President urges banks to review interest rates |03 February 2010

He was speaking during this year’s first En Moman avek Prezidan programme, which was aired on SBC TV at the weekend.

Mr Michel said everyone involved in Seychelles’ economic development should play their full part to ensure progress continues.

“Today the government is managing the economy in a transparent manner and is controlling its expenses while the Central Bank is carrying out its role as monetary regulator, but other partners like the commercial banks should also play their part and improve their performance,” he said.

Mr Michel said across the world today, interest rates on loans are far lower than in Seychelles, where prime rates are 12%.
This is not acceptable, he said; with the present economic stability, interest on loans should have a prime rate of around 7% to 8%.

He called on the Central Bank to talk to the commercial banks and ensure they address the issue as a matter of urgency.
Central Bank governor Pierre Laporte said yesterday that commercial banks are no longer justified in keeping their interest rates high.

The banks had reason to raise their interest rates on loans when inflation went up in 2008, but the situation has changed, he added.

In an interview with Nation, Mr Laporte explained that when inflation went up in November 2008 it was higher than interest rates and warranted the rates rising, but the situation has now been reversed.

“In November 2008, inflation went up by 63%, rising above interest rates, so the rates had to be increased. But today we have a situation where inflation has gone down to 0.5%,” he said.

Mr Laporte said interest rates were higher than inflation in October 2008 before the reforms, then after the devaluation of the rupee, inflation went up and interest rates had to rise to close the gap.

“Today we are in a situation where the year-on-year inflation rate is only 0.5%, but interest rates have fallen only slightly so the gap is once again very big, with the rates being higher than inflation,” he said.

“Since inflation is lower, there’s no reason why interest rates should be so significantly higher. The rates should be falling further. Having interest rates around 13% is not justified.

“Another reason why they should drop is that interest rates around the world are very low, so there is no reason why interest rates in Seychelles should be so high.”

Mr Laporte said when Seychelles launched its reforms it had to attract investors, so having high interest rates was good because it attracted investment and helped the exchange rate stabilise.

“But in today’s environment there’s no reason to have such high rates of interest,” he said.
Mr Laporte said the Central Bank cannot dictate to the banks in our current free environment, but added that current monetary policies are aimed at keeping liquidity with the banks.

“The strategy of the Central Bank is to maintain spare liquidity in the banking system to encourage them to lend money. It is better for the banks to lend at low interest rates than not to lend at all when people are avoiding borrowing because of the high interest rates,” he said.

The government was running deficits in the past and needed to borrow through treasury bills to finance its operations, but today the government is repaying its debts by running a surplus, Mr Laporte added.

It is not taking as much in treasury bills as before, which means banks are left with money in their hands.
“We have also reduced the minimum reserve requirement from 13% of their deposits to 10%, so they have more liquidity for them to lend out,” he said.

“I really do not know why banks are not reducing their interest rates, because the conditions are now there for them to do so.”

However, there is no evidence that the banks are collaborating to keep rates high, Mr Laporte added. When they are bidding, their offers are usually different from one bank to the other and the rates at which they sell foreign exchange also vary a lot, suggesting they are not colluding.