Conclusion of the second review under the IMF Extended Fund Facility (EFF) |10 May 2022
Minister for Finance, National Planning and Trade, Naadir Hassan; Central Bank of Seychelles Governor Caroline Abel; IMF and finance department representatives in a souvenir photo (Photo: Contributed)
Macroeconomic outlook favourable, but challenges remain, says IMF
By Roland Duval
The macroeconomic outlook is favourable, but challenges remain and in the short run, spill-over effects from the war in Ukraine are expected to weigh on the external and fiscal balances in 2022 due to a surge in commodity prices.
The above statement is part of the conclusion of the second review of the International Monetary Fund (IMF) mission on Seychelles’ economic and financial programme supported by the Extended Fund Facility (EFF) Arrangement, and the 2022 Article IV consultation.
Led by Boriana Yontcheva, the IMF delegation has been in the country from April 26 to May 9, conducting discussions on the second review of the programme.
The EFF arrangement, for the duration of 28 months over 2021 and 2023, seeks to support the government’s policy and reform efforts aimed at reinforcing the country’s recovery from the pandemic, preserving macroeconomic stability, and sustaining inclusive long-term growth.
The programme was initiated after the domestic economy plunged into a critical state as a result of the Covid-19 pandemic and the drastic decline in travel, tourism and related sectors, reaching a point where governmental obligations, including payments of services and salaries were becoming a major concern, thus necessitating reforms towards a more stable domestic economy and brighter economic future.
In a press conference held yesterday at the Liberty House in Victoria, Minister for Finance, National Planning and Trade Naadir Hassan, along with Ms Yontcheva gave an overview of the programme so far, including benefits it has brought for the country, along with present and future challenges, based on external factors, including the present Russia-Ukraine conflict.
Minister Hassan explained that at the beginning of the programme, the economy had declined by about seven percent, while in 2021, it grew by eight percent, with the government anticipating an additional growth of seven percent this year.
This, he said, is associated to the recovery of the tourism sector, along with the related businesses within the sector.
On a budgetary aspect, Minister Hassan explained that in 2020, the country made a deficit of 15.4 percent of gross domestic product (GDP) after recovering way less than the spending.
He said in 2021, the deficit was cut down to three percent of GDP, and this he said, was a massive improvement, based on recovering more money in terms of revenue and also better management of expenses, allowing the budget and debt to be more sustainable..
Minister Hassan added that in 2020, the country’s debt was 93 percent of GDP, while today it has reduced to 76 percent of GDP, and that based on forecasts, the government is anticipating that by 2026, the debt will be fewer than 50 percent of GDP.
He explained that a low debt is important as it acts as a buffer to sustain the economy against unexpected shocks.
He added that there have also been contingent liabilities such as Air Seychelles which had a debt of over US $14 million that has now been reduced following several negotiations.
Minister Hassan further explained that after all the debts are cleared, Air Seychelles will have to restructure its operating pattern to prevent a repetition of the previous situation.
He said since the ground handling is vital in the company’s operation and a crucial national asset it has to be ring-fenced and set aside from Air Seychelles as a way of protecting it, in case the airline faces future difficulties.
Even if the economy is recuperating, Minister Hassan explained that there are still various risks based on external factors, especially the Russia-Ukraine conflict, which is affecting, especially the cost of living, while the tourism sector remains resilient.
Regarding the cost of living, Minister Hassan explained that the main focuses of the government is to make sure of the availability of basic commodities, and also to ensure that people on lower salaries can still afford the commodities on the market.
He noted that based on discussion with the IMF, following the improvement in the economy, a mechanism will be put in place to assist those on lower salaries with a supplementary income.
This, he said, is still being worked on and will be announced in the coming weeks.
In its end-of-mission press statement, the IMF said the Seychellois economy strongly recovered in 2021, but spill-over effects from the war in Ukraine are expected to weigh on the external and fiscal balances in 2022 due to a surge in commodity prices.
It added that the government made impressive progress in implementing the EFF and restoring macroeconomic balances, meeting all quantitative targets under the programme, while maintaining the build-up of buffers against shocks remains critical in the current global environment.
In her report, Ms Yontcheva said the Seychellois economy strongly recovered in 2021 with real GDP growing to an estimated 8 percent, driven by a swift rebound of the tourism sector.
She said in spite of the deterioration of the international environment associated with the war in Ukraine, tourism earnings in March 2022 surpassed the 2019 level and GDP growth is expected to reach 7 percent in 2022.
She added that the price inflation rose to 10.1 percent in December 2021 up from 1.2 percent in 2020, reflecting the lagged impact of the large depreciation of the rupee in 2020 as well as pandemic-related cost-push factors but declined to 2.2 in March 2022 due to the impact of the 2021 appreciation of the currency.
Looking ahead, she noted that the surge of global prices is expected to bring inflation to 5.7 percent at the end of the year.
“The primary fiscal deficit declined from 15.4 percent in 2020 to 3 percent of GDP in 2021 over-performing programme targets by 3.3 percent of GDP‒ mainly owing to gains from strengthened revenue efforts, and lower current and capital spending,” noted Ms Yontcheva who added that the authorities’ efforts have substantially reduced debt vulnerabilities.
She further noted that combined with the strong recovery, the successful implementation of the liability management operation and a sharp appreciation of the currency in 2021, the ambitious fiscal consolidation has substantially reduced debt vulnerabilities, while the debt-to-GDP ratio declined to around 76 percent of GDP in 2021 from 93 percent in 2020.
She also added that the government has made impressive progress in implementing the IMF-supported programme and restoring macroeconomic balances. All end-December 2021 quantitative targets under the programme were met ‒ some, including the fiscal primary balance target, by a wide margin, while the broader structural reform agenda is also moving ahead.
“The government is pursuing its commitment to bolstering governance and fighting corruption. As of end April 2022, ninety percent of the international business companies submitted information to the beneficial ownership database launched in July 2021. The authorities are pursuing efforts to ensure accuracy and availability of the collected information,” she added.
Ms Yontcheva also noted that the Central Bank of Seychelles (CBS) has maintained an appropriately accommodative monetary policy, while it continues its efforts to strengthen the Seychelles monetary policy framework and closely monitor financial sector soundness to reinforce banks’ ability to support the recovery.
To conclude, she noted that in the long run, Seychelles’ open economy remains highly vulnerable to external shocks and climate change. Maintaining the build-up of buffers against shocks remains critical in the current global environment and requires the continuation of prudent macroeconomic policies and the safeguarding of international reserves.