Selected Issues


Selected Issues

External Stability and Competitiveness Assessment1

Seychelles’ exchange rate appears broadly in line with fundamentals. Although the formal quantitative analysis did not provide a definitive exchange rate assessment, other indicators point to a relatively strong external sector. Nevertheless, the authorities need to arrest recent appreciation in the REER before it poses a risk to the external stability.

A. Real Exchange Rate Assessment

1. The real exchange rate assessment based on EBA-lite approach produced mixed results. The current account (CA) model suggests a real exchange rate gap of +22.1 percent (implying sizable overvaluation of the rupee) with a large residual of −21.3 percent. On the other hand, the real effective exchange rate index (IREER) model estimates a real exchange rate gap of −13 percent (i.e. undervaluation of the rupee) with a residual of −17 percent. These discrepancies are largely explained by country-specific circumstances.2 In this context, the limitations of the approach are also reflected in a persistently poor fit of the panel estimation for small, tourism-based countries such as Seychelles.

EBA-lite Results

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Sources: Fund staff estimates

2. Seychelles is an economy highly reliant on a single sector (tourism) for foreign income. With the tourism-related sectors accounting for 32 percent of GDP and tourism earnings accounting for 30 percent of total exports of goods and services, Seychelles is way above the thresholds set for special cases for external assessments (15 percent of GDP and 25 percent of total exports, respectively). Traditional model coefficients do not sufficiently reflect the fact that the country has a concentrated source of external income (tourism). For example, sizeable capital inflows (FDIs) could further lower the current account balance due to large imports associated with these investments. This suggests going beyond quantitative point estimates by using alternative indicators and narrowing down the sample of countries for comparisons. To complement the formal quantitative analysis, a qualitative approach is also applied by comparing Seychelles to a group of structurally similar countries (small island economies dependent on tourism3) across other characteristics of external competitiveness.

B. Other Indicators of Competitiveness

3. The tourism sector has been performing strongly. Since 2009, Seychelles has experienced stronger growth in tourist arrivals relative to average of the comparator group and its share in the group total has steadily increased. On the other hand, the international tourism receipts have not been growing as fast, although they followed the same path as the group in general. The slower growth in tourism receipts is related to the depreciation of the euro relative the US dollar as the bulk of tourism receipts are denominated in euro. Foreign direct investment (inward) largely followed a similar pattern as other countries, with the exception of a large one-off investment in 2012. Since 2014, the authorities have imposed a moratorium on new large hotel investments.

Sources: World Bank, Fund staff estimates

4. The real effective exchange rate (REER) has been appreciating since end 2014, following a sharp depreciation. However, the pace slowed starting in [March 2016], reflecting negative domestic inflation. Still, over the past two years the real effective exchange rate has appreciated somewhat faster compared to the average of the group of comparator countries. The current level of the REER is around 13 percent higher than the average during the first 5 years under the program. Continued appreciation of the REER could pose risks to the country’s competitiveness in the context of an already large external current account deficit.

5. Other indicators show mixed results in external competitiveness relative to similar economies. In recent years, although the current account position compared to the comparator group has been weaker, Seychelles’ pace of accumulation of international reserves has been faster except for the last year when significant depletion occurred with the commencement of amortization of a restructured bond. The indicators of relative prices show that Seychelles has slightly lost competitiveness relative to its peers as the terms of trade indicator shows a deterioration over the past two years.

6. There has been limited progress in improving the business environment. Seychelles fell from 80th to 93rd in the rankings for the World Bank’s Doing Business overall indicator over the past three years. Particular areas of concern remain starting a business, dealing with construction permits, access to electricity and finance, and enforcing contracts. All these indicators have deteriorated and rank in mid-100s among 190. Among few indicators that recorded an improvement were paying taxes (32) and trading across borders (84).

Sources: Fund staff estimates; authorities

C. Reserve Adequacy

7. International reserves are expected to remain strong. After a decline in 2016 from above 4 months of imports, the reserves will stay stable around 3½ months. Based on the Assessment of Reserve Adequacy for Emerging Market (ARA-EM), this level appears to be adequate, with the projected reserves staying at around 170 percent of the ARA-EM metric. The need for additional reserves well above the metric is justified by the increasing vulnerability of Seychelles’ tourism economy to natural disasters and climate change.


Seychelles: Reserve Adequacy)

Citation: IMF Staff Country Reports 2017, 161; 10.5089/9781484304792.002.A006

Sources: Fund staff estimates

Prepared by Aidar Abdichev (AFR).


Ter-Martirosyan, A et al. External Assessments in Special Circumstances, IMF, 2014


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