Central Bank lecture-‘Reform success justifies economic path we took’ |03 December 2012

Vice-President Danny Faure – who launched the lecture and was finance minister when the reforms were initiated – said that four years after the move, Seychelles economy has reaped major benefits.

“It is clear that the change in economic policy from the fixed exchange rate to the floating system we now have has brought about significant transformation in the last few years,” he said.

He added the change has increased the level of optimism and excitement that the country will be able to develop further and allow the private sector to flourish at a much stronger pace.

Launching the discussions, Dr Atish Ghosh of the International Monetary Fund said the choice of exchange rate regimes is the perennial question in international economic policy meetings which has become more complicated since the global financial crisis.

“We are now at this interesting juncture where on the one hand the struggle of the peripheral countries on the euro zone is calling into question the viability of the fixed exchange rates.

“At the same time in the run up to the US presidential election there were candidates calling for a return to the gold standard reference. Meanwhile, there are advanced economies that traditionally floated their exchange rates, for example Japan and Switzerland which are trying to contend with large capital inflows and are actively discussing how to manage their exchange rates.”

He said many emerging markets and developing countries are contending with challenges surrounding exports, commodity price volatility, the prospect of volatile capital flows and excessive global liquidity.

Dr Ghosh said the topics discussed at the lecture are therefore very topical around the world and gave a “cross country experience that countries have had with their exchange regimes” and narrowed down to small states before triggering discussions on Seychelles outlook.
He led the delegates as they discussed Seychelles’ situation.

Among topics discussed were the fixed exchange rate options, the “dollarisation” of a country’s currency “which does not necessarily mean adopting the US dollar, but rather, any strong currency like the euro, and a currency regime where a country maintains its currency but backs it fully with foreign exchange reserves like Seychelles used to have until 1966”, and other options.

Dr Ghosh holds degrees from the Oxford and Havard universities and has published many articles as well as books on international economies, finance and public policy.

Central Bank governor Caroline Abel said because of Seychelles’ smallness and openness, the exchange rate has always been a key factor.

“Being dependent heavily on the rest of the world, exports represent a notable component of the country’s output while more than 90% of goods consumed are sourced from overseas.

“With recent developments in the foreign exchange market, the significance of the exchange rate as an important price – given its strong and direct relationship with earnings of the export sectors and the domestic general price level – has been highlighted,” she said.

“For this reason, the Central Bank has a particular interest in this important economic variable. It is closely monitored to ensure conformity with the bank’s policy and objective.”

Ms Abel noted amendments to the Central Bank Act in 2011 gave greater importance to price stability as it became the primary objective of the bank.

“Therefore, the choice of which exchange rate arrangement to adopt is a key policy decision for Seychelles given the impact of the exchange rate on domestic price developments.

“An essential aspect for consideration when deciding on the choice of exchange rate regime is the degree of flexibility that is to be allowed,” she said.

She said what has been observed worldwide – especially as a country becomes more developed – is a general tendency to move towards a more flexible system.

Ms Abel said regardless of the preferred choice, policy makers should be mindful that the chosen regime may not be the best option all the time and the relevant country is expected to learn and address any possible shortcoming of the prevailing exchange rate system.