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, in light of continued support for the administration among the electorate.
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. Tourist arrivals grew by a meager 1% despite concerted efforts to diversify markets, and tourism receipts fell by 8% 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.
Fiscal policy remains anchored in reducing public debt and further reducing external vulnerabilities. The Government maintained a primary fiscal surplus of 4.6% of GDP through a combination of expenditure containment and robust revenue effort that compares very favorably with other middle income small states. Revenue collection in 2014 was better than expected due to growing domestic demand and robust import tax collection. Overall, public expenditure increased in part due to salary increase granted to civil servants in 2014 and unexpected support to Air Seychelles, although it was partially compensated with a reduction in public investment due to implementation delays. Despite the primary fiscal surplus, debt valuation associated with the appreciation of the US dollar, together with the issuance of more debt for monetary purposes, increased the debt to GDP ratio from 64% in 2013 to 65% in 2014.
The current account deficit worsened putting pressure on the Seychelles rupee. The current account deficit deteriorated to 21% of GDP in 2014 compared to 11.5% 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 8% in 2014. Given Seychelles high trade openness, growing domestic demand has translated into higher demand for imports that grew 7% in 2014, at a time when exports fell by 2%. Foreign direct investment, which stood at 14% 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) tightened monetary policy in the second half of 2014 to curb the inflationary effects of the Seychelles rupee depreciation and contain credit growth, bringing inflation down from 3.4% in 2013 to 0.5% at the end of 2014. The CBS revised downward its reserve money target and expanded its open market operations with treasury bills, raising interest rates on treasury bills from 3.5% (August 2014) to close to 10% (April 2015). The Treasury and CBS also agreed to issue medium term treasury bonds representing 4.5% of GDP to mop up excess liquidity in the banking system. The CBS continued to build up international reserves from 3.7 months of imports in 2013 to 4.6 months in 2014, sterilizing them, and helping to resolve the excess liquidity in the financial system that undermined the monetary transmission mechanism.
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 a 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 tourism 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: Oct 05, 2015