On the convertibility of the rupee

By Paul Chow

Seychelles currency MONEY has many forms. For example, when the first settlers came to Seychelles, how did they exchange goods and services among each other?

Probably the most valuable commodity for a French settler was a slave. How did one settler settle his or her debt to another settler when slaves changed ownership? In other words what was the medium of exchange? Since almost every settler could get breadfruit, cassava, etc, from his own land, these goods probably had a very limited value as a medium of exchange with other settlers. But a slave had value in the form of the labour he or she could provide to the land. Without labour land was unproductive. So slaves were exchanged for slaves, in other words, a payment in kind. When goods or services are exchanged with other goods or services it is called barter.

Without a viable currency as a medium of exchange, barter was the most practical means of exchange in those days. But barter has limited potential as a means of exchange. And that became obvious as the community became bigger and the islands had to transact with the outside world.

When slavery was abolished by the British in February 1806, ex-salves had to be paid for their labour too. Since all the land was owned by the settlers, part of the payment for the labour of a worker was no doubt provided in form of accommodation on the land. That was also a form of barter.

But those labourers or ex-slaves who left the plantations to seek their fortunes in the streets of Victoria, for example, would not accept just any goods for their labour, because while their needs could be satisfied by, say, breadfruits today, they may not have the same need tomorrow. This was especially the case when a labourer was employed by the government. Therefore, money came into being.

In those days, money was coins, a piece of circular shaped metal produced by a manufacturing establishment called a mint. The metal that formed the coins had a certain value itself because of its relative rarity. So gold was more “expensive” to use as a form of money since gold was rarer than silver and silver more rare than copper.

As a result of the rarity of the base, metal coins made of gold were kept not only to be exchanged for goods or services but also as store of value. This means that coins made out of gold were kept as a form of savings as well and because of the rarity of the metal it kept its value over time or even increased in value over time.

Seychelles, however, did not produce either gold, or silver or copper. So to be able to obtain the coins to use as a means of exchange the community had to sell goods abroad in exchange for other country's money with which to buy their goods which we needed here in Seychelles. Internally, these same coins became also the means of exchange too in place of barter. As a dependency of the Colony of Mauritius, it was obvious that the coins of Mauritius were accepted as legal tender in Seychelles too. Money, therefore, replaced barter as a more viable means of exchange.

Money is also a unit of account, that is, so many pieces of coins for a packet of fish or a plank of timber of a known length. It is obvious that without money trade would have been more complicated and restricted as communities and transactions grew. Therefore, the type of money or coin that would arrive on our shores would depend on where or with which other port we traded with. To keep the colonial administration going, the imperial power, Britain, too had to send “money” to its colony which was in form of goods mostly, as well as pound notes and coins.

Seychelles Became a Crown Colony

When Seychelles became a crown colony in 1903, the colonial administrators in Britain introduced a local currency which they called the Seychelles rupee to be used in the new colony as the legal tender in place of the Mauritian rupee, which was the legal tender previously.

To obtain the new currency for circulation, the local treasury had to deposit sterling in an account with the Bank of England or the Crown Agents at the fixed exchange rate of 13.33 rupees to one pound sterling. As part of the so-called sterling area, we had to follow the same exchange control rules imposed by Britain for transactions with countries outside of the British Commonwealth which comprised colonial territories on all the three continents. Hence, sterling at the time was virtually the world's currency, such as the US dollar is today. Thus, this arrangement guaranteed the convertibility of the Seychelles rupee to the extent that sterling was convertible with other currencies outside the sterling area.

The authority with the responsibility to issue currency in the colony was called the Currency Board. This comprised a group of colonial administrators headed by the equivalent of a Minister of Finance called the Treasurer. He was the most important official in the colonial administration after the governor, although not in terms of protocol. The responsibility of the treasurer was to ensure that there was always enough money to pay for the administration of the territory. To raise money the colony imposed taxes on the personal incomes of the inhabitants of the colony and trade with the outside world. The colony could not borrow from anyone. It had to make ends meet, come what may, from its own resources.

Because sterling has to be deposited with the Bank of England in order to obtain the Seychelles rupee paper currency, it was evident that the face value of local currency in circulation would always be equivalent to the value of sterling in reserve with the Bank of England converted at the fixed rate of exchange. In practical terms, this meant that the amount of rupees in circulation would increase only if there was greater flow of sterling or other international currencies into the colony and vice versa. The colony, therefore, had to pay its way in the world.

So when an importer took rupees to the commercial bank to pay for imports or goods or if anyone wanted to send money abroad to pay for schooling of the children, the bank as an intermediary, would exchange the rupees for Sterling and pay the bills of the foreign exporter at their bank in UK or wherever, since Sterling was convertible into other currencies. This meant that the rate of exchange of other currencies with the rupee would depend on the rate of exchange of sterling with these currencies.

If the importer's bank did not have enough sterling in reserve abroad, they could buy them from other banks in Seychelles or surrender rupees to the Treasury which transfers the equivalent sterling amount from their account with the bank of England to the account of the local commercial bank in England. From the point of view of accounting, the reserve of the colony would drop by the equivalent sterling amount of the rupee currency surrendered back to the Treasury.

Hence, rupees in circulation in Seychelles decreased when payments abroad exceeded receipts of funds from abroad. Under this arrangement, it was not possible to have more rupees in circulation that there were foreign currencies available to exchange them. This was the bedrock of the monetary stability at the time, which made it possible for us to increase importation from R100 million in 1971 to R350 million by 1975 while at the same time increase foreign exchange reserves and maintain convertibility.

Seychelles Became a Member of the IMF

The Seychelles rupee remained linked to Sterling until we became a member of the IMF after independence. In 1978, after the revolution, we established a new way to issue the currency and to keep foreign exchange reserves. In the place of the Treasury we created the Monetary Authority under the authority of the Ministry of Finance, with a mandate to look after the country's foreign exchange reserves and to issue the currency for circulation. Instead of keeping our foreign reserves with the Bank of England, we entrusted it to the International Monetary Fund (IMF) in a pseudo currency called the Special Drawing Rights (SDR) at a fixed rate of exchange. Not all countries, however, did the same. They preferred to let the currency market determine their exchange rates on a daily basis.

While the exchange rate of the rupee was fixed with the SDR, our trade and international transactions, however, were in US dollars or Sterling or other countries currencies. How, therefore, did we calculate the exchange rate of those currencies that did not use the SDR as their reserve currency? While before, the commercial banks would used the changing value of sterling with other currencies to determine their exchange rate with the rupee, this time the IMF would send us each day the amount of SDR each of these currencies would theoretically buy, we would then insert them in a complicated formulae and come up with a value of the other currencies to exchange for the rupee. Some years ago we decided to abandon the IMF formula and adopt one of our own to set the exchange rates.

In all these, however, the most important element of the currency board system, the issue of local currency in exchange for a reserve currency, was abandoned. The reason we abandoned it was because the Central Bank, which replaced the Monetary Authority, started lending money to the government to spend when the budget expenditure exceeded revenue. Then when the cheques came to be cleared, the Central Bank simply picked up a pile of currency notes it had previously printed and gave them to the commercial banks. As this money came into circulation it created a greater demand for foreign currencies for imports. This is the cause of our foreign currency or foreign exchange shortage problem. In reality, it is not the foreign exchange which is in short supply, it is the rupees available to buy foreign exchange which is too much.

Today, tourists carry various currencies with them to be exchanged for our currency when they come on holiday. Like at the beginning when the first settlers arrived, some of these currencies have good value and are sought after such as the Euro, Sterling or dollars because of their convertibility against other currencies outside of Seychelles. Other currencies are of less interest for the opposite reason, including our own currency.

How can we save the situation? One answer is to restore the discipline of the Currency Board system and fixed our exchange rate with one international currency. Then we should build foreign exchange reserves in that currency sufficient to guarantee the full convertibility of all the currency notes and coins in circulation. This monetary discipline will ensure that there is never too many rupees chasing too few foreign currencies.