Economic developments, outlook, and risks

Economic recovery in 2021 turned out to be stronger than anticipated at the time of the first review of the program mainly thanks to higher-than-expected tourist arrivals. The real GDP for 2021 increased by 7.9 percent, compared with 6.1 percent forecasted in November 2021. The strong recovery is expected to continue in 2022 driven by further improvement in tourism as well as a pick-up in construction activity. Tourist arrivals during the first four months of 2022 were strong at around 80 percent of those in 2019, an all-time high, and tourism earnings in March 2022 surpassed the 2019 level. Real GDP growth for 2022 is forecasted to reach 7.1 percent, which is roughly the same as what was expected in November 2021 (7.2 percent). This is a remarkable performance when considering that the global growth projection for 2022 was revised down from 4.9 percent in the 2021 October World Economic Outlook (WEO) to 3.5 percent in the 2022 April WEO by 1.4 percentage points.

Likewise, fiscal performance in 2021 was significantly better than projected at the time of the first review. The primary balance deficit (3.0 percent of GDP) outperformed its target for the first review (6.6 percent)—that had already been lower than the original target of 9.1 percent agreed on at the time of program negotiation—by a wide margin. Strengthened revenue collection efforts, robust economic recovery, as well as lower current and capital spending gave rise to this fiscal outperformance, which contributed to partially offset the shortfall in bilateral budget support loans.

Inflationary pressures remained elevated during the first quarter of 2022, despite the downward trajectory partly due to the lagged impact of the currency appreciation last year. In May 2022 the year-on-year inflation rate was 2.1 percent, but the annualized monthly inflation registered at 5.2 percent. In view of the rising commodity and food prices globally, annual inflation is expected to rise to around 6 percent at the end of the year.

The current account balances showed signs of modest improvement with an estimated deficit of about 20 percent of GDP in 2021 compared to about 22 percent in 2020. However, a surge in international fuel and commodity prices is expected to weigh on the external balances this year, with the deficit projected to widen somewhat to 22 percent. Following the significant appreciation of the rupee in 2021, the exchange rate has been stable.

The public debt situation significantly improved, and cost of domestic financing was reduced dramatically thanks to the successful implementation of the liability management operation (LMO) and prudent fiscal consolidation efforts. The public debt level relative to GDP fell from 89.5 percent in 2020 to 76.8 percent in 2021 and is expected to further decline to 75.2 percent in 2022. Now, Seychelles’ public debt is assessed to be sustainable, albeit with risks, which has improved from the previous assessment, “sustainable, albeit with significant risks.”

While the Seychellois authorities welcome the positive economic development and outlook, they noted with concern that the outlook is subject to large risks, including spillovers from the war in Ukraine, the impact of rising commodity and food prices, and pandemic-related travel restrictions and disruptions.

Fiscal policy and public finance management

The keystone of the EFF program remains to attain sustainable fiscal surpluses over the medium term to maintain public debt sustainability. Ambitious fiscal consolidation, together with exchange rate appreciation in 2021 and robust GDP growth, contributed to a big reduction in the public debt to GDP ratio. The primary deficit target in 2022 has been revised up modestly to 1.4 percent of GDP compared to the forecast at the first review partly due to the need to provide targeted, temporary transfers to the most vulnerable households to mitigate the adverse impact of a surge in energy and food prices. Given Seychelles’ vulnerabilities to external shocks, the Government remains committed to returning to its pre-COVID level, around 50 percent by 2026.

The authorities have upgraded public expenditure management and improved the efficiency of public spending. They are taking steps to strengthen a medium-term fiscal framework including the integration of a planning and financing process. A new agency, Seychelles Infrastructure Agency, was created in January 2022 to improve the planning and execution of capital projects across the Government. A Public Investment Management Assessment (PIMA – climate change) is planned to be conducted later in 2022.

On the revenue side, the authorities have sought to widen their tax base with revisions of the exemptions under value added taxes, rationalize business tax, limit deductibility provisions, and uniformize tax rates among sectors. Also, reforms to improve customs tax collection by moving to online services and reducing paper transactions and costs are underway.

The Government has taken various actions to strengthen the management of state-owned enterprises (SOEs). The Public Enterprise Monitoring Commission (PEMC) has become the only authority to oversee SOEs and will conduct governance audit and operational assessment of key SOEs through an independent audit firm. On Air Seychelles, fiscal risks have been reduced with the restructuring of its debt. In early October 2021, the government appointed two administrators as per the requirement of the Insolvency Act. The administrators restructured Air Seychelles and settled its debts with no fiscal cost to the Government and without disrupting ground handling operation. In May 2022, an agreement was reached with the bondholders for 66.7 percent haircut on the company’s debts. By doing so, Air Seychelles has been placed on a more sustainable financial footing and allowed for the subsequent operational restructuring, including ring-fencing of ground handling operation.

The Government continues to improve public debt management following the successful LMO implementation. It started to publish the quarterly issuance calendar for bonds and is developing a secondary market for government securities in consultation with CBS and other relevant stakeholders.

Monetary and financial sector policies.

Monetary policy has been accommodative with the aim to help the economy surmount challenges brought by the pandemic. That said, the Central Bank of Seychelles (CBS) remains vigilant to monitoring inflation dynamics and stands ready to act if inflationary pressures persist. CBS is committed to a flexible exchange rate regime and intervenes only to limit disorderly market conditions and to build external buffers. CBS has made continuing efforts to improve its monetary policy operating framework with several IMF Technical Assistances.

CBS remains committed to ensuring a stable and well-capitalized banking system by effectively monitoring and supervising the health of the financial system. CBS has started unwinding the COVID-19 related support such as the private sector relief schemes for enterprises and forbearance measures. CBS is cognizant of potential risks from growing nonperforming loans and thus will undertake a bank-level assessment of the asset quality, including the impact of unwinding forbearance measures. To strengthen the legal basis of its financial stability mandate, CBS submitted the policy paper on the Financial Stability Act to the cabinet for approval in May 2022. CBS continues to pursue its modernization agenda pertaining to the National Payment System with the aim to develop efficient, convenient, affordable, and innovative payment facilities.

Structural reforms, economic transformation, and governance

The authorities seek to ensure sustainable and inclusive medium-term growth and thus undertake reforms to diversify the economy, deepen economic linkages among sectors and promote digitalization. Continued efforts have been made to diversify the tourism market geographically and to offer a wide range of services while enhancing local value chains with tourism at the center. Priority is given to improving the business environment and developing a national entrepreneurship framework. In this respect, the authorities push forward hard with the digital economy agenda. It includes improving relevant digital infrastructure, digitizing government services, including launching the digital ID system, introducing digital payment systems, and enhancing digital skills and literacy.

The authorities remain committed to accelerating the drive for energy transition with a long-term goal to achieve a decarbonized economy by 2050. Key implementation targets focus on modernizing the entire electricity sector and boosting electricity generation from renewables. The Government is now undertaking the review of energy policy with the help of the World Bank. Seychelles remains vulnerable to climate risk such as severe erosion, waves crashing on coastal roads, and inundations during rainy seasons. The authorities have expressed great interest in tapping a Resilience and Sustainability Trust, once it is ready.

The authorities continue to show progress in improving governance and transparency. After the centralized database of beneficial ownership (BO) became operational in July 2021, 90 percent of legal persons and legal arrangements in the international financial services sector submitted information to the BO database as of April 2022. The authorities remain committed to validate the accuracy of the BO database, including by submitting a periodic strategic analysis report to the National AML/CFT Committee.