Thursday, June 23, 2011

The Seychelles story....

Seychelles is a small country like Maldives, geographically very similar to us; with a group of small islands. Even their primary source of income is tourism, and fisheries. Their population is less than 90,000.

Back in 2008, while we were busy with the political reforms, and the first multi-party presidential election, Seychelles was going through an economic crisis. They had a huge imbalance in the balance of payments, and hence a huge imbalance in the foreign exchange market. They also had pegged exchange rate regime, where their Rupee was fixed to the US dollar at the rate of 8 Rupee per dollar. They had a huge external debt, much higher than ours in nominal terms. Due to years of government deficit financing through printing Rupees, there was a black market for dollars, and a shortage of dollars in the commercial banks. The black market rate was at Rp 12 per dollar.

Then, in November 2008, they floated the Rupee, together with many other economic reforms, and changes to the laws and regulations on foreign exchange. For five months, the exchange rate kept going up, reaching almost 17 per dollar. After that, it started coming down, to as low as Rp10.3 per dollar.

Economic liberalization; focusing on removing all sorts of market distortions, and moving towards market forces is the key message we get. Further, living within our means, sincerity and a commitment by everybody as a team, are all essential for the success.

Now, there is easy availability of dollars in the banks, there is no black market, and the exchange rate has stabilized.