Exchange rates for rupee, dollar and euro
I wish to comment on your article “stronger dollar brings higher prices” in the Nation of August 3.
Why does a change in the exchange rate of the dollar vis-a-vis the euro, which takes place in the currency markets outside Seychelles, affect the rupee exchange rates of these two currencies – transactions which take place only in Seychelles?
Regrettably, the Central Bank governor, in the statement you attributed to him in reference to the crisis of confidence in Greece, did not give an adequate explanation.
In the article you also wrote: “Some businesses that pay for imported goods in dollars but earn their income in euros or rupees have been forced to raise prices because of changes in the two currencies.”
Since the economic reform, the banks and money changers can provide any amount of foreign exchange on demand. Why, therefore, would anyone in Seychelles need to earn foreign exchange directly to be able to import goods? If all prices of goods and services we offer to foreigners were in rupees, foreigners would bear the risk of the exchange rate variation between the euro and the dollar.
By trying to earn foreign exchange yourself you are only trying to be a pseudo money changer on the side, diverting precious resources to do something that others are better able to do for you at a lower cost.
And this is not a risk-free exercise either, as many have found. When the hotels and tourism industry operators price their services in foreign currencies and deposit these proceeds in foreign currency accounts, they are effectively taking a bet on the future rupee value of these deposits, which they will, in any event, need to convert to pay for their input here in Seychelles.
Many have found that they got fewer rupees than they anticipated. I know of one hotel that raised its room rates for its rupee-based customers to compensate, thus sacrificing a potential local market.
The liberalisation of the foreign exchange market in Seychelles (the floating of the currency) was meant to create a domestic market for foreign currency trading where supply would satisfy demand, and which would determine the rupee’s exchange rates with other international currencies, based on the premise that the demand for foreign exchange is governed by the amount of rupees in the economy.
The role of the Central Bank was simply to ensure that the money supply (rupees in circulation) did not increase artificially in order to maintain stable exchange rates. So far the Central Bank has kept to this brief but the exchange rates, it appears, are not behaving according to the theory.
At the Seychelles Economic Forum in May last year, I circulated a paper in which I proposed that we adopt a currency board exchange rate arrangement, under which the exchange rate of the rupee would be fixed at the same rate with the US dollar and the euro.
This would stabilise not only the value of our foreign earnings in terms of rupees but also that of our dollar payments, which would be the same in terms of rupees spent. Under this arrangement it would not matter to most of us here in Seychelles how many dollars the euro fetches outside Seychelles as we would be buying the euro or the dollar with our rupees at one rate, and euros and dollars arriving in Seychelles would be exchanged for rupees at the same rate.
A euro, dollar or rupee account with your bank would be the same. Banks would be able to lend in any of the three currencies, which means interest rates would tend to be those applicable in Euroland or the US. Without exchange rate risks, our international credit rating would go up one notch.
In its report published soon after the start of the economic reforms in 2008, the International Monetary Fund said that despite its recommendation that we float the rupee, we would need to adopt another exchange rate mechanism for the long term.
In the light of the current problem that merited a public comment from the governor of the Central Bank, the time has now come for us to heed this warning. The currency board arrangement has worked well in many small open economies and is behind the prosperity of Hong Kong. I would be happy to explain its concept to anyone.
Paul Chow
Source: NATION 8-13-10