Independent since 1976, Seychelles is a relatively young democracy that enjoys a stable political system. The first multiparty presidential election was held in 1993, after the adoption of a new constitution. In the last election (May 2011), the incumbent president, James Michel, was reelected for another five-year term with a comfortable majority (55% of votes). More than three years into his second term as president, James Michel will probably remain in power during the forecast period without significant challenges. He is well positioned to run for a third and final term in the 2016 election, because of continued support for the administration among the electorate.
Since his double election victory, the president has sought both to advance economic reform and to impose his authority on the long-standing ruling People's Party (PP; also known as Parti Lepep), which still harbors quasi-socialist and mercantilist elements. The PP has firm control over the National Assembly, as the two main opposition groups, the Seychelles National Party (SNP) and the smaller Seselwa United Party (at the time called the New Democratic Party), boycotted the 2011 legislative poll in protest at the government's failure to introduce electoral reforms. As a result, the PP holds all 25 directly-elected seats and six of the seven proportional representation seats. A court of appeal granted one proportional representation seat to a newer opposition party, the Popular Democratic Movement (PDM).
Following a major crisis in 2008, Seychelles has managed a remarkable turnaround in restoring fiscal sustainability and laying the groundwork for growth. Having successfully exited from crisis, the government’s attention has turned increasingly toward consolidating progress on debt sustainability and increasing resilience by putting Seychelles on a higher, private sector-led growth trajectory.
Affected by the economic slowdown in Europe, economic growth decelerated in 2014. The tourism and manufacturing sectors grew at a slower pace than anticipated. The tourism sector grew by a meager 1% despite concerted efforts to diversify markets, and tourism receipts fell by 3% due to exchange rate fluctuations. The manufacturing sector also performed below par, notably the fish processing sector, following a significant decline in the price of raw tuna. The effects of storage on fishing activities as well as the depreciation of the US dollar weighed heavily on the cash flow of operators. This was partially compensated by stronger domestic demand, associated to some government programs and salary increases in 2013.
Primary fiscal surplus continues supported by expenditure containment, which supports reduction of public debt. The primary fiscal surplus for 2014 was 4.3% of GDP. Revenue collection was below expectations due to lower taxes on international trade as the country prepared accession to the World Trade Organization (WTO) and the Southern Africa Development Community (SADC) as well as lower receipts from business taxes, which is principally explained by lower growth in domestic output. This was compensated with a reduction in public investment. The government’s primary surplus will help achieve the debt reduction target of reducing the debt-to-GDP ratio to 50% by 2018.
The current account deficit worsened putting pressure on the Seychelles rupee. The current account deficit deteriorated to 18.4% of GDP in 2014 compared to 16.9% of GDP in 2013. The economy is facing strong balance of payments pressures as tourism revenues, which account for more than two thirds of the country’s foreign exchange receipts; fell by about 3% in 2014. Given Seychelles high trade openness, growing domestic demand has translated into higher demand for imports that grew 7.5% in 2014, at a time when exports grew by only 2%. Foreign direct investment, which stood at 16.5% of GDP notably in the tourism and hotel sector, has to a large extent financed the current account deficit thereby minimizing the impact on external debt. The economy continued to build up international reserves from 3.6 months of imports in 2013 to reach 4.1 months in 2014.
The Central Bank of Seychelles (CBS) continues to tighten monetary policy to bring down inflation from 4.3% in 2013 to 2.3% in 2014. Excess liquidity in the banking system is being resolved. In 2014, the building up of international reserves has been sterilized and has helped to resolve the excess liquidity in the banking system that reached 7% of GDP in 2013, undermining the monetary transmission mechanism. The Treasury and CBS agreed to issue medium term treasury bonds representing 4.5% of GDP to mop up excess liquidity. The CBS also revised upwards the Standing Deposit Facility rate from 1% (since August 2010) to 1.75% in August 2014.
A number of downside risks to the economic outlook remain. The European recovery is fragile and remains vulnerable moving forward. As a result, the tourism sector may be adversely affected, further reinforced by the instability in the Russian market, one of the main markets. On the domestic front, the key downside risk to the economic outlook remains the ability of the government to implement its reform agenda, particularly in areas which most support economic growth in the near-term. On the positive side, recent developments such as diminishing oil prices will have positive impact on the balance of payments, partially compensated by the dollar appreciation given the larger exposure of Seychelles to the European market for its exports (i.e. tourism receipts). However, the risks are manageable. The economy remains highly dependent on tourist but diversification to non-traditional tourism markets continues. Credit and money growth is being curbed and the exchange rate is being adjusted. The government’s comfortable external reserves, a flexible exchange rate, high government deposits, and a fiscal surplus provide some bulwark against external shocks.
Last Updated: Jun 23, 2015