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FEATURE

MANAGING OUR MONEY WISELY?

“The People”, (the organ of the SPPF) of the 4 May 2006, under the title “Managing how we spend - wisely” made a number of unsubstantiated claims about the conduct of economic policy under Mr. Michel. Reading them one is left wondering as to who exactly is the target audience of the article, given the economic drivel emanating from it.

The money supply

The first article begins by “informing” us that the “monetary policy has remained the same, with the fiscal accounts in strong retrenchment”. Monetary policy, according to economists who know the subject, is about the management of the money supply. The money supply is all the cash (or notes and coins) in circulation as well as all the money we (that is the general public including parastatals and government) have deposited in the banks.

In a well managed economy, the money supply expands as a result of increases in real economic activities and declines when economic activities decline. So when money supply increases faster than the rate of increase of real economic activities (output), central banks take action to limit the increase in money supply to stamp out a rise in prices (demand inflation).

In our situation, real economic activities have declined substantially over the past five years but the money supply has continued to increase until the very end of the 2005. The pause or modest decline was only because the Central Bank redefined some of the deposits belonging to foreign investors in the commercial banks as foreign assets rather than domestic assets. As a result of the mismatch, as they say, between the money supply and real economic activities, prices of goods in the shops as well as prices of services have increased at an alarming rate. Rather than do what they are bound by the acceptable rules of economics to do, our government, instead, send officials of the Ministry of Finance on television to blame the so-called greedy merchants for the price rise.

MERP (June 2003), as we all remember, was supposed to sort out the money supply problem. Mr. Michel, as we all remember also, told us that within a year all the “liquidity overhang” or excess money supply problem would be eliminated, a statement supported by the absurd claim that he would literally be burning bank notes. Well, as we know none of that happened, so what was The People talking about?

External debts

Everyone who manages a family budget wisely knows that if you don’t pay your bills when they become due you may have money left in your pocket or in the bank account at the end of the month. But this money is not yours to spend as you wish since you have debts or bills to settle eventually. It is not clear whether the writer of the People’s article is stupid or uninformed or whether he or she is simply engaging in cynical propaganda. It is common knowledge that the government cannot pay its debts on time, as any local contractor (not associated with SPPF) knows, and do not pay most of its external debts at all.

The People’s claim that the “fiscal accounts (are) in strong retrenchment” is not supported by verifiable statistics. For example, the Government continues to deny the IMF permission to publish its annual study of the economy of Seychelles on its website - the latest of which was submitted to the government just a few months ago, no doubt with the most up to date figures for 2005. This study could no doubt confirm independently whether the government’s or the People’s claims are bon fide. Does anyone really think that JJ would have missed an opportunity to use it for propaganda purposes if the IMF had confirmed their claims?

The People’s article claims that there is a “sharp improvement in the net foreign asset position abroad”. Here they are talking about financial assets not the SEPEC tankers. Once again, the claim is not just spurious but borders on deceit. Like the household budget if you do not pay all your bills or debts when they become due after you have received your salary, whatever “surplus” you have as a result is not yours to spend. A country with “net foreign assets” that are clear – in other words not mortgaged or needed to settle debts falling due - would enjoy an improved credit rating. Minister Dugasse was candid enough to admit that Seychelles has a negative international credit rating. In other words no one outside Seychelles in his right mind will give us a loan.

Interest rates

The People then goes on to suggest “In line with best financial practices, market related interest rates were charged on both short term advances and securitized debt” to government. The best example of a market in Seychelles is the Victoria Fish Market where prices are determined by supply and demand. When there’s plenty of fish or vegetables prices drop.

In the world of finance in Seychelles, no one wants to buy government debts but the banks are obliged to do so by order of the Central Bank. Since people keep money in the banks in Seychelles because they cannot spend them the banks are very happy to oblige even if they were not forced to so. As a result, Banks earn most of their profits from interest earned on government debts, which is in effect our money collected from GST, licenses and business profits that are used to pay the interest. The so-called securitized debts are just Central Bank advances to government and some foreign debts incurred in rupees. But all the interests earned by the Central Bank (paid to it by the Government) are returned to the government as dividend. So the market related interest rate drivel is just, well, driveling.

The article goes on to say that there is a situation of “persisting monetary and external disequilibria”. Does this suggest that all is in order in the Seychelles economy? The article then went on to suggest that, “MERP has successfully stabilized the economy at a cost to output (productive capacity) and external competitiveness (imports/exports)” This suggests very clearly that MERP has been the cure that nearly killed the patient. If I remember well, the Seychelles Weekly forecasted that exactly that was likely to happen as a result of GST when MERP was announced.

One, therefore, cannot talk of a successful stabilization of the economy if in the same breath one admits that the so called “stabilization” has led to a lowering of competitiveness and the capacity to produce goods. In fact, since we produce very little of what we consume, it has actually led to fewer tourists coming. A lowering of productive capacity by its very nature means fewer or no new jobs, less profits, slower repayment of bills by households and businesses, as well as bankruptcy or inability of businesses and individuals to repay their bank loans. As a result banks have to make bigger provisions for non-performing loans – which they have been doing.

The competitiveness issue

The article further suggests that, “subsequent legislation, such as theTourism (Incentives Act and the Agriculture & Fisheries (Incentives) Act brought in to address cost concerns have in some ways addressed the competitiveness issue”. One cannot be a little pregnant. You are either pregnant or not pregnant. As we all know the cost of doing business is still same, high prices are still there and rising, shortages of goods are still common or getting worse in the SMB supermarket. Raw materials for local production especially are in short supply. The cost to the tourists of staying in any tourism establishments, eating in their restaurants or drinking at their bars is still very high.

The article does mention the taboo issue of devaluation or floating the currency in its list of alternative options to “promote external competition by influencing relative prices through the rate of exchange”. This (devaluation) it suggests is “fraught with risks, including fiscal, consumer welfare, wage/price fluctuations and social cohesion”.

The reality is that while we have not officially devalued, prices – as a result of the parallel market in foreign exchange - have risen sky-high while wages have stagnated. So today, without devaluation, we are suffering the same consequences of devaluation that the People described.

In this context, therefore devaluation would only result in the commercial banks - which receive most of the tourism and official foreign currency inflows - attracting the foreign exchange currently going into the parallel market to add to those that they are receiving from tourism establishments and investors by law.

Hence, devaluation today means more people will be able to obtain foreign exchange from the banks (and more likely at a lower rate compared with the parallel market since there will be more than in the parallel market) especially as the parallel market is technically a crime. Banks will then be able to finance importers faster and more often, which would result in more goods being imported by more people. More goods imported by more people means competition. Competition means lower prices

Since banks would be giving foreign currency earners and investors more rupees for their Euros, they in turn can employ more people or compensate their best workers better or buy more locally produced services or do all these things all at once. More revenue due to bigger turnover means more profits, which means better services and better value for money to customers, if not lower prices as well. This is the cascading effect known as trickle down economics.

Indebtedness

The People further said that “although the country continued to run external debt payment arrears, some important “progress” was made in regularizing relations with bilateral and multilateral creditors” by debt rescheduling. The reality is that one debt cancellation (India) took place together with a fresh loan, at least that’s what we are told. This is the financial equivalent of a treadmill – where regardless of how fast you run you remain on the same spot. In the real world, running on a treadmill at least gets your body fit.

The most interesting statement from the article is that “The high level of official domestic and external indebtedness leaves the fiscal accounts highly vulnerable to interest rate and exchange rate risks”. This, it appears, is the first time that government/central bank have admitted that any attempt to get us out of the economic quagmire will result in the finances of the government being put in a perilous situation. That’s an interesting admission. It means that JJ and Rene have been leading us down a garden path all along. To put it another way, they have check mated themselves.

Why, therefore, should we return them to power?