Monetary&Fiscal Policy Responses Indian Ocean&Africa Seychelles

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Monetary&Fiscal Policy Responses Indian Ocean&Africa Seychelles

  1. 1. POLICY RECOMMENDATION TO PROMOTE GROWTH AND DEVELOPMENT, GIVEN THE CURRENT GLOBAL FINANCIAL CRISIS Dr. Gerard Adonis
  2. 2. Job Opportunities and Expatriate Employment  Both Seychelles and Mauritius rely greatly on expatriate labour.  Number of foreign labour employed in Mauritius is estimated over 30,000 while Seychelles about 8,000  Despite rapid transformation in the socio-economic development of the country, such gain has not been accompanied by a revision of the education system.
  3. 3.  As a result has led to a serious incidence of skills mismatch and in consequence rising unemployment.  Recommendation  Government divert more resources into education if want to attain objective of replacing expatriate workers and avoid skill bottleneck.  Need to ensure quality education in all the institutions.
  4. 4. Trade Preference  In their effort to diversify, Government have to ensure reduction of dependence on trade preferences for their product.  Recent Events Dismantling of Multi-fibre Agreement Lower guaranteed sugar prices (39%) from EU – (Mauritius & ACP countries)
  5. 5.  In finding ways to make economy more resilient, Government should focus on empowering the private sector to improve their capacity and competitiveness.  How?  Proposed Reform in the Tax System (Seychelles case)  Among the reform proposed are;
  6. 6.  Review of tax concessions and exemptions.  New tax code to be introduced in January 2010.  Existing tax rate of 40% (above SR 250,000) on businesses will be reduced as of January 2010.  Companies operating in the import zone under special import licences must operate on the same terms and conditions as domestic importers  Retail mark up (30%) in calculating GST will be eliminated as of January 2010.  Introduction of the personal income tax to replace the existing Social Security contribution January 2010.  Replacement of GST by VAT
  7. 7. Creation of Regional Integration  Being small is disadvantageous  To overcome their inherent development constraints and benefit from economies of scale some African countries (incl Mauritius and Seychelles) actively promoting and participating in regional cooperation and economic integration.
  8. 8.  Seen over the years creation of regional groupings e.g. SADC, COMESA and IOC  Despite existence of those regional groupings, trade cooperation among members limited.  E.g. Trade among IOC members less than 10%  Need greater economic integration by addressing issues relating to;  Trade Barriers  Tariffs
  9. 9.  Creation of Regional Banks In-depth study should be undertaken to explore possibility of setting up Regional Banks. Unfortunate that continent of Africa has only one major Bank With FC at its peak and Governments’ inability to bailout their local institutions, many have no recourse but banging on the door of AfDB. • Consider scenario of having many more of the other African countries queuing at the door of AfDB! • Having Regional or Sub-Regional Banks therefore would definitely be advantageous.
  10. 10. Adoption of Single Currency  Time has come for countries in Africa and IOC to seriously explore eventuality of creation of single currency  Can start at regional level  Often small economies do not have luxury of large reserves to defend their local currency.  Having single currency may help cushion the economies from adversities like the one the world is currently experiencing.
  11. 11. Economic Diversification  Many African countries depend too much on traditional sources and on only 1 or 2 sectors for their economic development.  When crisis strikes they are the first ones to be affected  Governments should do their utmost to speed up process of diversification and modernise their economies, hence reducing reliance on traditional sources.
  12. 12.  Should explore potential of venturing into service sector devt s.a financial services.  Need good infrastructure  Sound Macroeconomic Policy Inflationary Target Stable Exchange Rate Transparent & non-discriminatory Tax Policy
  13. 13. Promote Local Investment  Governments should take more proactive role to kick start the economy  Could be achieved by; Encouraging more effective public sector investment. Encourage local businessmen to undertake investment activities in the local economies. Facilitate the availability of funds Negotiate and establish line of credit facilities with overseas institutions through local Devt Banks.
  14. 14. Import Substitution  Small economies are often at a disadvantage when comes to global trade.  Difficult to negotiate fairer price and cannot benefit from economies of scale  Are heavily dependent on import  Recommendation
  15. 15.  Government should encourage more import substitution by;  Providing fiscal incentive to local enterprises  Level playing field  Make available necessary funding (e.g. Concessionary Credit Agency Seychelles) • Concurrently promote export-oriented industries
  16. 16. Promotion of Small Enterprises  Many African countries have large informal sector  Botswana’s informal sector estimated to contribute about 33% towards GDP  As those activities go unrecorded, could undermine the country’s future development prospect.
  17. 17.  Seychelles and Mauritius been very successful in promoting small enterprises because governments provided fiscal incentives.  loans at favourable rate  easy access to financial resources  tax exemption (business tax)  Benefits  formalising the informal sector  promoting employment creation  broadening the tax base
  18. 18. Debt Management  Most African countries, including Seychelles have one thing in common - high unsustainable public debt.  Very few countries in Africa have an efficient debt management system in place, i.e. transparent and reliable.
  19. 19.  Recommendation  Establishment of a Public Debt Law to strengthen transparency and management of public debt  Creation of a Public Debt Service Fund – purpose will be to help the Government service its domestic public debt hence reduce reliance on commercial bank borrowing.
  20. 20. Foreign Direct Investment  Despite Africa’s vast resource base, the continent has been unable to attract large FDI.  One aspect often criticised by foreign investors is infrastructural bottlenecks, and lack of skilled labour.  Area Governments should improve on by; guaranteeing adequate funds encouraging more effective public sector investment
  21. 21.  Recommendation  Inflationary Target Lite  If Government seriously want to attract further investment, need to; restore the shattered business confidence address the issue of cost of borrowing  To achieve that; Consider adopting new monetary policy regime to control inflation
  22. 22.  Exchange Rate Policy  Strongly recommended that Government set long- term target for the exchange rate.  This will help; restore confidence in the currency, cushion it from external shocks.

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