Request for Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for Seychelles

Abstract

Request for Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for Seychelles

On behalf of our Seychellois authorities, we thank staff, management and the Executive Board for their continued support of Seychelles, especially during these challenging times. The authorities have requested a purchase of SDR22.9 million, equivalent to 100 percent of quota, under the Rapid Financing Instrument. This would fill about a quarter of the balance of payments financing need and should help catalyze additional support.

Before the COVID-19 pandemic, Seychelles was continuing to make considerable progress in strengthening economic stability and sustainability. The Seychellois authorities have demonstrated their strong commitment to economic reform under successive Fund programs and the current Policy Coordination Instrument (PCI). They have implemented sound monetary and fiscal policies, reduced public debt and progressed structural reforms, all of which have significantly improved the resilience of the economy since the 2008 economic crises.

While staff have not yet completed the latest review under the PCI, their preliminary view is that all end-December 2019 quantitative targets were met while the 12-month average inflation at end-2019 was well within the inner bound of the monetary policy consultation clause. Structural policies have been progressed broadly in line with the PCI targets.

The outbreak of COVID-19 caused a health emergency. Progressively from February 2020, the authorities restricted international arrivals and, in order to prevent further spread of the virus, the authorities closed Seychelles’ borders and suspended all international flights effective from mid-March. From early April, outdoor movements were prohibited and non-priority businesses closed. The authorities allocated additional financing equal to 0.5 percent of GDP to health-related spending. Thanks to strict and timely measures, Seychelles has had only 11 cases of COVID-19 and no fatalities. Recently, there have been no new cases reported and the authorities are now planning to ease restrictions in phases.

Outlook

As a small open economy highly dependent on tourism, the economy of Seychelles has been hit exceptionally hard. In the WEO projections, Seychelles is the worst hit economy in Sub-Saharan Africa and the economy is projected to shrink by 10.8 percent this year, with a recovery next year. The authorities doubt that the outlook is that promising; their expectation is that the tourism sector is unlikely to recover as staff project. The sector accounts for 24 percent of the Seychelles economy directly, an estimated 75 percent indirectly, and, crucially, 76 percent of foreign exchange receipts. The current account balance is expected to widen to close to 30 percent of GDP, as tourism receipts and FDI inflow have dried up. The authorities do not expect that the tourism sector will rebound swiftly to pre-COVID levels and are mindful about longer-term economic challenges.

Fiscal policy

As a result of COVID-19, fiscal revenues are projected to decrease sharply, and the primary fiscal deficit is projected to reach 9.7 percent of GDP this year. Gross financing needs are approaching almost 60 percent of GDP. To lessen the negative economic impact, the authorities have provided assistance for social protection to vulnerable groups and will provide wage subsidies to affected businesses from the budget, while also taking measures to reduce lower priority fiscal expenditures, including adjusting capital expenditures.

The key fiscal target under the PCI was to reduce the debt-to-GDP ratio to 50 percent by 2021. Now, the debt-to-GDP ratio at the end of 2020 is estimated to be 85.7 percent instead of 52 percent as had been projected in the 2020 budget. But the spike is expected to be temporary and the authorities are committed to the broad objectives underlying the PCI. The authorities honored debt repayments of USD18.2 million due in the first quarter of 2020; another USD32.9 million will become payable at the end of the year. The Seychellois authorities remain firmly committed to honor their debt service obligations. They are mindful of the debt sustainability risks.

Monetary policy

The Central Bank of Seychelles is committed to maintain a prudent monetary policy stance and mitigate any pressures from increased capital outflows. The Central Bank lowered the policy rate by 100 basis points, has started providing liquidity support to affected businesses and stands ready to provide FX liquidity to the market to ensure an uninterrupted supply of essential goods and medical supplies to the country, while maintaining its flexible exchange rate policy.

Financing request under the RFI

Seychelles is a small open economy, with a high dependence on tourism, which makes Seychelles very vulnerable to the current crisis. The authorities took strong preventive measures to contain the spread of the virus. Our Seychellois authorities are confident that they will prevail over these challenges and are looking to take necessary measures to revive the economy. Still, owing to the closure of borders and a worldwide freeze on travel, the economic toll is high and the economic challenges are enormous. Seychelles won’t be able to meet the economic challenges alone and the country needs urgent support from the Fund and the international community during these testing times. The Fund’s assistance, together with the World Bank and other donors’ support, will help meet two-thirds of urgent balance of payments needs stemming from the disruption to tourism as a result of the pandemic. We hope that the Fund’s assistance will also help to catalyze additional financing to close the remaining financing gap.