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Summary: A series of economic reforms that began in 2008 has changed the orientation of this Indian Ocean archipelago of islands from its former state-centred past to one in which the private sector is becoming the main engine of growth. The island's banking industry has also evolved and, as Wanjohi Kabukuru discovered, is set for robust expansion.

In 2008 Seychelles, facing a huge external debt and recession, launched major reforms of its economic policy replacing the previous state-led intervention in manufacturing, trade and retail with a more private sector, market oriented approach. In 2009, the IMF approved an Extended Fund Facility (EFF) to replace the earlier Standby Agreement (SBA).

The reforms, backed by the IMF were driven chiefly by the Central Bank of Seychelles (CBS). Pierre Laporte, a former IMF technocrat, took over from Francis Chang Leng as governor of CBS. Laporte has been credited with overseeing change within the Seychelles economic system and also in the banking sector.

Public debt reduction and fiscal consolidation are the two critical objectives that the Seychelles government has pursued in the last five years. As a result, the global credit rating agency Fitch raised Seychelles from a 'B with a stable outlook' in 2011 to a 'B with a positive outlook' in 2013.

The CBS was mandated to guide the government in the repeal of the Foreign Earnings (Regulation) Act. This act had imposed severe restrictions on the flow of foreign exchange. The second major change that Laporte undertook was bringing in a new monetary policy and supervising liquidity.

The coming into force of the Seychelles Investment Act 2010 opened up the investment environment in the country and eliminated the previous non-discretionary fiscal policies. The CBS' other duty was to oversee the floating of the Seychellois rupee (SCR). Laporte's task was not just to manage the introduction of financial reforms but also put in place safeguards against inflation and the likely political fallout in the face of a devalued rupee. When the rupee was floated in 2008, it dipped to SCR16:$1; today it has stabilised at SCR11.9:$1. However the most radical change came from the CBS-guided amendments to the Financial Institutions Act. They boosted competition, established the legal groundwork for new financial products, granted the CBS a regulatory role and reduced the government's role in financial institutions. These amendments also established a credit bureau and cut off default risks.

By the time an IMF review team visited Seychelles in 2011, all the major reform targets such as overhauling the tax system, strengthening of financial sector administration, upgrading of the monetary procedures, macroeconomic markers and streamlining public financial management measures had been achieved.

Seychelles has six private banks: Nouvobanq which is the trade name of the Seychelles International Mercantile Banking Corporation (SIMBC); Barclays Bank; Mauritius Commercial Bank (MCB); Habib Bank; Bank of Baroda; BMI Offshore Bank and Bank of Ceylon. Nouvobanq is a joint partnership between the Seychelles government and Standard Chartered Bank which began operations in 1991. The Seychelles government owns 78% of Nouvobanq and the remaining 22% is held by Standard Chartered.

The Mauritian MCB, headquartered in Port Louis, entered Seychelles in 2003 when it took over Banque Francaise Commerciale Indien Ocean (BFCOI) whose head office is in the Indian Ocean French department of Reunion island. MCB also has subsidiaries in Mozambique, France, Madagascar, Mayotte and Reunion.

The Development Bank o f Seychelles (DBS), (SCB) and t he Housing Finance Corporation (HFC) are wholly or partly owned by the state. Two insurance companies and a pension fund complete Seychelles' financial sector. As a result of the financial institutions reforms in 2011, the government divested in the then Seychelles Savings Bank (SSB) and offered 40% of the shares to the general public. Employees and bank account holders were given the first priority to buy shares. SSB has changed its name to the Seychelles Commercial Bank. All banks are now required to submit annual business plans and non-bank state financial institutions such as DBS and HFC are closely monitored by the CBS. In line with economic changes in the archipelago, the CBS is also restructuring HFC and DBS to meet the demands of a new financial environment. The CBS regulates the banking sec tor and until July last year, acted as the insurance sector regulator before the portfolio was moved to the Seychelles International Business Authority (SIBA). According to the Seychelles National Bureau of Statistics, as of June 2013, the population of Seychelles was 89,949. Seychelles has a GDP of $800m and an economy dominated by the services sector notably tourism, fisheries and foreign direct investments

Although Seychelles has the highest per capita income in Africa, because of the very small size of its population, the combined deposits for 2011 (the last year for which accurate figures are available) were only SCR6.9bn ($572m).

A learning process

In 2012, after steering the economic reforms at CBS, Laporte was appointed as Finance Minister in the island nation. His post at CBS was taken over by Caroline Abel who had served as Deputy CBS governor.

"We still face challenges in our banking sector," Laporte says. "Our banks still need to lend more and encourage more depositors. As a government, we are constantly seeking to provide an environment where banks can prosper and we need more banks to stir the current competitive edge and further lower lending rates to expand access to the wider population."

Tourism still remains the backbone of Seychelles' economy, accounting for 25% of the GDP and 37% of employment. The majority of tourists visiting Seychelles were mainly from Europe and this partly explains why the Eurozone crisis hit Seychelles. In the recent past, the Seychelles Tourism Board has intensified its campaigns to win over new markets particularly in the Middle East, Far East and Africa. Etihad Airlines, Emirates, Qatar, Kenya Airways and Ethiopian Airlines are some that fly into Mahe every week. Fishing, another major contributor to the Seychelles economy has, in the last five years, slowed down owing to declining fish stocks and insecurity posed by piracy. This has in turn affected the tuna canning production in Port Victoria.

As a small island developing nation, Seychelles faces numerous economic vulnerabilities. However the financial policy makers are keen to cushion this island nation from such constraints by diversifying the economy.

Seychelles is currently working to positioning itself as a financial hub. Using its geographic location, the archipelago is seeking to make itself an offshore f inancial centre with a difference. Among its key selling points are low government licensing fees, tax free International Business Companies (IBCs) and a fast growing network of Double Taxation Avoidance treaties with over 14 countries. These countries include China, South Africa, UAE, Qatar, Malaysia, Mauritius, Belgium, Cyprus and Zimbabwe among others.

"It has been a learning process for us at the Central Bank," Ms Abel says. "Since 2008, we have had to make quick adjustments to our thinking and accommodate the market in setting up a friendly monetary policy that benefits everyone. It is not easy but we are on the right track based on the achievements so far made."

In its quest to become a financial centre , In 2012 , the Seychelles Securities Exchange, Trop-X was set up in Eden Island on Mahe's east coast. It is a multi-currency and multiasset financial exchange targeting institutional and retail investors with a focus on assets ranging from futures, ETFs, and listed equities among others. It is associated with the South African Financial Exchange (SAFE) and claims that Seychelles' hedge fund and mutual fund legislation is among the most robust in the world. Press claims that the Seychelles offshore sector has been used for money laundering have been refuted vigorously. "Those claims were largely exaggerated and lacked facts," Laporte says. "We have adequate laws and infrastructure and even a strong Financial Intelligence Unit (FIU) committed to have a clean jurisdiction. We are seeking to attract offshore interest companies and banks." ua

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Publication:African Banker
Geographic Code:6SEYC
Date:Feb 17, 2014
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