May 19, 2006May 19, 2006LAST OF FOREIGN AIRLINE DITCHES THE RUPEE
Qatar Airways, which started flying into Seychelles just over a year ago - amid fanfare and claim by the Government led by James Michel that this was evidence of economic progress under his presidency - has finally succumbed to the inevitable reality of doing cross border business in a country with a failed currency. As from the 1st of May, Qatar Airways has stopped accepting payment for airline tickets in
Failed national currency
Our currency, the rupee, is now accepted only by the state owned airline, Air
A few travel agents with connections to foreign currency earning activities are sometimes prepared to offer a deal where the rupee value of the fare is one and a half to two times the amount that it would have come to if it had been converted at the official rate of exchange. This is in effect a parallel market rate of exchange. Air
Only a few weeks ago the Governor of the Central Bank, Francis Chang Leng appeared in a special television programme, created as a subliminal propaganda for the official SPPF candidate - President James Michel. The programme purports to discuss and present the positive achievements of the economy since Michel became president.
On the programme, Chang Leng tried to rubbish the benefits of devaluation – which the IMF claims is inevitable. He was clearly intending to scare the viewers while at the same time lay a trap for the opposition, when in fact it is the IMF that is insisting we devalue or else we will never restore convertibility. Chang Leng claimed that with devaluation R1000 in the commercial banks will overnight be worth nothing. The decision by Qatar Airways shows that without devaluation R 1000, whether with commercial banks or in our pockets, is in reality, worth nothing. Chang Leng himself has issued orders to all commercial banks to sell foreign currencies only to persons who present an airline ticket to the cashier who stamps the ticket to prove the customer had received foreign exchange.
But if, for some reason one cancels the trip the airline or travel agent will not entertain any refund until you return the foreign exchange back to the banks first. All this rigmarole is set up so you could receive a maximum of US$ 400. With the cheapest airline ticket costing over R3000 the effective rate exchange rate for your US$ 400 is R15 to the dollar.
Body Blow to our national pride
In the SBC scaremongering programme, Chang Leng also claimed that all exchange controls would be lifted by the end of the year. What will change in our economic circumstances that would favour lifting exchange controls then but not now? Is it the presidential elections? This seems to be a sign that Michel has accepted the inevitability of devaluation which the IMF insists upon, but only after the elections. Qatar Airways, by its action, does not give much credence to Chang Leng’s promise.
Meanwhile, British Airways has closed down its agency and does not sell any tickets in
The decision by Qatar Airways not to accept rupees when they sell their services in
Currency crisis
The demise of our national currency started as far back as 1987. That was the year, the IMF warned in its Article IV consultation document that unless we adopted macro economic adjustments our economy would succumb to a currency crisis by 1991. At that time the state owned Seychelles Marketing Board (SMB) had the monopoly for all importation. By restricting imports artificially, SMB created the false sense of financial wellbeing. In 1991, just as the IMF predicted, the Government called on all the international commercial banks operating in
Since then, things have gotten worse. All attempts by the past Central Bank governors to mop up excess liquidity (excess rupees in circulation) have foundered as the government under Mr. Rene kept putting political survival above the nation’s economic well being. The latest measure by the Central Bank is the creation of the foreign exchange pipeline which requires importers to surrender rupees to the Central Bank now for foreign exchange in the future.
The pipeline remains at almost the level it was in 2004 when it was created – with over SR 500 million – while importers are waiting up to two years to get their invoices paid. Any commercial invoices unpaid before June 2001, however, were repudiated by our Central Bank, whose remit is supposedly that of the banker of last resort. Most of the small reduction in the pipeline since it was established in 2004 has been because importers have withdrawn funds to buy foreign currency in the parallel market at a premium to import goods.
10 years ago, in a futile attempt to stop the parallel market in foreign exchange the government imposed exchange controls for the first time since the
But the rules governing the exchange of currencies for rupees under the new exchange controls Act are totally convoluted which resulted in widespread confusion as they were being enforced. To put the exchange control regulations into practice, the law created a new legal residency status for tourists, who are not
Tourists are given a dog tag type tracking number on arrival stamped in their passports. All licensed tourism establishments are compelled to make monthly returns to the Central Bank containing the names, passport or ID numbers as well as the dog tag numbers and the value of the accommodation consumed by all the guests that have checked out. In addition they must also attach with their returns a copy of the bank statements where the foreign currencies are deposited. To take foreign currency hotels and guest houses were given licenses to act as pseudo money changers, except that they are allowed only to “buy” but not to sell them. In order for Qatar Airways and other international airlines to be able to accept payment in foreign currency they too were licensed as pseudo money changers.
To police the exchange control regulations, a whole new bureaucracy has been set up in the Ministry of Finance staffed initially with Sri Lankan nationals imported for that purpose. Their job was to establish a method to reconcile the returns of the tourism establishments with that of the commercial banks. Since most hotels accommodate clients of international as well as local tour operators who pay in arrears, the task became monumental. Meanwhile, tourists who were refused services by their hotels if they paid with rupees they had legally exchange with the banks were baffled and angry.
National currency now effectively unusable
Our national currency, the rupee, is now usable for fewer and fewer economic activities, as a means of exchange or unit of account – two important functions of a currency. All new investors in the tourism industry for example, are given privileges to conduct business entirely in foreign currency together with the right to repatriate almost all their foreign currency earnings. Foreigners are being given special licenses to wholesale and retail imported goods in foreign currency to tourism establishments while Seychellois owned and operated shops are barred.
When an a country reaches a state where, for ordinary transactions, its citizens prefer to use anything but their own currency as a means of exchange its economy is considered to be a dollarized economy, even though the dollar itself is not the preferred currency. The phenomenon is known as “good money chasing the bad”. When this happens, only a massive devaluation can restore monetary equilibrium.