730,089) - (iv) 188,306,386 Total liabilities 1,358,001,292 ( 2,730,089) - 1,355,271,203 Capital and reserves Capital 1,000,000 - - 1,000,000 General reserve 20,000,000 - - 20,000,000 Revaluation reserve 131,641,042 - - 131,641,042 Retained earnings - 2,730,089 - (iv) 2,730,089 - Total equity 152,641,042 2,730,089 - 155,371,131 Total equity and liabilities 1,510,642,334 - - 1,510,642,334

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 4 TRANSITION TO IFRS (Continued) 4.2.1 Reconciliation of equity at 01 January 2008 (Continued) Explanation of the effect of the transition to IFRS The following explains the material adjustments to the statement of financial position and retained earnings. (i) Cash and cash equivalents SCR Reclassification of Reserve tranche with IMF from ‘Other assets’ to ‘Cash and cash equivalent’.

41,692

Total impact – increase in cash and cash equivalents

41,692

(ii) Loans and advances SCR Reclassification of balances for staff loans from ‘Other assets to ‘Loans and advances’.

5,948,001

Total impact – increase in loans and advances

5,948,001

(iii) Property, plant and equipment SCR Reclassification of deposit payment made towards purchase of a plot of land from ‘Property, plant and equipment’ to ‘Other assets’. The deposit payment was wrongly capitalised in previous years (Note 11).

( 2,400,099) Total impact – decrease in property, plant and equipment

( 2,400,099)

(iv) Other liabilities and Retained earnings SCR Reversal of provision made for staff welfare fund which were not in line with IAS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’.

( 2,021,082)

Reversal of provision for mortgages which were not in line with IAS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’.

( 325,000)

Reversal of over-provision made for retirement benefit obligation under previous GAAP

( 384,007)

Total impact – decrease in other liabilities and increase in retained earnings

( 2,730,089)


4.2.2 Reconciliation of equity at 31 December 2008

Effect of correction of

GAAP


IFRS prior year Note IFRS

SCR SCR SCR SCR Assets Cash and cash equivalents 1,211,772,819 ( 165,647,882) - (i) 1,046,124,937 Investment securities 998,097,840 3,306,907 - (ii) 1,001,404,747 Loans and advances 140,600,000 6,797,845 - (iii) 147,397,845 Long term deposits with banks 40,273,000 165,732,000 - (iv) 206,005,000 Currency replacement costs 6,437,465 - - 6,437,465 Property, plant and equipment 53,502,816 ( 57,244) (2,400,099) (v) 51,045,473 Intangible assets - 57,244 - (vi) 57,244 Other assets 12,864,310 ( 10,188,870) 2,400,099 (vii) 5,075,539 Total assets 2,463,548,250 - - 2,463,548,250

Liabilities Currency in circulation 477,573,318 - - 477,573,318 Deposits from Government 115,061,490 144,008,276 - (ix) 259,069,766 Deposits from banks 698,612,330 2,566,045 - (viii) 701,178,375 Other deposits 592,541,726 ( 144,008,276) - (x) 448,533,450 International Monetary Fund obligations 168,033,660

-

- 168,033,660

Other liabilities 167,547,907 ( 2,909,485) - (xi) 164,638,422 Total liabilities 2,219,370,431 ( 343,440) - 2,219,026,991

Capital and reserves Capital 1,000,000 - - 1,000,000 General reserve 20,000,000 - - 20,000,000 Revaluation reserve 223,177,819 - - 223,177,819 Retained earnings - 343,440 - (xii) 343,440 Total equity 244,177,819 343,440 - 244,521,259 Total equity and liabilities 2,463,548,250 - - 2,463,548,250


4.2.2 Reconciliation of equity at 31 December 2008 (Continued)

Explanation of the effect of the transition to IFRS The following explains the material adjustments to the statement of financial position and retained earnings. (i) Cash and cash equivalents SCR (a) Reclassification of foreign currency deposit held with a local financial bank

from ‘Cash and cash equivalents’ to ‘Long term deposits with banks’.

(165,732,000) (b) Reclassification of Reserve tranche with IMF from ‘Other assets’ to ‘Cash

and cash equivalents’.

84,118

Total impact – decrease in cash and cash equivalents (165,647,882)

(ii) Investments securities SCR Reclassification of accrued interest on treasury bonds and treasury bills from ‘Other assets’ to ‘Investments securities’.

3,306,907

Total impact – increase in investments securities

3,306,907

(iii) Loans and advances SCR Reclassification of staff loans from ‘Other assets’ to ‘Loans and advances’

6,797,845

Total impact – increase in loans and advances 6,797,845

(iv) Long term balances with banks SCR Reclassification of foreign currency deposit held with a local financial bank from ‘Cash and cash equivalents’ to ‘Long term deposits with banks’ (refer to (i) (a) above).

165,732,000

Total impact – increase in long term deposits with banks 165,732,000



Explanation of the effect of the transition to IFRS (continued) (v) Property, plant and equipment SCR Reclassification arising due to a prior-period error (Note 11)

( 2,400,099)

Reclassification of software from ‘Property, plant and equipment’ to ‘Intangible assets’.

( 57,244)

Total impact – decrease in property, plant and equipment

( 2,457,343)

(vi) Intangible assets SCR Reclassification of software from ‘Property, plant and equipment’ to ‘Intangible assets’ (refer to (v) above).

57,244

Total impact – increase in intangible assets

57,244

(vii) Other assets SCR Reclassification of reserve tranche with IMF from ‘Other assets’ to ‘Cash and cash equivalents’

( 84,119)

Reclassification of accrued interest on treasury bonds and treasury bills from ‘Other assets’ to ‘Investments securities’

( 3,306,907)

Reclassification of staff loans from ‘Other assets’ to ‘Loans and advances’

( 6,797,845)

Reclassification arising due to a prior-period error (Note 11) 2,400,099

Total impact – decrease in other assets ( 7,788,772) (viii) Deposits from banks SCR Adjustment for the initial fair value of a deposit bearing a coupon rate that was above market interest rate at the start date

2,566,045

Total impact – increase in deposits from banks 2,566,045

(ix) Deposits from Government SCR Reclassification of CBS blocked foreign deposits from ‘Other deposits’ to ‘Deposits from Government’

100,350,421

Reclassification of a deposit from an investor from ‘Other deposits’ to ‘Deposits from Government’

43,657,855

Total impact – increase in deposits from Government 144,008,276



Explanation of the effect of the transition to IFRS (continued) (x) Other deposits SCR Reclassification of CBS blocked foreign deposits from ‘Other deposits’ to ‘Deposits from Government’

( 100,350,421)

Reclassification of a deposit from an investor from ‘Other deposits’ to ‘Deposits from Government’

( 43,657,855)

Total impact – decrease in other deposits

( 144,008,276)

(xi) Other liabilities SCR Reversal of provision made for staff welfare fund which were not in line with IAS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’

( 1,805,236)

Reversal of provision for mortgages which were not in line with IAS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’

( 325,000)


( 779,249)

Total impact – decrease in other liabilities

( 2,909,485)

(xii) Retained earnings SCR Reversal of provision made for staff welfare fund which were not in line with IAS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’

1,805,236

Reversal of provision for mortgages which were not in line with IAS 37, ‘Provisions, Contingent Liabilities and Contingent Assets’

325,000


779,249

Adjustment for the initial fair value of a deposit bearing a coupon rate that was above market interest rate at the start date

( 2,566,045)

Total impact – increase in retained earnings

343,440


4.2.3 Reconciliation of net income for the year ended 31 December 2008

GAAP

Effect oftransition to

IFRS Note IFRS SCR SCR SCR Interest income 85,637,169 - 85,637,169Interest expense ( 20,519,758) ( 2,566,045) (i) ( 23,085,803)Net interest income 65,117,411 ( 2,566,045) 62,551,366 Fee and commission income 21,708,929 21,708,929Gains arising from dealings in foreign currencies 45,514,378 - 45,514,378Gains arising from revaluation of foreign currency monetary assets and liabilities

-

147,331,231 (ii) 147,331,231

Other income 1,423,231 - 1,423,231Staff costs ( 23,212,872) 179,396 (iii) ( 23,033,476)Currency expenses ( 2,077,078) - ( 2,077,078)Depreciation and amortisation ( 1,626,872) - ( 1,626,872)Professional charges ( 5,600,601) - ( 5,600,601)Other operating expenses ( 5,558,135) - ( 5,558,135)Net profit and total comprehensive Income for the year 95,688,391 144,944,582 240,632,973

The following explains the material adjustments to the statement of comprehensive income: (i) Interest expense SCRAdjustment for the initial fair value of a deposit bearing a coupon rate that was above market interest rate at the start date. 2,566,045Total impact – increase in interest expense 2,566,045

(ii) Gains arising from revaluation of foreign currency monetary assets and

liabilities SCRAdjustment arising on translation of monetary assets and liabilities as at year-end mid exchange rates which were booked directly in equity under previous GAAP. 147,331,231

Total impact – increase in net gain on foreign currency revaluation 147,331,231 (iii) Staff costs SCR

(a) Reversal of over-provision made for retirement benefit obligation for the year ended 31 December 2008. ( 395,242)

(b) Reversal of movement in provisions for staff welfare fund during the year ended 31 December 2008.

215,846

Total impact – decrease in staff costs ( 179,396)

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 4 TRANSITION TO IFRS (Continued) 4.2.4 Reconciliation of cash flows for the year ended 31 December 2008

GAAP


IFRS IFRS SCR SCR SCR Cash flows from operating activities Net profit for the year 95,688,391 144,944,582 240,632,973 Adjustments for: Depreciation of property, plant and equipment 1,626,872 (28,622) 1,598,250 Amortisation of intangible assets - 28,622 28,622 Amortisation of currency replacement cost 2,056,703 - 2,056,703 Interest receivable - ( 3,306,907) ( 3,306,907)Decrease in retirement benefit obligations - ( 395,242) ( 395,242)Purchase of notes and coins ( 4,668,739) - ( 4,668,739)Profit on disposal of property, plant and equipment ( 273,901) - ( 273,901) Operating profit before working capital changes 94,429,326 141,242,433 235,671,759 Increase in deposits 520,228,982 13,871,353 534,100,335 Increase in International Monetary Fund obligations 162,675,356 - 162,675,356 Increase/(decrease) in other liabilities 18,209 ( 11,089,462) ( 11,071,253)Increase in long term deposits with banks ( 40,273,000) ( 165,732,000) ( 206,005,000)Increase in loans and advances ( 54,200,000) (849,844) ( 55,049,844)Increase/decrease in other assets ( 2,399,656) 4,199,178 1,799,522 Exchange difference on revaluation of assets and liabilities 147,331,231 ( 147,331,231) - Cash generated from operations 827,810,448 ( 165,689,573) 662,120,875 Cash flows from investing activities Acquisition of property, plant and equipment ( 20,753,082) - ( 20,753,082)Proceeds from disposal of property, plant and equipment 758,469 - 758,469 Proceeds from redemption of government securities 55,530,333 - 55,530,333 Net cash generated from investing activities 35,535,720 - 35,535,720 Cash flows from financing activities Increase in currency in circulation 26,963,747 - 26,963,747 Purchase of government securities ( 1,045,000) - ( 1,045,000)Net cash from financing activities 25,918,747 - 25,918,747 Increase in cash and cash equivalents 889,264,915 ( 165,689,573) 723,575,342 Cash and cash equivalents at start of the year 322,507,904 41,692 322,549,596 Cash and cash equivalents at end of the year 1,211,772,819 ( 165,647,881) 1,046,124,938

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 4 TRANSITION TO IFRS (Continued) 4.2.4 Reconciliation of cash flows for the year ended 31 December 2008 (Continued) The main IFRS transition effects presented by the Bank in its statement of cash flows for the year ended 31 December 2008 were: - Under GAAP, exchange gains/losses arising from the translation of monetary assets and

liabilities denominated in foreign currencies were booked directly in equity whereas under IFRS, these are recognised in the statement of comprehensive income.

- Other movement resulting from the restatement of statement of financial position at 31 December 2008 and 01 January 2008 to comply with IFRS. 5 TRANSFER TO GOVERNMENT CONSOLIDATED FUND Transfer to the Government Consolidated Fund has been carried out in accordance with Section 16(2) of the CBS Act. Movements during the year are as follows:

2009 2008 SCR SCR

At 01 January 151,482,846 174,989,622 Reversal of transfer – Revaluation reserve ( 55,794,455) - Reversal of transfer – Retained earnings ( 28,706,518) - 66,981,873 174,989,622 Paid to Government Consolidated Fund ( 66,981,873) ( 174,989,622)Transfer from retained earnings 19,211,014 95,688,391 Transfer from revaluation reserve - 55,794,455 At 31 December (Note 20) 19,211,014 151,482,846

• CBS Act 2004 applicable to the 2008 financial statements Section 28 of the CBS Act 2004 requires that: (1) the gains arising from any change in the value of the Bank’s assets or liabilities in, or denominated in, gold, foreign currencies or other units of account as a result of alterations of the parity of the Seychelles rupee, or of any change in the values, parities or exchange rates of such assets or liabilities with respect to the Seychelles rupee, other than gains arising from the normal trading activity of the Bank, shall be credited to a Revaluation Reserve Account and neither they nor the losses arising from any such change other than losses arising from normal trading activity shall be included in the computation of the annual profits and losses of the Bank. Accordingly, an amount of SCR 147,331,231 was transferred from the Retained Earnings to the Revaluation Reserve Account at 31 December 2008. (2) The losses arising from any such change other than losses arising from the normal trading activity of the Bank shall be set off against any credit balance in the Revaluation Reserve Account and, notwithstanding any other provision of this Act, if such balance is insufficient to cover such losses, the Government shall issue to the Bank non-negotiable, non-interest-bearing securities to the extent of the deficiency.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 5 TRANSFER TO GOVERNMENT CONSOLIDATED FUND (Continued) • CBS Act 2004 applicable to the 2008 financial statements (Continued) (3) Any credit balance in the Revaluation Reserve Account at the end of each financial year of the Bank shall be applied first, on behalf of the Government, to the redemption of any outstanding securities issued under subsection (2). (4) One-fifth of the remaining balance or an amount equivalent to one percent of the demand liabilities of the Bank as at the end of the financial year, whichever is greater, shall be transferred to the Consolidated Fund: Provided that when the remaining balance does not exceed one percent of the aforesaid demand liabilities, the entire amount of the balance shall be transferred to the Consolidated Fund. Accordingly, an amount of SCR 55,794,455 was transferred from the Revaluation Reserve to the Government Consolidated Fund at 31 December 2008. (5) No credit or debit shall be made to the Revaluation Reserve Account except in accordance with the provisions of this section. • Agreement between the Bank and the Ministry of Finance relating to the 2008 financial

statements On 31 March 2009, pursuant to an agreement made between the Bank and the Ministry of Finance, it was decided that upon completion of the external audit for the year 2008, the Bank shall: • pay seventy percent (70%) of the 2008 audited net profit (SCR 95,688,391) from the

Provisional Transfer to the Government Consolidated Fund Account to the Consolidated Fund (SCR 66,981,873);

• retain the remaining thirty percent (30%) of the Net Profit and the twenty percent (20%)

distribution from the Revaluation Reserve Account, in the Provisional Transfer to the Government Consolidated Fund Account as stipulated in section 16 and 28(4) of the CBS Act 2004 amounting to SCR 28,706,518 and SCR 55,794,455 respectively.

• transfer the remaining thirty percent (30%) of the Net Profit to the authorised capital and

General Reserve; The following transactions were reflected in the 2009 financial statements: Analysis of distributions for 2008 SCR Audited 2008 Net profit 95,688,391 Distributed as follows: Government Consolidated Fund – 70 percent ( 66,981,873) Authorised capital – 30 percent ( 28,706,518)

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 5 TRANSFER TO GOVERNMENT CONSOLIDATED FUND (Continued) • Central Bank of Seychelles Act 2004, as amended in 2009 applicable to the the 2009

financial statements Section 16 of the Central Bank of Seychelles Act 2004, as amended in 2009 requires that the distributable earnings of the Bank be calculated as follows:

a) net profit less an amount equal to the total amount of unrealised gains included in net profit; b) after applying paragraph (a), adding the total amount of unrealised gains in respect of assets,

if those unrealised gains, included in the net profit of a previous year, are realised; c) by the retention of the unrealised valuation losses to the extent that they exceed any balance

in the relevant Revaluation Reserve Account. i) Payable to Statutory capital Where the Bank has distributable earnings, 50 percent of those earnings shall be distributed in the following priority to the statutory capital until authorised capital reaches 3.33 percent of monetary liabilites and the General Reserve reaches 6.67 percent of monetary liabilities. ii) Payable to Government Consolidated fund Any residual distributable earnings remaining after distrbution to statutory capital shall be transferred to the Governement Consolidated Fund. Where the distributable earnings of the Bank is less than zero, they shall be offset against the General Reserve. The following transactions were reflected in the 2009 financial statements: SCR Net loss for the year (240,893,685) Retained earnings b/f following IFRS adjustment 343,440 Add back unrealised losses 440,696,498 200,146,253 Revaluation reserve c/f 223,177,818 Revaluation reserve transferred from Government Consolidated Fund 55,794,455 Unrealised losses (440,696,498) (161,724,225) Distributable earnings 38,422,028 Distributed as follows: Authorised capital – 50% 19,211,014 Government consolidated fund – 50% 19,211,014

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 6 CASH AND CASH EQUIVALENTS 2009 2008 SCR SCR Balances held abroad and foreign currency notes 1,956,094,399 1,041,255,248 Cash in transit - 4,715,117 Holdings of Special Drawing Rights 138,053,806 70,453 Reserve tranche with IMF 58,077 84,119 2,094,206,282 1,046,124,937

Included in cash and cash equivalents are pledged and encumbered balances held abroad equivalent to SCR 175,728,107 and SCR 5,748,270 respectively (2008: pledged – SCR 208,933,825 and encumbered – SCR 177,903,589). These represent funds earmarked set aside by the Bank for the purpose of developing projects, foreign currency minimum reserve requirements of local banks or other pledges and contingent liabilities. 7 INVESTMENT SECURITIES 2009 2008 SCR SCR Government treasury bonds 1,030,247 1,068,345 Investment in Government treasury bills 1,132,782,886 253,283,562 Government restructuring bond - 747,052,840 1,133,813,133 1,001,404,747 Current 1,132,813,133 253,306,907 Non-current 1,000,000 748,097,840 1,133,813,133 1,001,404,747

During the year under review, the 20-year Government restructuring bond amounting to SCR 747,052,840 was fully converted into marketable securities as follows: • SCR 250 million 91-day treasury bills; and • the balance of SCR 497,052,840 into 365-day treasury Bills. The 91-day treasury bills carry interest at rates ranging from 4.96 percent to 5.05 percent per annum and the 365-day treasury bills carry an interest rate of 25.07 percent per annum. Government treasury bonds of SCR 1 million represents discounting of bills on behalf of Government on the secondary market. The Bank facilitates the secondary market for buyers and sellers and holds the securities until their maturity or until there are new buyers and earns interest during the period of holding.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 7 INVESTMENT SECURITIES (Continued) Securities pledged as collateral The carrying amount of Government treasury bills pledged as collateral was SCR 378.9 million (2008: nil). These transactions were conducted under terms that are usual and customary to standard reverse repurchase agreements. 8 LONG TERM DEPOSITS WITH BANKS 2009 2008 SCR SCR Long term SCR deposit with a local bank - 40,273,000 USD deposit facility with a local bank 112,499,000 165,732,000 112,499,000 206,005,000 Current 112,499,000 165,732,000 Non-current - 40,273,000 112,499,000 206,005,000

The amount of SCR 112,499,000 represents a deposit placed with a local bank. The deposit is denominated in US Dollars and interest is revised and received monthly. As at 31 December 2009, the facility was earning an interest of 0.1 percent per annum. The deposit facility maturing in 2010 has been pledged with the bank for Letters of Credit provided in favour of the Government. The long term SCR deposit represented a three year deposit made by the Bank with a local bank. The deposit was denominated in SCR and was earning interest at the rate of 5 percent per annum, payable monthly. The deposit has been received before its maturity date. 9 LOANS AND ADVANCES 2009 2008 SCR SCR Advances to Government - 140,600,000 Staff loans 11,305,894 6,797,845 11,305,894 147,397,845 Current 1,801,366 141,713,356 Non-current 9,504,528 5,684,489 11,305,894 147,397,845

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED 9 LOANS AND ADVANCES (Continued) (a) Advances to Government At 31 December 2009, the Government had repaid all its advances. Interest on advances was calculated on a daily basis and compounded on a monthly basis. The applicable interest rates were revised on a monthly basis and were the average treasury bill rates for the four weeks of the previous month plus a margin of 0.5 percent for balances up to SCR 250 million and a margin of 2.5 percent for balances above SCR 250 million (2008 – Up to SCR 100 million – 4.5 percent per annum and above SCR 100 million – 7.5 percent per annum). (b) Staff loans The Bank grants loans to its employees at preferential rates. The loans are initially recognised at fair value, based on the market interest rate, and the difference between the fair value on initial recognition and the loans proceeds is accounted for as prepaid employee benefits and is amortised over the lower of the life of the loan or the remaining working lives of employees. The loan is subsequently measured at amortised cost, using the effective interest rate method, with the effective interest being the market rate of interest of the type of loan at the initial recognition date. 10 CURRENCY REPLACEMENT COSTS SCRCOST At 01 January 2008 4,781,786Additions 5,896,435At 31 December 2008 and 2009 10,678,221 AMORTISATION At 01 January 2008 2,184,053Charge for the year (Note 30) 2,056,703At 31 December 2008 4,240,756Charge for the year (Note 30) 2,056,703At 31 December 2009 6,297,459 NET BOOK VALUE At 31 December 2009 SCR 4,380,762 At 31 December 2008 SCR 6,437,465

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 11 PROPERTY, PLANT AND EQUIPMENT

Land Buildings

Office Furniture

& Fittings

Office Machine

& Equipment Motor

Vehicles Total SCR SCR SCR SCR SCR SCR Cost:

At 01 January 2008 2,200,000 35,811,008 2,969,942 4,641,372 1,038,366 46,660,688 Additions - 19,420,919 233,888 220,693 877,582 20,753,082 Disposals - ( 17,500) ( 404,278) ( 330,769) ( 433,553) ( 1,186,100) At 31 December 2008 2,200,000 55,214,427 2,799,552 4,531,296 1,482,395 66,227,670 Additions - 2,371,821 310,785 1,186,227 143,095 4,011,928 Disposals - ( 7,000) - ( 19,380) ( 654,253) ( 680,633) At 31 December 2009 2,200,000 57,579,248 3,110,337 5,698,143 971,237 69,558,965 Accumulated depreciation: At 01 January 2008 - 7,810,795 2,288,127 3,895,871 290,686 14,285,479 Charge for the year - 828,216 203,713 358,058 208,263 1,598,250 Disposals - ( 6,141) ( 283,886) ( 279,958) ( 131,547) ( 701,532) At 31 December 2008 - 8,632,870 2,207,954 3,973,971 367,402 15,182,197 Charge for the year - 864,422 140,132 626,387 166,027 1,796,968 Disposals - ( 2,562) - ( 14,535) ( 181,201) ( 198,298) At 31 December 2009 - 9,494,730 2,348,086 4,585,823 352,228 16,780,867 Net book values:

At 31 December 2009

SC

R 2,200,000 48,084,518 762,251 1,112,320 619,009 52,778,098

At 31 December 2008 SC

R 2,200,000 46,581,557 591,598 557,325 1,114,993 51,045,473

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 11 PROPERTY, PLANT AND EQUIPMENT (Continued) Prior period error (a) Deposit on land wrongly capitalised as land Land SCRBalance at 01 January 2008, as previously reported 4,600,099Prior period error – reclassification of deposit on land ( 2,400,099)Balance at 01 January 2008, as restated 2,200,000

The above prior period error relates to a payment of SCR 2,400,099 made on account of a plot of land, for which the Bank did not hold valid title. Due to a project that did not materialise, the Bank did not go ahead with the transaction and has been repaid the deposit on 18th May 2009. In accordance with the requirements of IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, the reclassification from Property, Plant and Equipment to Other Assets has been made retrospectively. This reclassification has no impact on the profit for the year and on the total equity of the Bank. (b) Change in the estimated useful life of buildings During the year, the management has reassessed the estimated useful life of its buildings and concluded that it shall be of 50 years instead of 67 years, as previously stated. Accordingly, the depreciation on the building has been adjusted to reflect the remaining useful life. The change in estimate relating to the useful life of the building from 67 to 50 years would cause depreciation for the year ended 31 December 2009, to increase and the net book value as at that date to decrease by SCR 2,883,413. 12 INTANGIBLE ASSETS

Computer software

SCR Cost At 01 January 2008 and 31 December 2008 114,488 Additions 5,200 At 31 December 2009 119,688 Accumulated amortisation At 01 January 2008 28,622 Charge for the year 28,622 At 31 December 2008 57,244 Charge for the year 29,922 At 31 December 2009 87,166 Net book amount At 31 December 2009 32,522 At 31 December 2008 57,244

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 13 OTHER ASSETS 2009 2008

SCR SCR

Cheques held for clearing 3,126,850 1,341,517 Items due and not received 1,847,000 737,507 Others 1,123,014 596,416 Deposit on land - 2,400,099 6,096,864 5,075,539

Deposit on land represented payment made for purchase of land, for which the Bank did not hold valid title. The balance has been re-classified from Property, plant and equipment, with retrospective effect (refer to Note 11). 14 CURRENCY IN CIRCULATION Notes and coins in circulation are shown at face value, net of the notes and coins held in the tills and vaults at the Bank. 2009 2008 SCR SCR Notes issued Face value R 500 250,328,500 187,842,000 R 100 232,576,600 220,887,000 R 50 24,155,600 25,153,550 R 25 9,424,900 7,940,275 R 10 9,964,760 8,838,080 Total notes issued 526,450,360 450,660,905 Coins issued Face value R 5 10,074,605 9,806,100 R 1 10,543,502 9,414,497 25 cents 5,180,421 5,043,700 10 cents 1,657,688 1,579,896 5 cents 1,085,972 1,050,398 1 cent 18,032 17,822 Total coins issued 28,560,220 26,912,413 Total notes and coins issued 555,010,580 477,573,318 Current 555,010,580 477,573,318

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 15 DEPOSITS FROM GOVERNMENT 2009 2008 SCR SCR Government rupee deposits 371,646,588 81,806,676 Government foreign exchange deposits (project accounts) 9,327,727 33,170,695 Government deposits with IMF 58,077 84,119 Central Bank of Seychelles blocked foreign deposits 2,172 100,350,421 Others - 43,657,855 381,034,564 259,069,766 Current 381,034,564 259,069,766

(a) Government Foreign Exchange Deposits (Project Accounts) These represent amounts deposited by the Government at the Bank and have been earmarked for specific local projects to be undertaken by the Government. The deposits are denominated in foreign currencies and are non-interest bearing. (b) Central Bank of Seychelles Blocked Foreign Deposits These deposits are foreign exchange receipts denominated in the three main currencies for which the beneficiaries have not yet been identified and/or funds that have been deposited with the Bank for other purpose for which the relevant documents have not yet been formalised as at the reporting date. 16 DEPOSITS FROM BANKS 2009 2008 SCR SCR Banks demand deposits 571,227,564 637,534,144Foreign currency minimum reserve requirement 169,657,051 - Deposit auction arrangement 850,820,754 16,000,000Pipeline deposit accounts (Repayable on demand) - 4,805,186Long term deposit facility from a local bank 40,273,000 42,839,045 1,631,978,369 701,178,375 Current 1,591,705,369 658,339,330 Non-current 40,273,000 42,839,045 1,631,978,369 701,178,375

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 16 DEPOSITS FROM BANKS (Continued) (a) Bank demand deposits Commercial banks hold demand deposit accounts with the Bank to facilitate settlement of interbank transactions. Furthermore, as per regulations issued under the CBS Act, they are required to maintain a minimum amount which is adjusted on the basis of the monetary policy stance as approved by the Board of Directors. Prior to 15 September 2008, banks were paid interest on excess reserves at the minimum deposit rate plus a margin of 75 basis points. However, this was discontinued and instead banks were paid interest only on the minimum statutory required reserves of the liable rupee deposits, at 0.25 percent, up to 31 March 2009. In April 2009, this was further revised, whereby rupee reserves above a 10 percent threshold and up to 13 percent were paid interest at a rate equivalent to half the weighted average lending rate charged by the banks to their customers, and that up to 10 percent to remain at an interest rate of 0.25 percent. As per the last revision on 01 October 2009, the minimum reserve requirement for SCR deposits amounted to 10 percent of their customers' deposits (Rupee deposits held as demand, savings and time deposits and the equivalent in SCR of foreign currency deposits held by residents but exclude inter-bank and foreign currency deposits held by non-residents) and earn interest at 25 basis points. (b) Foreign Currency Minimum Reserve Requirement During the reporting period the Bank has not paid interest on foreign currency reserve requirement which was introduced in April 2009, in view of the low interest earned by the Bank on its overnight placements in US dollar and Euro. (c) Deposit Auction Arrangement The Deposit Auction Arrangement (“DAA”) is a liquidity management tool made available by the Bank to the commercial banks for better liquidity management by both parties. The Bank uses the instrument to mop up excess liquidity in the system whilst the bank uses it as a convenient means for them to invest their excess reserves and earn a competitive return over three specified short-term time span (7 days, 14 days and 28 days). Under this scheme, commercial banks are called to state the amount of funds they would like to bid in any of these maturities at the desired interest rate. The Monetary Operation Committee of the Bank decides whether to accept or reject any bid as guided by the liquidity position in the financial system and depending on the sterilisation needs. At the reporting date, the amount of SCR 850.8 million had a maturity periods of 7, 14 and 28 days (2008 – SCR 16 million for a maturity period of 7 days). (d) Long term deposit from Local banks The long term deposit from a local bank represents a new one year deposit facility made on 31 December 2009, by a local bank with the Bank and carries the market interest rate of the 365 day Government treasury bills at 8 percent per annum, payable monthly in SCR. The amount for 2008 represents a three year fixed deposit made by the same local bank with the Bank under a special arrangement and carried interest at the rate of 8 percent per annum, payable monthly in USD.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 17 OTHER DEPOSITS 2009 2008 SCR SCRSpecial deposits 298,012 115,261Abandoned property account 7,392,808 7,281,608Liquidation deposit - 439,893,106Policy owner’s protection fund 5,814,795 626,762Others 780,155 616,713 14,285,770 448,533,450Current 14,285,770 448,533,450

(a) Abandoned Property As per the Financial Institutions Act 2004, commercial banks are required to publish and report to the Bank, abandoned/dormant accounts of clients, where no transaction has been made for at least 10 years. In the 11th year, unclaimed funds are transferred to the Bank. The abandoned property account is non interest bearing and refundable to the clients on demand. (b) Liquidation deposit Liquidation deposit represented funds deposited at the Bank by the liquidator following the disposal of a property in the Seychelles. The proceeds, denominated in foreign currency, were converted into SCR at the spot rate at the date of the transaction due to the foreign exchange restrictions existing at that date, and deposited with the Bank. The deposit was non interest bearing and the liability of the Bank was restricted to the SCR amount deposited at the date of the transaction. The liquidation deposit was transferred to the liquidator during the year under review. (c) Policy Owner’s Protection Fund (“POPF”) In accordance with section 88 of the Insurance Act 2008 the Bank shall establish and maintain a POPF for the purpose of:

- indemnifying and compensating or assisting or protecting policy owners and others who have been prejudiced in consequence of the inability of registered insurers to meet their liability under life policies and compulsory insurance policies issued by them;

- compensating persons in respect of damage arising out of the use of a motor vehicle on a road , whether or not such use is required to be covered by a policy of insurance in respect of third party risks under the Motor Vehicles Insurance (Third Party Risks) Act.

In compliance with section 89 of the Act a general business levy and a life business levy of 1% of premiums is imposed and paid annually to this account by every domestic licensed insurers. 18 OPEN MARKET OPERATIONS 2009 2008 SCR SCR Reverse repurchase agreement 375,000,000 -

In the pursuit of continuing implementation of the monetary policy reforms, the Bank developed the scope and accuracy of its Monetary Policy Framework to attain its overall objective of price stability through the Reserve Money Targeting Program. These policy instruments are classified into two groups: Liquidity Absorbing (“LA”) and Liquidity Injecting (“LI”) covering a specific period. Since September 2008, the Bank has implemented the following:

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 18 OPEN MARKET OPERATIONS (Continued) Liquidity Absorbing Instruments:

• Deposit Auction Arrangement (DAA) (September 2008). • Outright Sales of Government securities (March 2009). • Reverse Repurchase Agreements (Reverse Repo) (June 2009). • Standing Deposit Facility (December 2009) • Foreign Exchange Auction.

Liquidity Injecting Instruments:

• Credit Auction Arrangement (CAA) (September 2009), • Standing Credit Facility (June 2009). • The Emergency Lending Facility (June 2009). • The Repurchase Agreements (Repo) (June 2009) • Foreign Exchange Auction – Buying foreign exchange from the market (November 2008)

The amount of SCR 375,000,000 comprises 91-day reverse repurchase agreements of SCR 250,000,000 and 88-day reverse repurchase agreements of SCR 125,000,000 with interest rates ranging from 3.75 percent to 4.5 percent per annum. As at reporting date, the open market operations were of a current nature. 19 INTERNATIONAL MONETARY FUND OBLIGATIONS 2009 2008 SCR SCR Purchases outstanding - Stand By Arrangement and Extended Fund Facility 209,520,432 157,355,968Allocation of Special Drawing Rights 146,073,007 10,381,407IMF no. 1 account 484,484 285,100IMF no. 2 account 19,003 11,185 356,096,926 168,033,660 Current 503,487 296,285Non-current 355,593,439 167,737,375 356,096,926 168,033,660

Seychelles became a member of the IMF on 30 June 1977 and was initially assigned a quota of XDR1,000,000. The quota allocation determines the financial and organisational relation with the IMF. Subsequent increases in quota subscription were effected over the years; the last increase effected on 10 February 1999 brought the quota subscription to XDR8,800,000 and remained unchanged as at reporting date. The portion payable in SCR is paid by way of non-negotiable, non-interest bearing promissory notes issued by the Government in favour of the IMF, which are repayable on demand. These promissory notes are lodged with the Bank acting as custodian for the IMF. Seychelles maintained the following balance sheet accounts with the IMF under heading IMF Obligation: IMF Purchases Outstanding Account: SDR Allocation Account, IMF No.1 Account and IMF No. 2 Account. Other balance sheet accounts classified under cash and cash equivalents include SDR Holdings Account and Reserve Tranche Account. Seychelles also holds an off balance sheet item called the IMF Securities Account backed by Government issued promissory notes amounting to SCR 454,849,305 as at the reporting date (2008 – SCR 193,538,493). SDR Allocations are subject to charges while SDR holdings earn interest on a quarterly basis.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 19 INTERNATIONAL MONETARY FUND OBLIGATIONS (Continued) The IMF Purchases Outstanding account was opened in November 2008 as a result of the IMF Reform Programme. In support of the IMF Reform Programme, the Government was granted a two-year Stand-by Arrangement for an amount of XDR 17.6 million (200 percent of quota). Under the Stand-by arrangement XDR 11.0 million (2008 – XDR 6.16 million) has been disbursed. In December 2009, the Government was granted continued support for their reform effort through a three-year arrangement under the Extended Fund Facility (“EFF”) in an amount of XDR 19.8 million (equivalent to 225 percent of quota) for which XDR 0.88 million was disbursed in 2009. This new arrangement has replaced the Stand-by Arrangement. The Bank revalues the IMF accounts in its Statement of Financial position in accordance with the practices of the IMF’ Treasury Department. In general, the revaluation is effected annually on 30 April and whenever the Fund makes use of SCR in accordance with the IMF designated plan. For accounting purposes the IMF accounts have been revalued using exchange rates at the reporting date. The repayment terms are as follows: XDR SCR 1-3 years 3,410,000 60,140,124Over 3 years 8,470,000 149,380,308Total 11,880,000 209,520,432

20 OTHER LIABILITIES 2009 2008 SCR SCR Payable to Government Consolidated Fund - Note 5 Transfer from retained earnings 19,211,014 95,688,391Transfer from revaluation reserve account - 55,794,455 19,211,014 151,482,846Provision for staff gratuities - Contractual 1,120,915 582,268Provision for staff gratuities - Continuous 259,000 195,000Provision for staff compensation 1,028,000 1,073,000Items due and not yet paid 5,933,475 5,480,326Others 5,236,410 5,824,982 32,788,814 164,638,422

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 20 OTHER LIABILITIES (Continued) (a) Employee Benefit Obligations Total Compensation Gratuity (continuous) 2009 2008 2009 2008 2009 2008 SCR SCR SCR SCR SCR SCR Present value of unfunded obligation 2,008,000 1,443,000 1,749,000 1,248,000 259,000 195,000 Unrecognised actuarial loss ( 721,000) ( 175,000) ( 721,000) ( 175,000) - - Liability recognised in the statement of financial position at the end of the year 1,287,000 1,268,000 1,028,000 1,073,000 259,000 195,000 Current service cost 278,000 185,000 162,000 100,000 116,000 85,000 Interest cost 76,000 77,000 67,000 66,000 9,000 11,000 Actuarial loss/(gain) recognised 40,000 ( 31,000) 2,000 - 38,000 ( 31,000)Total included in staff costs 394,000 231,000 231,000 166,000 163,000 65,000 Movements in liability recognised Balances as at 01 January 1,268,000 1,517,000 1,073,000 1,274,000 195,000 243,000 Total expenses as above 394,000 231,000 231,000 166,000 163,000 65,000 Contributions and benefits paid ( 375,000) ( 480,000) ( 276,000) ( 367,000) ( 99,000) ( 113,000)Balance as at 31 December 1,287,000 1,268,000 1,028,000 1,073,000 259,000 195,000 Discount rate 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Future salary increases 4.50% 4.50% 4.50% 4.50% - -

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 20 OTHER LIABILITIES (Continued) (a) Employee Benefit Obligations (Continued) Total Compensation Gratuity (continuous) 2009 2008 2009 2008 2009 2008 SCR SCR SCR SCR SCR SCR Present value of obligation: At 01 January 1,443,000 1,517,000 1,248,000 1,274,000 195,000 243,000 Current service cost 278,000 185,000 162,000 100,000 116,000 85,000 Interest cost 76,000 77,000 67,000 66,000 9,000 11,000 Benefits paid ( 375,000) ( 480,000) ( 276,000) ( 367,000) ( 99,000) ( 113,000) Liability gain/(loss) 586,000 144,000 548,000 175,000 38,000 ( 31,000) 2,008,000 1,443,000 1,749,000 1,248,000 259,000 195,000 Fair value of plan assets: Employer contributions 375,000 480,000 276,000 367,000 99,000 113,000 Benefits Paid ( 375,000) ( 480,000) ( 276,000) ( 367,000) ( 99,000) ( 113,000) At 31 December - - - - - - Fair value of plan assets - - - - - - Present value of defined obligation ( 2,008,000) ( 1,443,000) ( 1,749,000) ( 1,248,000) ( 259,000) ( 195,000) Deficit ( 2,008,000) ( 1,443,000) ( 1,749,000) ( 1,248,000) ( 259,000) ( 195,000) Asset experience gain/(loss) - - - - - - Liability experience gain/(loss) ( 586,000) ( 144,000) ( 548,000) ( 175,000) ( 38,000) 31,000 Expected employer contribution 2010 382,000 288,000 94,000

The Bank does not have any plan assets as the employee benefit relates to unfunded obligation in relation to compensation and gratuities.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 21 STATUTORY CAPITAL 2009 2008 SCR SCR Authorised capital 48,917,532 1,000,000General reserve 20,000,000 20,000,000 68,917,532 21,000,000

(a) Authorised Capital As per section 14 of the Central Bank of Seychelles Act 2004, as amended in 2009, the initial authorised capital of the Bank shall be SCR 1,000,000 and accumulate as per the distributable earnings (see Note 5) in section 16 of the Act. The stautory capital of the Bank shall be 10 percent of monetary liabilities of which 3.33 percent shall relate to authorised capital and the remaining 6.67 percent shall relate to General reserve. All capital stock of the Bank as and when issued shall be for the sole account of the Government and shall not be transferable or subject to any encumbrance. (b) General Reserve The General Reserve shall be established and maintained in accordance with Section 15 of the Central Bank of Seychelles Act 2004, as amended in 2009. Transfer to the General Reserve shall be made from distributable earnings until it reaches 6.67 percent of monetary liabilities. Where the distributable earnings of the Bank is less than zero, they shall be offset against the General Reserves. Where the General Reserves accumulates a balance of less than zero, the Government shall within 30 days of publication of the annual accounts, recapitalise by transfering marketable securities to the ownership of the Bank to restore the General Reserve to zero. 22 REVALUATION RESERVE Gains and losses arising from changes in the valuation of the Bank's assets and liabilities denominated in foreign currencies and other units of account as a result of alterations of parity of the Seychelles rupee have been credited or charged to the statement of comprehensive income and subsequently transferred to the revaluation reserve account in accordance with Section 45(5) and 45(6) of the Central Bank of Seychelles Act 2004, as amended in 2009. 23 INTEREST INCOME 2009 2008 SCR SCRInterest on investment securities 228,191,326 60,543,021Interest on deposits with banks 5,131,866 11,923,619Interest on loans and advances to Government 1,302,644 12,776,898Interest on advances to staff and local banks 982,843 393,631 235,608,679 85,637,169

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 2009 2008 SCR SCR

24 INTEREST EXPENSE Interest on Minimum Reserve Requirement 4,561,513 470,100Interest on deposit auction arrangement 18,927,199 2,472,803Interest on fixed deposit with local banks 3,221,840 4,982,425Interest on reverse repurchase agreements 11,992,788 - Other interests 13,046 15,160,475 38,716,386 23,085,803

25 FEES AND COMMISSION INCOME Commission 59,683,656 21,116,985Licence fees - Financial institutions 893,482 591,944Licence fees - Insurance 880,963 - Deficiency fees - Minimum Reserve Requirement 1,328,917 - 62,787,018 21,708,929

26 (LOSSES)/GAINS ARISING FROM DEALINGS

IN FOREIGN CURRENCIES Foreign currency transactions (realised) ( 23,078,922) 45,514,378Revaluation of foreign currency monetary assets and liabilities (unrealised) ( 440,696,498) 147,331,231

( 463,775,420) 192,845,609 27 STAFF COSTS Salaries and allowances 15,441,986 13,391,246Staff training 4,735,906 5,852,804Other staff costs 3,312,241 3,789,426 23,490,133 23,033,476

28 CURRENCY EXPENSES Notes and coins expense 115,621 20,375Amortisation of currency replacement cost 2,056,703 2,056,703 2,172,324 2,077,078

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 29 PROFESSIONAL CHARGES 2009 2008 SCR SCRConsultancy fees 1,117,602 4,190,186Legal fees 36,000 76,000Statutory audit fees and related expenses 810,936 1,064,151Audit related fees and related expenses 1,279,518 111,864 Directors fees and allowances 171,600 158,400 3,415,656 5,600,601

30 NOTES TO CASH FLOW STATEMENT Restated 2009 2008 SCR SCR Cash flows from operating activities Net (loss)/profit for the year ( 240,893,685) 240,632,973 Provisions for employee benefits 19,000 ( 395,242)Interest receivable ( 132,453,386) ( 3,306,907)Depreciation and amortisation charges 1,826,890 1,626,872 Amortisation of currency replacement cost 2,056,703 2,056,703 Purchase of notes and coins 248,398 ( 4,668,739)Loss/(profit) on disposal of property, plant and equipment 208,745 ( 273,902)Operating profit before working capital changes ( 368,987,335) 235,671,758 Increase in deposits 685,498,984 534,100,335 Increase in International Monetary Fund obligations 188,063,266 162,675,356 Decrease in other liabilities ( 133,560,522) ( 11,071,253)Decrease/(increase) in placements with banks 53,233,000 ( 206,005,000)Decrease/(increase) in loans and advances 136,091,951 ( 55,049,844)(Increase)/decrease in other assets ( 727,927) 1,799,522 Net cash generated from operations 559,611,417 662,120,874

31 RELATED PARTY TRANSACTIONS In the normal course of its operations, the Bank enters into transactions with related parties. Related parties include Government and key management personel, consisting of members of the Board of Directors, with voting powers. Unless stated, all transactions with related parties take place at arm’s length. As banker to the Government, the following are transactions entered into:

• Banking services; • Foreign exchange transactions; • Payment and settlement facility; • Investment in Government Securities; • Agent to the Government in raising domestic debt;

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 31 RELATED PARTY TRANSACTIONS (Continued) Material transactions with the Government are as follows: 2009 2008 SCR SCR Purchase of foreign currency 1,731,766,000 1,861,993,000Sale of foreign currency 1,157,232,000 1,381,908,000 Investment in Government Securities 1,133,813,133 1,001,404,747

The Bank, in its capacity as fiscal agent to the Government in raising domestic debt, executes auctions, carries out back office operations, promotes the development of financial markets, works towards improving trading and settlement infrastructure. The Bank executed the following treasury bills auction: Year ended 31 December 2009 2008 SCR SCR 91-day treasury-bills 3,924,020,000 4,684,340,000 182-day treasury-bills 1,227,080,000 - 365-day treasury-bills 649,485,000 100,000,000 Total 5,800,585,000 4,784,340,000

Other transactions with the Government consist of receipts and payments in SCR made on behalf of the Government. Outstanding balances from the Government consist of Investment securities whilst outstanding balances to the Government consist of deposits from Government and the payable to the Government Consolidated Fund under Other Liabilities, as disclosed in the financial statements and its notes. Key Management Personnel Key Management Personnel comprise the Governor, Deputy Governor and the Non-Executive board members. The latter are considered to be part of the key management personnel as they have the authority and responsibility for planning, directing and controlling the activities of the Bank. The aggregate remuneration paid to key management personnel comprised: 2009 2008 SCR SCR Salary and allowances 2,010,913 2,272,363Car benefits 151,720 65,957Short-term benefits 74,826 11,868Total 2,237,459 2,350,188

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED)

31 RELATED PARTY TRANSACTIONS (Continued) Movements in loans to key management personnel are as follows: SCR Balance as at 01 January 2008 490,750 Total loans granted 44,936 Total repayments ( 19,312) Balance as at 31 December 2008 516,374 Total loans granted 3,622,966 Total repayments ( 305,562) Balance as at 31 December 2009 3,833,778

32 FINANCIAL RISK MANAGEMENT The Bank's activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. A description of the significant risk factors is given below together with the risk management policies applicable. (i) Market risk Market risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises of interest rate risk, currency risk and other price risk. In respect of the Bank, market risk arises from open positions in interest bearing and foreign currency denominated financial instruments, all of which are exposed to general and specific market movements. The Bank's exposure to market risk is the result of both trading and asset/liability management activities. The market risk is managed by limiting transaction to mature markets. (a) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Interest rate risk is managed as follows: • Foreign reserve interest rate risk management Interest rate risk increases or reduces the total return on the portfolio which consists mainly of demand and short term deposits and is measured by daily calculation of the effective portfolio duration of the foreign exchange reserves and comparison with the interest rate benchmark specified in the Reserve Management Guidelines. The limits on interest rate risk aim to avoid reporting losses as a result of market valuation changes over a one year reporting period. • Domestic market operations interest rate risk The Bank’s exposure to interest rate risk that arises from domestic market operations is constrained by an effective duration limit, which ensures that interest rate exposures are of short-term nature, such as standing credit facility, short-term reverse repurchase agreements to banks and investment in Government treasury bills.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (i) Market risk (continued) (a) Interest rate risk (continued) The table below summarises concentration of the interest rate re-pricing risk categorised by the earlier of contractual re-pricing or maturity dates:

Demand and Upto 1 Month 1 to 3 months 3 to 12 months 1 to 5 years Over 5 years

Non-interest bearing Total

SCR SCR SCR SCR SCR SCR SCR As at 31 December 2009 - Financial assets - Cash and cash equivalents 1,942,004,937 - - - - 152,201,345 2,094,206,282 Investment securities 747,052,840 250,000,000 - 1,045,000 - 135,715,293 1,133,813,133 Long term deposits with banks - - 112,499,000 - - - 112,499,000 Loans and advances 157,362 312,760 1,331,243 4,752,117 4,752,411 - 11,305,893 Other assets - - - - - 6,096,865 6,096,865 Total financial assets 2,689,215,139 250,312,760 113,830,243 5,797,117 4,752,411 294,013,503 3,357,921,173 Financial liabilities Currency in circulation - - - - - 555,010,580 555,010,580 Deposits from Government - - - - - 381,034,563 381,034,563 Deposits from banks 1,422,048,318 - 40,273,000 - - 169,657,051 1,631,978,369 Other deposits - - - - - 14,285,770 14,285,770 Open Market Operations 375,000,000 - - - - - 375,000,000 International Monetary Fund obligations

-

146,073,007

-

209,520,432

-

503,486

356,096,925

Other liabilities - - - - - 30,380,899 30,380,899 Total financial liabilities 1,797,048,318 146,073,007 40,273,000 209,520,432 - 1,150,872,349 3,343,787,106 Net financial position 892,166,821 104,239,753 73,557,243 ( 203,723,315) 4,752,411 ( 856,858,846) 14,134,067

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (i) Market risk (continued) (a) Interest rate risk (continued)

Demand and Up to 1 Month 1 to 3 months

3 to 12 months 1 to 5 years Over 5 years

Non-interest bearing Total

SCR SCR SCR SCR SCR SCR SCR As at 31 December 2008 Financial assets Cash and cash equivalents 1,043,669,203 - - - - 2,455,734 1,046,124,937 Investment securities - 250,000,000 - 1,045,000 747,052,840 3,306,907 1,001,404,747 Long term deposits with banks 165,732,000 - - 40,273,000 - - 206,005,000 Loans and advances 140,698,252 196,505 818,599 3,309,275 2,375,214 - 147,397,845 Other assets - - - - - 5,075,739 5,075,739 Total financial assets 1,350,099,455 250,196,505 818,599 44,627,275 749,428,054 10,838,381 2,406,008,269

Financial liabilities Currency in circulation - - - - - 477,573,318 477,573,318 Deposits from Government - - - - - 259,069,766 259,069,766 Deposits from banks 656,100,189 - - 40,273,000 - 4,805,186 701,178,375 Other deposits - - - - - 448,533,450 448,533,450 International Monetary Fund obligations

-

-

-

167,737,375

-

296,285

168,033,660

Other liabilities - - - - - 162,788,154 162,788,154 Total financial liabilities 656,100,189 - - 208,010,375 - 1,353,066,159 2,217,176,723 Net financial position 693,999,266 250,196,505 818,599 (163,383,100) 749,428,054 (1,342,277,778) 188,831,546

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (i) Market risk (continued) (a) Interest rate risk (continued) Sensitivity to Interest Rate Risk The table below presents the sensitivity analysis of the Bank’s financial assets and liabilities in relation to changes in interest rates.

Total gain/(loss) impacting

Statement of comprehensive

income



income

2009 2008 SCR SCR Impact of: An increase of 100 basis point in the domestic market interest rates 1,221,409 1,951,276 A decrease of 100 basis point in the domestic market interest rates ( 1,221,409) ( 1,951,276) An increase of 100 basis point in the market interest rates for foreign currencies 58,342 226,981 A decrease of 100 basis point in the market interest rates for foreign currencies ( 58,342) ( 226,981)

Exposure to interest rate risk might not change materially both on foreign and local financial assets given the conservative approach of the Bank as directed by the Reserve Management guidelines and monetary policy in the open market operations, respectively. (b) Currency risk Currency risk refers to the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign exchange rates. 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, the Euro, Pound Sterling and IMF Special Drawing Rights. The Bank incurs currency exposure as a result of its management functions and does not hedge against currency risk. Exchange gains and losses arising from the revaluation of assets and liabilities denominated in foreign currencies are accounted in the statement of comprehensive income and are transferred to the revaluation reserve account in accordance with Section 16 of the Central Bank of Seychelles Act 2004, as amended in 2009.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (i) Market risk (continued) (b) Currency risk (Continued) The table below disclose all on balance sheet financial assets and financial liabilities by concentration of currency risk.

Euro € US $ GBP £ XDR SCR Others Total

As at 31 December 2009 SCR SCR SCR SCR SCR SCR SCR Financial assets Cash and cash equivalents 865,316,154 1,063,837,117 26,941,128 138,053,806 - 58,077 2,094,206,282 Investment securities - - - - 1,133,813,133 - 1,133,813,133 Long term deposits with banks - 112,499,000 - - - - 112,499,000 Loans and advances - - - - 11,305,894 - 11,305,894 Other assets - - - - 6,096,864 - 6,096,864 Total financial assets 865,316,154 1,176,336,117 26,941,128 138,053,806 1,151,215,891 58,077 3,357,921,173 Financial liabilities Currency in circulation - - - - 555,010,580 - 555,010,580 Deposits from Government 1,321,176 7,416,904 2,172 - 372,294,312 - 381,034,564 Deposits from banks 69,415,155 100,241,896 - - 1,462,321,318 - 1,631,978,369 Other deposits - - - - 14,285,770 - 14,285,770 Open Market Operations - - - - 375,000,000 - 375,000,000 International Monetary Fund Obligations - - - 355,593,440 503,486 - 356,096,926

Other liabilities - - - - 30,380,899 - 30,380,899 Total financial liabilities 70,736,331 107,658,800 2,172 355,593,440 2,809,746,365 - 3,343,737,107 Net financial position 794,579,823 1,068,677,317 26,938,956 (217,539,634) (1,658,530,474) 58,077 14,184,065

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (i) Market risk (continued) (b) Currency risk (Continued)

Euro € US $ GBP £ XDR SCR Others Total

As at 31 December 2008 SCR SCR SCR SCR SCR SCR SCR Financial assets Cash and cash equivalents 259,651,598 732,949,987 53,209,805 154,572 - 158,975 1,046,124,937 Investment securities - - - - 1,001,404,747 - 1,001,404,747 Long term deposits with banks - 165,732,000 - - 40,273,000 - 206,005,000 Loans and advances - - - - 147,397,845 - 147,397,845 Other assets - - - - 5,075,538 - 5,075,538 Total financial assets 259,651,598 898,681,987 53,209,805 154,572 1,194,151,130 158,975 2,406,008,067 Financial liabilities Currency in circulation - - - - 477,573,318 - 477,573,318 Deposits from Government 82,285,306 162,472,895 7,763,026 - 6,548,539 - 259,069,766 Deposits from banks - - - - 701,178,375 - 701,178,375 Other deposits - - - - 448,533,450 - 448,533,450 Open Market Operations - - - - - - - International Monetary Fund Obligations - - - 167,737,375 296,285 - 168,033,660 Other liabilities - - - - 162,788,154 - 162,788,154 Total financial liabilities 82,285,306 162,472,895 7,763,026 167,737,375 1,796,918,121 - 2,217,176,723 Net financial position 177,366,292 736,209,092 45,446,779 (167,582,803) ( 602,766,991) 158,975 188,831,344

Assets in other currencies mainly include positions in Swiss Francs.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (i) Market risk (continued) (b) Currency risk (Continued) Sensitivity to foreign currency risk The table below presents the sensitivity analysis of the Bank’s financial assets and liabilities in relation to changes in exchange rates.



income



income

2009 2008 SCR SCR Impact of: An appreciation of 5% in the value of the Seychelles Rupees against all other currencies. ( 83,635,722) ( 21,324,030) A depreciation of 5% in the value of the Seychelles Rupees against all other currencies. 83,635,722 21,324,030

The Bank’s exposure to foreign currency risk can change materially over time given that the net exposure to foreign currency is expected to continue to rise based on the new adopted Reserve Management guidelines and the Bank’s monetary policy. (c) Other price risk Other price risk refers to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. The Bank has no exposure to other price risk.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (ii) Credit risk Credit risk refers to the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. (a) Credit risk measurement The Bank’s maximum exposure is reflected in the carrying amount of financial assets in the statement of financial position. The Bank manages its credit risks by adopting a practice of investing international reserves in short term deposit instruments and holding demand deposits only with counterparts with good credit status such as other Central Banks, the Bank for International Settlements and international commercial banks as guided by the Bank’s Reserve Management guidelines. As such, the Bank is not exposed to significant credit risk, which is the risk that its counterparties will be unable to fulfil their contractual obligations. Credit risk related to the placement of deposits with international commercial banks, including correspondent banks, is guided by credit ratings obtained from Standard and Poor’s, Moody’s Investors Services, or Fitch Ratings. To be eligible for deposits, including holdings on correspondent account, the international bank must be rated AA and equivalent ratings, or better, by any one of these agencies. The Bank currently holds investments with ratings not meeting these criteria which it expects to terminate in the near future. To limit credit risk, no more than 15 percent of reserves are invested in claims on international commercial banks. To diversify exposure to international commercial banks, no more than 2 percent of the foreign exchange reserves, are placed with any international commercial bank at any time. Reflecting uncertainties regarding banks, the maturity of international commercial bank deposits should not exceed 6 months. Investment with international commercial banks would best take the form of tradable instruments such as certificates of deposit, as these are more liquid and exposure can be cut in case of downgrades. The maturity of investments in tradable instruments of banks can exceed 6 months. The exposure to credit risk in the local markets is limited due to the largest amount of domestic financial assets in the portfolio of Government securities which carries no risk. Furthermore, given that the Bank is the regulatory authority for banks, any investment and transactions with them such as reverse repurchase agreement and foreign currency swap will be treated as low risk. The following table presents the Bank’s financial assets based on Standard & Poor’s credit rating of the issuer. AAA is the rating used for identification of highly reliable international financial institutions such as the Bank for International Settlements. This rating indicates the entity has an extremely strong capacity to pay interest and principal. AA is a high grade-rating, indicating a very strong capacity and A is an upper-medium grade, indicating a strong capacity to pay interest and principal. BBB is the lowest investment grade-rating, indicating a medium capacity to pay interest and principal. Ratings lower than AAA can be modified by + or – signs to indicate relative standing within the major categories. N/R indicates the entity has not been rated by Standard & Poor.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (ii) Credit risk (Continued) (a) Credit risk measurement (Continued)

2009 2008

Credit Rating

Amount SCR

% of Financi

al assets

Amount SCR

% of Financial

assets Financial assets

Cash and cash equivalents · Demand deposits AAA 1,939,415,579 57.76% 1,024,526,804 42.58%

A+- 41,855 0% 18,026,027 0.75% B+- 2,489,427 0.07% 1,045,918 0.04%

· SDR Holdings AAA 138,111,883 4.11% 154,572 0.01% · Term deposits N/R - 0% - 0% · Foreign currency cash No risk 14,147,539 0.42% 2,371,616 0.10%

Investment in Government securities B- 1,133,813,133 33.77% 1,001,404,747 41.62% Loans and Advances N/R 11,305,894 0.34% 147,397,845 6.13% Long term deposit with banks N/R 112,499,000 3.35% 206,005,000 8.56% Other assets 6,096,865 0.18% 5,075,538 0.21% 3,357,921,175 100% 2,406,008,067 100%

As at the reporting date, the Bank held SCR 11,305,894 (2008 – SCR 6,797,845) as collateral on its financial assets. (b) Concentration of risk - Geographical sectors The table below breaks down the Bank’s main credit exposure at the carrying amounts, as categorised by geographical region as of 31 December 2009. For this table, the Bank has allocated exposures to regions based on the country of domicile of its counterparties.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (ii) Credit risk (b) Concentration of risk - Geographical sectors (Continued)

Europe US Seychelles

Other countries Total

SCR SCR SCR SCR SCR At 31 December 2009 Financial Assets Cash and cash equivalents 1,896,386,481 181,182,835 14,147,539 2,489,427 2,094,206,282 Investment securities - - 1,133,813,133 - 1,133,813,133 Long term deposit with banks - - 112,499,000 - 112,499,000 Loans and advances - - 11,305,894 - 11,305,894 Other assets - - 6,096,865 - 6,096,865 Total financial assets 1,896,386,481 181,182,835 1,277,862,431 2,489,427 3,357,921,174

Europe US Seychelles Other

countries Total SCR SCR SCR SCR SCR At 31 December 2008 Financial Assets Cash and cash equivalents 926,539,221 116,168,181 2,371,617 1,045,918 1,046,124,937 Investment securities - - 1,001,404,747 - 1,001,404,747 Long term deposit with banks - - 206,005,000 - 206,005,000 Loans and advances - - 147,397,845 - 147,397,845 Other assets - - 5,075,539 - 5,075,539 Total financial assets 926,539,221 116,168,181 1,362,254,748 1,045,918 2,406,008,068

As at the reporting date, the Bank did not have any asset that was past due or impaired and has not experienced such situations in the past.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (iii) Liquidity risk Liquidity risk refers to the risk that the Bank will encounter difficulty in meeting obligations associated with financial liabilities. It refers to the possible difficulties in selling (liquidating) large amounts of assets quickly, possibly in a situation where market conditions are also unfavourable, resulting in adverse price movement. To that end, the liquidity of each financial instrument eligible for investment is duly considered by the Bank before an investment is made. As per the Reserve management guidelines, to reduce liquidity risk of the total reserve portfolio, a minimum of 20 million US dollar equivalent of reserves shall be invested in cash and overnight deposits with other central banks and eligible commercial banks. To reduce liquidity risk of investment in debt securities, debt instruments with maturity of up to 6 months shall have an issue amount equivalent to at least US Dollar 250 million, and with maturity exceeding 6 months equivalent to at least US Dollar 500 million. At the reporting date, no such instrument was in issue. (a) Contractual maturity of financial assets and liabilities The table below analyses the Bank’s financial assets and liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the maturity table are the undiscounted cash flows. Such undiscounted cash flows differ from the amount included in the statement of financial position which is based on discounted cash flows. Balances due within one month equal their carrying balances, as the impact of discounting is not significant.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (iii) Liquidity risk (Continued) (a) Contractual maturity of financial assets and liabilities (Continued)

Demand & up to 1

month 1 to 3 months 3 to 12 months 1 to 5 years Over 5 years Total SCR SCR SCR SCR SCR SCR At 31 December 2009 Financial liabilities Currency in circulation 555,010,580 - - - - 555,010,580 Deposits from Government 381,034,563 - - - - 381,034,563 Deposits from banks 1,592,866,573 536,973 42,689,380 - - 1,636,092,926 Other deposits 14,285,770 - - - - 14,285,770 Open Market Operations 378,951,980 - - - - 378,951,980 International Monetary Fund Obligations - 488,793 1,475,391 142,301,780 - 144,265,964

Other liabilities 30,380,899 - - - - 30,380,899 Total financial liabilities 2,952,530,365 1,025,766 44,164,771 142,301,780 - 3,140,022,682

Financial assets Cash and cash equivalents 2,094,206,282 - - - - 2,094,206,282 Investment securities 891,752,430 253,170,273 31,350 1,076,350 - 1,146,030,403 Long term deposit with banks - - 112,499,000 - - 112,499,000 Loans and advances 178,081 354,138 1,514,499 5,528,607 6,072,261 13,647,586 Other assets 3,126,850 - 1,847,000 - - 4,973,850 Total financial assets 2,989,263,643 253,524,411 115,891,849 6,604,957 6,072,261 3,371,357,121

Net liquidity gap ( 36,733,278) ( 252,498,645) (71,727,078) 135,696,823 6,072,261 (231,334,439)

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (iii) Liquidity risk (Continued) (a) Contractual maturity of financial assets and liabilities (Continued)

Demand & up to 1

month 1 to 3 months 3 to 12 months 1 to 5 years Over 5 years Total SCR SCR SCR SCR SCR SCR As at 31 December 2008 Financial liabilities Currency in circulation 477,573,318 - - - - 477,573,318 Deposits from Government 259,069,766 - - - - 259,069,766 Deposits from banks 658,696,036 536,973 2,416,380 44,300,300 - 705,949,689 Other deposits 448,533,450 - - - - 448,533,450 International Monetary Fund

Obligations - - - 208,956,771 - 208,956,771 Other liabilities 162,352,346 - - - - 162,352,346 Total financial liabilities 2,006,224,916 536,973 2,416,380 253,257,071 - 2,262,435,340

Financial assets Cash and cash equivalents 1,046,124,937 - - - - 1,046,124,937 Investment securities 11,205,793 299,087,058 132,778,606 765,203,256 897,630,678 2,105,905,391 Long term deposit with banks 375,928 763,578 3,186,102 197,976,574 - 202,302,182 Loans and advances 140,710,349 220,698 925,182 3,851,571 3,038,372 148,746,172 Other assets 1,341,517 - 737,507 - - 2,079,024 Total financial assets 1,199,758,524 300,071,334 137,627,397 967,031,401 900,669,050 3,505,157,706

Net liquidity gap 806,466,392 (299,534,361) ( 135,211,017) ( 713,774,330) ( 900,669,050) (1,242,722,366)

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (iii) Liquidity risk (Continued) In terms of managing liquidity in the domestic currency market, the Bank being the issuer of bank notes and coins and a creator of central bank money does not face significant liquidity risk. (iv) Fair value of financial assets and liabilities The table below summarises the carrying amounts and fair values of those financial assets and liabilities not presented on the Bank’s statement of financial position at their fair value: 2009 2008 Carrying value Fair value Carrying value Fair value SCR SCR SCR SCR Financial assets Cash and cash equivalents 2,094,206,282 2,094,206,282 1,046,124,937 1,046,124,937Investment securities 1,133,813,133 1,140,689,265 1,001,404,747 836,022,906Long-term deposit with banks 112,499,000 112,499,000 206,005,000 205,207,645

Loans and advances 11,305,894 11,305,894 147,397,845 147,397,845Other assets 6,096,864 6,096,864 5,075,539 5,075,539 Financial Liabilities Currency in circulation 555,010,580 555,010,580 477,573,318 477,573,318Deposits from Government 381,034,564 381,034,564 259,069,766 259,069,766Deposit from banks 1,631,978,369 1,631,485,070 701,178,375 700,450,975Other deposits 14,285,770 14,285,770 448,533,450 448,533,450Open Market Operations 375,000,000 375,000,000 - - International Monetary Fund obligations 356,096,926 356,096,926 168,033,660 168,033,660

Other liabilities 30,380,899 30,380,899 162,352,346 162,352,346 Cash and cash equivalents The estimated fair value of cash and cash equivalents is the carrying amount given that all items are demand deposit accounts and currency notes. The carrying amount of the floating overnight deposit rate is a reasonable approximation of fair value. Investment securities The fair value of investment securities classified as loans and receivable is based on market prices of the Government treasury bills as at the date of the Statement of financial position. The Bank has used the compounded interest method in arriving at the fair value of Government treasury bills at interest rate of 4.17 percent and 6.47 percent for the 91 day and 365 day treasury bills, respectively. For the Government treasury bonds, the Bank has used the amortised cost using the effective interest rate method and the market rate used in the calculation are the average commercial bank’s rate for fixed deposit instrument with maturity of more than 1 year.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (iv) Fair value of financial assets and liabilities (Continued) Long term deposit with banks The estimated fair value of the Long term deposit with banks is the carrying amount of the deposit given that the floating monthly deposit rate is a reasonable approximation of fair value. Loans and advances The fair value for Loans and advances is stated at the amortised cost using the effective interest rate method. Other assets The estimated fair value of other assets approximates its carrying amount given that other assets are non-interest bearing and repayable within one year. Currency in Circulation The estimated fair value of currency in circulation is its carrying amount which is non-interest bearing and the amount is repayable on demand. Deposit from Government The estimated fair value of deposits from Government is its carrying amount given that the deposits are non-interest bearing and the amount is repayable on demand. Deposits from banks The estimated fair value of deposits with no stated maturity, which includes non interest bearing deposits, is the amount repayable on demand. The deposit also includes a one year deposit facility for which the fair value is based on the 365 day Government treasury bill at the date of the statement of financial position stated at amortised cost using the effective interest rate method. Other Deposits The estimated fair value of other deposits is its carrying amount given that the deposits are non-interest bearing and the amount is repayable on demand. Open Market Operations The estimated fair value of open market operations approximates its carrying amount given that open market operations are repayable within three months. Other liabilities The estimated fair value of other liabilities approximates its carrying amount given that other liabilities are non-interest bearing and repayable within one year.

CENTRAL BANK OF SEYCHELLES NOTES TO THE FINANCIAL STATEMENTS – 31 DECEMBER 2009 (CONTINUED) 32 FINANCIAL RISK MANAGEMENT (Continued) (iv) Fair value of financial assets and liabilities (Continued) International Monetary Fund obligations The estimated fair value of the liabilities to the IMF is the carrying amount given that they attract a floating interest rate. (v) Capital management The statutory capital of the Bank which comprises of the authorised capital and general reserves shall be built up to 10 percent of monetary liabilities and can be more in one year should the monetary liabilities decrease. As per the CBS Act, Section 16(2) states that where the Bank has distributable earnings for any financial year, 50 percent of those earnings shall be distributed in the following priority, to the statutory capital:

(a) Authorised capital until it reaches 3.33 per cent of monetary liabilities; and (b) The General Reserve until it reaches 6.67 per cent of monetary liabilities.

As at 31 December 2009 statutory capital stood at 2.68 percent of monetary liabilities (2008 – 1.29 percent). (vi) Non financial risk management (a) 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. 33 SUBSEQUENT EVENTS Subsequent to the reporting date, investment in government treasury bills amounting to SCR 1,047 million (nominal value of SCR 997 million) was restructured as follows: - 1 tranche of 91 day treasury bills of SCR 250 million - 2 tranches of 182 day treasury bills of SCR 250 million and SCR 247 million respectively. - 1 tranche of 365 day treasury bills of SCR 250 million. 34 TAXATION The Bank is exempted from taxation under Section 49 of the CBS Act.

ANNEX II

OFFICERS OF THE CENTRAL BANK OF SEYCHELLES (as at December 31, 2009)

Mr Pierre Laporte - Governor

Ms Jennifer Morel - Deputy Governor

Governor’s Office

Mr Antoine Fernandes - Internal Auditor

Securities & Financial Markets Division

Vacant - Head of Division

Mr Pedro Pierre - Compliance & Inspection Officer

Mr Georges Tirant - Insurance Officer

Ms Emmalie Carosin - Securities Officer

Mr Naddy Marie - Mutual Funds Officer

Deputy Governor’s Office

Ms Martine Faure - Legal Officer

Ms Shannon Jolicoeur - Legal Officer

Administration and Human Resources Division

Mrs Juliana AhThew-Rose - Head of Division

Mr Kevin Samson - Director of Administration

Mrs Levina Françoise - Senior Human Resources Officer

Mr Brian Nicette - Human Resources Officer

Banking Services Division

Mr Patrick Stravens - Advisor Banking Services

Mr Christophe Edmond - Head of Division

Vacant - Director Banking and Currency Operations

Mr Mike Tirant - Assistant Accountant

Ms Danielle Robert - Assistant Accountant

Mrs Jeannette Payet - Banking & Currency Officer

Mr Terry Adrienne - Payment System Officer

Ms Liz Julienne - Payment System Officer

Mr Francis Lebon - Senior Domestic Debt Officer

Ms Vanessa Bijoux - Domestic Debt Officer

OFFICERS OF THE CENTRAL BANK OF SEYCHELLES (Cont’d) (as at December 31, 2009)

Financial Services Supervision Division

Ms Jenifer Sullivan - Head of Division

Mr Naadir Hassan - Director Financial Services Supervision

Mr Francis Payet - Financial Services Analyst

Miss Joan Lespoir - Financial Services Analyst

Mr. Jean-Paul Barbier - Financial Services Analyst

Ms Nathalie Houarau - Financial Services Analyst

Mr James Jean - Financial Services Analyst

Mrs Janine Henriette - Financial Services Analyst

Ms Audrey Morel - Financial Services Analyst

Mr Edouard Rose - Financial Services Analyst

Mr Aaron Leong-Pon - Financial Services Analyst

Mr Tyron Scholastique - Financial Services Analyst

Policy, Market Operations and Statistics Division

Ms Caroline Abel - Head of Division

Mr. Brian Commettant - Economist

Ms Moyra Alexis - Economist

Mrs Hilda Palconit - Economist

Ms Nadine Boniface - Economist

Ms Ingrid Sinon - Economist

Mr Lenny Palit - Economist

Mr Davis Laporte - Economist

Ms Nadine Boniface - Economist

Ms Dorotha Michel - Statistician

Mrs Gina Rosette - Statistician

Technical Services Division

Ms Philippa Samson - Head of Division

Mr Darell Edmond - Network System Administrator

central bank of seychelles report 2009.pdf · r = seychelles rupee n.a = figure not available .. =...

Documents