How the economy works: A perspective from former finance minister |12 February 2021

To understand the state of the economy today, one must first understand how an economy works.  
There are four main areas of an economy.  They are all connected to each other, but have different roles.  It is very similar to the organs of the body.  For the body to be healthy, all organs must be functioning, and if one or two organs are having trouble, the other organs will have to step in to assist in order to prevent death.  These other organs can help for a while, but not forever.  
In the economy the four sectors are as follows:

Fiscal

This is everything related to Government.  It includes taxes, budget expenditure and the like.

BoP/External

This is everything related to foreign exchange, and basically measures how the country’s importation (things for which we need FX to buy) compares to the country’s exports (things for which we get FX from selling)

Real

This is everything that all of us do during our daily lives, from the amount we save, to the amount we consume, to our decision to seek employment.

Monetary

This is related to the amount of money in our economy and is under the purview of the Central Bank. Even if it is under the purview of the Central Bank, the Central Bank does not have total control, as it will be impacted by developments in the other three sectors.

Government coffers (Fiscal)
The country has been running Primary Surpluses every single year since 2008.  This means that for each of those years, the amount of money coming into the Government coffers (taxes) was larger than the amount of money spent by Government.  
However, in 2020, Government ran a Primary Deficit, which meant that Government spent more than it earned.  It was the first time in over a decade that Government had spent more than it earned; and this was as a direct consequence of Covid-19 and its impact on our economy.  Seychelles was not alone in running a Primary Deficit in 2020.  Most other countries in the region ran one, most countries in the northern hemisphere also ran one, such was the impact of the pandemic.
The statistics to back up these claims are available on the website of the Central Bank of Seychelles and on the website of the International Monetary Fund.

Fiscal stimulus
The main area that Government chose to spend on was on an economic stimulus to prop up the economy.  Once the airports were closed in March 2020, and the tourists stopped coming, the tap would close on a sector that was bringing in USD 3 million a day.  Staff in hotels were being asked to stop work. These tourism sector staff would have had no money to spend – whether it is for food, clothes, equipment, fuel, anything. This would have led to the loss of comfortably over 10,000 to 15,000 jobs.  Let us call these people the Round 1 casualties.
The businesses that rely on those people’s money (grocery shop owners, mechanics, landlords) would then also be very badly affected.  Let us call these people the Round 2 casualties  The businesses that then rely on the expenses of people that are hit in Round 2 would then be hit.  Let us call those Round 3 casualties.  Government itself would be a major casualty once the Round 1, Round 2 and Round 3 casualties have taken place. The banks, which is where the vast majority of the population place their savings, would have also been badly hit.
In a situation with Round 1, Round 2 and Round 3 casualties, there is virtually no economic activity as nobody has any money to spend.  As people are starting to starve, they will try to farm the land they are on, and do some fishing.  People without land are in a bit of trouble in such a situation.  With such a drastic drop in value addition in the economy, there will be no taxes, so no revenue for Government – and along with that would go a large number of public sector jobs.  
It is hard to picture such a scenario because we are so developed today.  Most of the gains that the country has made is now taken for granted.  
Given this bleak outlook, Government came to the conclusion that it would shoulder the cost of preventing Round 1 so that Round 2 and Round 3 would not happen.  An economic stimulus package can come in various forms.  Some countries just give everyone an equal one off sum and hope they spend it.  Australia did this about a decade ago where it gave its citizens approximately 1,000 Australian dollars for each child in their care. Covid caused a large number of countries to introduce very large stimulus packages.  The US chose to give all adults earning less than USD 6,000 a month a cheque for USD 1,200 along with other measures worth approximately 10% of GDP (USD 2 trillion dollars). In the UK they introduced the furlough scheme where the Government covered approximately 80% of a person’s wages up to a cap GBP 2,500 a month.  UK’s total stimulus package has been estimated to cost approximately 13% of GDP, of which the furlough scheme is expected to have cost approximately 3.5% of GDP.  
Here, Government opted to pay wages of the staff of most companies who were hit, including registered, self-employed individuals.  The programme was called Financial Assistance for Job Retention (FA4JR), with an accompanying body to retrain and reskill individuals that had been made redundant.  The total cost of the scheme for 2020 is approximately R1 billion, which is roughly 3% of GDP.  Despite the accusations of abuse and irresponsible generosity, the scheme is a lot less generous than schemes of other countries whose economies are a lot less dependent on tourism-like sectors.  
As a consequence of the programmes that Government put in place here, mass lay-offs were avoided and Round 1 casualties were kept to a minimum.  Round 2 and Round 3 did not occur.  This is supported by the statistics.  

Foreign Exchange (BoP/External)
In 2019, the economy generated more foreign exchange than it spent.  More money came in than was spent on imports. To be exact, USD 47 million more.  This net inflow is not “Government’s money”.  Instead it is a consequence of all the foreign exchange that came into the economy as a result of everyone’s hard work – whether it is the chambermaid in the hotel, the mechanic fixing a car so a plumber can go fix a pool at a guest house, the Immigration officer allowing tourists to enter, the teacher producing tomorrow’s chefs or the dentist that ensured the accountant could go to work.  Each and every one of us who work in the economy have an important role in the performance of the economy.
Covid put paid to this progress.  The reduction in tourism vastly reduced the number of dollars flowing into the country.  With Government stepping in and providing economic stimulus, we had roughly the same number of rupees in the economy.  With the same number of rupees, but fewer dollars, it is expected that the number of rupees for each dollar would increase.  And we saw that happen.
In January 2020, a dollar was worth approximately R14.04.  In October 2020, a dollar was worth approximately R18.97.  This was after the airport and borders had been shut for [three] months.  
In March 2020 when we closed the airport, the country’s International Reserves was USD 438m.  International Reserves is a measure of the country’s savings in hard currency.   At the time, the Governor of the Central Bank had told us that if we were not careful, it would run out in 18 months.  Thanks to the effort of all of us, we were able to watch over these reserves.  In October 2020, when I left the Ministry of Finance these reserves were at a respectable USD 432 million.  At today’s exchange rate of 21.5 rupees to the dollar, that corresponds to SCR 9,288,000,000.00 or SCR 9.3 BILLION.  
The statistics to back up these claims are available on the website of the Central Bank of Seychelles.

Employment (Real)
The number of formal jobs in Seychelles in October 2020 was at 51,812 jobs.  This is lower than the 55,805 that existed in December 2019, just before the pandemic hit.  However, it was still higher than the 45,776 jobs that the economy had when I became Minister in 2016 – something for which I am very proud of my compatriots since it was the effort from all of us which allowed this to happen.
As a result of Government’s Covid programmes, although the total number of jobs dropped by 4,000 between January and October – it was expatriates who bore the brunt of the hit.  
Unemployment in October 2020 was less than 4%.  
The statistics to back up these claims are available on the website of the National Bureau of Statistics.

Poverty
A recent publication by the National Bureau of Statistics and the World Bank confirmed what the majority of poorer people already knew.  Over the last four years, poverty has been reduced.  From a figure of 39%, announced just before the 2015 elections, to 25%, announced just after the 2020 elections.  The main reduction was a result of the increase in payments to the elderly, an improvement which solidified their ability to maintain their dignity in their old age given the fact that our level of development today is in large part thanks to their hard work. 
The statistics to back up these claims are available on the website of the National Bureau of Statistics.

Public debt
I took office with public debt at 64% of GDP.  In 2019, this number had dropped to as low as 59% of GDP.  In 2020, as Government put in place the measures to protect the economy, this increased.  In October 2020, it had reached 89% of GDP.
If you can afford not to take on debt, then you should avoid it.  However, it is difficult for a country to develop if it does not take on debt.  The fact that the USA, UK, France, Canada and numerous others have debts above 100% are proof of that.  Most people and businesses also take on debt in their lives – not because they are poor or silly – but because it empowers them to grow. 
The statistics to back up these claims are available on the website of the Central Bank of Seychelles.

Health
Covid was declared a global pandemic in January 2020, under the watch of former President Danny Faure. We had a close call with Patient 11 at the end of March 2020 – a staff of Air Seychelles.  However, quick decisive action to restrict movement between 8th of April and 4th May ensured that we did not have community transmission.  
In October 2020, Government had managed to limit the number of positive cases in Seychelles to 158 of which the vast majority was caused by the Seafarer situation in July 2020.  The day after elections, 155 of the 158 had recovered.  There were three active cases – all in quarantine and all non-Seychellois.  
At that point there had been NO deaths due to Covid in Seychelles.  
The programmes put in place to safeguard the economy and minimise shock to the population also had a Health aspect to them as they acted to minimise psycho-social impacts on the population.  Time will tell whether we were right to take this into consideration.
The statistics to back up these claims are kept by the Department of Health.

Summary
Prior to Covid, Seychelles economy was doing well.  The number of jobs in the economy was growing faster than the local population and expatriates had to come in to help.  More foreign exchange was coming into the country than was leaving.  Government was collecting more money than it was spending and was using the surplus to pay off its debts to get to a target of 50% debt to GDP by 2021. Poverty was reducing.  
However, Covid came in and slammed the brakes on our progress.  In fact, it put the country into reverse.  It put virtually the whole world into reverse with almost all countries experiencing negative economic growth (i.e. a contraction).  
The programmes Government introduced were aimed at slowing down the reverse speed.  These measures were not perfect.  However, they were conjured up in consultation with stakeholders and were working.  This view is backed up by the prevailing statistics in October 2020 as I have outlined above.

Thank you for sharing my views with your readers.

Maurice Loustau-Lalanne

Former Minister for Finance