CBS maintaining relaxed monetary policy for fourth quarter |27 September 2023

Mr Commettant

The Monetary Policy Rate (MPR) remains unchanged for the fourth quarter of the year, the board of the Central Bank of Seychelles (CBS) decided on Monday.

The rate will remain relaxed at 2.0 percent, on account of the improvement in domestic economic activity, First Deputy Governor Brian Commettant noted yesterday.

The domestic economy continued to be largely driven by the tourism industry, which remained as the primary source of foreign exchange, despite a reduction in estimated tourism earnings in the first half of the year.

Between the months of April up until June, 84,478 arrived in Seychelles, a decrease of 3.5 percent in comparison to the first quarter of the year. Of them, 70 percent hail from Europe, primarily Germany and France, while 19 percent are from Asia.

The sector is estimated to have contributed €205 million, a reduction of 6.9 percent in comparison to the second quarter in 2022, due to a number of factors.

“One of these factors is the changes in the composition of visitors, which also influences spending patterns.

“Another reason is that while the economy is recovering from the Covid pandemic, we have observed that more visitors are opting to stay at guesthouses and self-catering accommodation, whereby revenue per room is less than hotel stays. This tendency means that despite the increase in arrivals, it does not necessarily translate to an increase in revenues generated by the sector,” Mr Commettant stated.

The CBS recorded an uptick in tourism performance in both July and August, with the sector estimated to have contributed €69 million in August, although this represents a reduction of 6.2 percent when compared to August 2022.

As at September 17, 2023, visitor arrivals were higher by 4.7 per cent when compared to 2022, consistent with the positive performance of the traditional Western European markets as well as other regions. In spite of the increase in arrivals, the sector remains somewhat vulnerable in the face of risks including elevated foreign inflation and geopolitical tensions that may negatively affect global demand for travel.

In relation to domestic prices, there has been a decline in average prices of goods and services thus far this year. Prices reduced by 0.6 percent during the second quarter of the year, compared to last year. This was partly attributed to the reduction in global food and energy prices, as well as transportation costs. Additionally, this reflects the appreciation of the domestic currency, all of which contribute towards reducing inflationary pressures in the domestic market.

In the foreign exchange market, the CBS has observed an increase in line with improved domestic economic activity. As at September 22, there was an increase of ten percent in foreign exchange supply and an increase of 5.4 percent in demand in comparison to 2022. The total value supplied was US $678 million, while demand totalled in at $657 million. So far this year, the economy has retained $22 million.

The tourism sector and professional services, construction and the fishing sector are the main contributors of foreign exchange, while commerce accounts for the vast majority of demand.

As at September 22, the foreign exchange reserves stood at $712 million, with the net international reserves at $545 million.

Mr Commettant highlighted that the monetary policy is informed by a number of external factors, including foreign inflation, and global monetary conditions.

Addressing inflation, Mr Commettant stated that despite the fact that foreign inflation is gradually subsiding, it remains above the respective targets of Central Banks. Lower than anticipated demand in China has eased pressure in energy and food prices, thereby meaning that the inflation rate is lower than the 2022 record.

Another important component which has contributed towards lowering inflation is the improvement in commerce, in comparison to during the peak of the pandemic.

However, despite improvements, monetary policy conditions are anticipated to remain tight in various economies, including Australia, Canada and England. This has an adverse impact on economic performance.  

According to International Monetary Fund (IMF) projections, global growth will decline from 3.5 percent in 2022, to 3.0 percent in 2023, and 2024, also on account of weaker manufacturing output and subdued global demand.

In terms of international commodity prices, despite a decline when compared to 2022, prices still remain above pre-pandemic levels.  Oil prices increased in June, primarily due to the reduction in production and supply, coupled with an increase in demand. The reduction in supply is expected to be sustained throughout the rest of the year, and into 2024, which is likely to further increase prices, Mr Commettant stated.

Global food prices are also expected to remain elevated, due to a number of different factors, such as export restrictions on key commodities from India, and the cessation of the Black Sea Grain Initiative on July 17.

In light of the developments, coupled with the vulnerability of the domestic economy, the CBS Board is maintaining an accommodative monetary policy. The MPR remains at 2.0%, with the interest rates on the SDF and SCF kept at 0.5 percent and 3.5 percent, respectively. The Minimum Reserve Requirement (MRR) remains unchanged at 13 per cent of applicable deposit liabilities.

The CBS remains vigilant towards all developments, and stands ready to adjust its policies whenever necessary.

Laura Pillay