CHANG LENG PRAISES BLACK MARKET

In desperation, Chang Leng is now resorting to giving credit to the black market which it sought to criminalise in the vain attempt at stamping it out nearly ten years ago. “The Central Bank Governor acknowledged that the exchange rate change would likely result in some price rises, but said that the current prevalence of “black market” rate imports would limit this and that the long term positive economic effects would eventually filter into all sectors of society”,  the official statement said. Yet, while the law remains on the statute books – threatening anyone who so much as accept a dollar from a tourist without an authorisation from the Central Bank, Chang Leng claimed that he would “encourage the commercial banks” to let you deposit this illegal money in an account, as if the banks need any encouragement.

Now the banks are over themselves trying to sell the idea that one can really open a foreign currency account provided one could justify where the money came from. Would they accept your dollars or euros if you told them it you bought I from the beach bum on Beau Vallon Beach, after all it is still illegal to change foreign currency without a licence issued by the Central Bank?  Three years ago the Seychelles Chamber of Commerce proposed that importers be allowed to pay their overseas suppliers’ invoices at the banks with foreign currency notes without questions asked. Many are sceptical about Chang Leng’s latest scheme, fearing it is a trap to confiscate their hard earned dollars.

In order to give the impression that the Central Bank had a plan all along which it is now putting into operation, Chang Leng threw in an order for an interest rate rise on the minimum rate of interest banks must pay their customers who keep savings with them.  In actual fact, this is a power Chang Leng does not have under the law, neither under the Central Bank Act 2004 nor under the Financial Institutions Act 2004.  Unlike the average person residing in Seychelles, Chang Leng as Governor of the Central Bank can only do what the law allows him to do. And the law as it stands does not give Chang Leng the power to tell the banks what interest rates they should pay to their customers on their deposits.

Under the Central Bank Act 2004, Chang Leng could only set reserve requirements on deposits held by their customers with commercial banks. The more reserves the Central Bank require the commercial banks to keep with the Central Bank, the less money they would have to lend, hence interest rates would rise. To entice deposits banks would automatically increase their savings rates. This is one market mechanism used by Central Banks to influence interest rates. The other is the sale and purchase of government securities by the Central Bank, which reduces or increases money supply. But despite the fact that Chang Leng is ordering the commercial banks to keep 67.5%  of deposits in the form of government securities interest rates have not risen.

The other power which the Central Bank does not have, but which Chang Leng uses and the commercial banks obey blindly, is to set rates of exchange for the buying and selling of foreign currencies by the commercial banks.  According to the Central Bank Act 2004, Section 26(1), Chang Leng is only empowered to “determine the rates at which it (the Central Bank) will buy or sell foreign currencies. The Bank may publish the rates so determined.”  Section 26(2) of the Act, also said that “while determining the exchange rates under subsection (1) the Bank may also determine a mid-rate around which purchasing and selling exchange rates may be established”.

The rational behind this is that the Central Bank is the repository of the country’s official foreign exchange reserves and therefore, the banker of last resort when there is a shortfall of foreign exchange in the economy. It is through the buying and selling currencies which the Central Bank is empowered to do using the reserves that the exchange rate is determined. In such a free market environment banks and other financial intermediaries are mindful of the Banks power of intervention to buy or sell foreign exchange to their detriment that they would like to know the rates set by the Central Bank to determine their own rates. If the law had been observed, there would have been no black market in foreign currency exchange.

In order to give more credence to the so called target Chang Leng, in the official statement, embellished his role and that of the Central Bank in the record arrival of tourist so far this year. “I believe that this process has been a success and that it has been responsible for creating a more competitive tourism sector – which has seen growth at record levels” Chang Leng wrote in the official statement. This is, of course a false claim, as our table shows. Tourism earnings as depicted by the actual amount of foreign exchange passing through the banking system and converted into rupees has barely changed.

Chang Leng’s claim that his policies have contributed to the decline in the pipeline is also not borne out by the facts as shown in our table. While the pipeline has declined since the Minister of finance’s declaration last year that those deposits not supported by customs documents showing that goods actually arrived in the country would not be honoured, many simply removed their rupee deposits from the pipeline. Central Banks own statistics show that the pipeline declined only when part of the junk bond proceeds was used between July and August this year.  There is a lot of speculation the main beneficiary of this exercise were SPPF front companies whose bills were cleared first.

While having stopped the manipulation of the exchange rates will establish a modicum of stability in the exchange rate, Chang Leng has still failed to restore the full convertibility of the rupee. This dismal failure, after two years in the job deserves to be highlighted and President Michel must sooner rather than later have him stand down as Governor of the Central Bank in favour of a more knowledgeable individual who understands the way the monetary system in a market based economy works.

October 12, 2007
Copyright 2007: Seychelles Weekly, Victoria, Mahe, Seychelles