October 20, 2006

CENTRAL BANK ISSUES NEW FOREX DIRECTIVE TO BANKS

The Central Bank has issued new directives to banks on how to treat foreign exchange earnings coming into the banking system. The move follows the announcement by the Minister of Finance, Danny Faure, last week in the National Assembly that Government plans to liberalise the regulations controlling foreign exchange.

The new directive orders the commercial banks to transfer 15% of all foreign exchange  they receive to the account of the Central Bank. In practice, the Central Bank must buy the currencies from the commercial banks using rupees, otherwise the commercial banks will be short of money to give to the earners of the foreign exchange. The Central Bank can use the rupees provided by the Government – which needs to pay foreign currency debts or buy medicines for the Ministry of Health – to buy the foreign exchange, or it can exchange for the reserve in rupees which commercial banks have to keep with the Central Bank for foreign currencies, to add to the official reserves.

The new directives, however, changes dramatically the way foreign exchange earnings are allocated. Previously, the priority for foreign exchange lay with the earners themselves who, with the approval of the Central Bank, could keep between 15% to 78% of their earnings in foreign exchange. In other words, their earnings were not converted into rupees. As a result, the economy was directly deprived of this money for its day to day transactions.

Now, under the new rules, the first to get to keep the foreign exchange is the Central Bank. Those who have been authorised to retain some foreign exchange they have earned will henceforth keep the same percentage but from a lower amount of foreign exchange. Whilst before,  a foreign exchange earner could keep 15% on each US$ 100 it earns, under the new rules it could keep 15% of US$ 85, after the Central Bank had taken its cut. As a result the foreign exchange earners are now up in arms.

What is left after the foreign exchange earners have taken their cut could be anything from US$72.25 for every US$100 or zero. One estimate is that the foreign exchange earners could be keeping on aggregate up to 35% of the total foreign exchange coming into the commercial banks. That 35% must now be deducted from 85% that’s left after the Central Bank has taken its cut. The commercial banks themselves, under the new rules have priority to buy 25% of what is left after the retention by foreign exchange earners have been deducted. In practice this could worth US$12.75 of every US$ 100 they receive to zero dollars for the banks. Banks will have full discretion on the use of their own retentions.

Finally, what is left will be used to finance letters of credit for importation as well as cash for travels. The whole exercise, as you have probably guessed, does not improve one iota the availability of foreign exchange in the country. The more it changes, the more it remains the same.

Copyright 2006: Seychelles Weekly, Victoria, Mahe, Seychelles