CBS set to meet reserve money target by March end |24 March 2016

The Central Bank of Seychelles is expected to comfortably meet its reserve money target by the end of the first quarter.

This came to light this week following the bank’s first quarterly monetary policy meeting for the year 2016 which took place on Monday.

The Board of Directors discussed the impact of international developments on the Seychelles economy with particular focus on the Eurozone area, the growing risk of Brexit and the economic slowdown in China. 

While global commodity prices have stagnated since the start of the year, double digit declines were recorded relative to the corresponding period in 2015. 

Oil prices have also contracted in comparison to the previous quarter but remained volatile.

The Board was briefed on recent domestic economic developments through a review of latest statistics and policy revisions. 

Monetary data showed moderate growth in the money supply while credit to the private sector expanded by 9.5 per cent in February on a year-on-year basis, albeit significantly lower than the corresponding period of last year when it stood at 22 per cent. 

In the previous month, credit growth stood at 7.4 per cent. 

The Bank is expected to comfortably meet its reserve money target by the end of the first quarter.

Real sector highlights included a sustained growth in visitor arrivals which translated into an estimated growth of 6.7 per cent in tourism earnings relative to the first two months of 2015. 

This was achieved despite a weaker Eurodollar rate in 2016 over the corresponding rate of 2015. 

The growth in earnings was consistent with developments in the foreign exchange market, whereby supply expanded by 9.3 per cent as at March 18. 

Nevertheless, demand expanded by 10 per cent, which supported conditions for the SCRUSD parity to depreciate by 1.3 per cent relative to end-2015. 

This development has adversely impacted the Bank’s ability to accumulate international reserves over the period, although historically there is minimal demand pressure in the market during the first quarter of the year. 

On the policy front, the key developments were the pronouncements made in the State of the nation address, namely the upward revisions to the minimum wage and old age pension; changes to the personal income tax regime as well as other policies targeting housing, and small and medium enterprises.

Inflation data showed that after a peak of 4.0 per cent in December 2015, the annualised inflation rate has trended downwards to 3.4 per cent in February 2016. 

The year-on-year inflation rate has recorded two consecutive months of negative growth. 

These movements have been underpinned by favourable international commodity prices, more importantly that of oil.

In the meeting of December 2015, the Board was advised that projections for 2016 suggested a gradual decline in prices (consistent with global economic forecasts) and broadly unchanged domestic consumer demand and exports.  However, as at March 18, net outflows in the foreign exchange market stood at 13 per cent above that of the corresponding position of 2015, with demand pressures in part due to increased wages linked to the 13-month salary.  Moreover, recent changes in fiscal policy may lead to a surge in aggregate demand as higher credit growth outside deposit-taking institutions and the recent uptick in private sector credit at commercial banks could have further spill-over effects on the balance of payments and the exchange rate.  These conditions could be exacerbated without a greater pick-up in export earnings.

In addition, external developments suggest a rebound in global energy prices in the second half of the year. This is consistent with developments within the Organisation of the Petroleum Exporting Countries (Opec), with recent news suggesting a commitment to oil production freeze.

In light of these conditions, which underpin an uptick in inflationary conditions in the short to medium term, the Board has unanimously decided to tighten monetary policy as of the second quarter of 2016 to maintain price stability.  Operationally, this will be reflected in a reduction in the reserve money levels for the rest of the year compared to the December 2015 projections as illustrated in the accompanying table.

The Bank remains vigilant and continues to actively monitor developments locally and internationally, while standing ready to adjust policies further should the need arise.

^1.         December 2015 projections

^2.        March 2016 projections