Seychelles’ economy continued to recover in 2023, amid persisting global uncertainties and challenges |29 December 2023
International developments
In 2023, the global economy continued to recover from the adverse impacts of the Russia-Ukraine conflict and the abating effects of the Covid-19 pandemic.
The successive increases in interest rates by central banks globally, coupled with the moderation in international commodity prices, led to the gradual easing of inflationary pressures in most regions. Nonetheless, inflation remained above the targets of key central banks. The tighter monetary conditions that resulted from the higher interest rates weighed down on investment, consumption and real estate activity. As a result, global economic growth was slow and uneven, with widening divergences between advanced economies and emerging markets. According to the World Economic Outlook report of October 2023, published by the International Monetary Fund (IMF), the global economy is projected to grow by 3.0 per cent in 2023, compared to 3.5 per cent in 2022. However, in the latter half of 2023, new uncertainties emerged in light of the escalation of the latest conflict in Gaza between Israel and Hamas that broke out on October 7, 2023, which has resulted in a resurgence of fears among investors on its possible repercussions on the global economy.
In regard to international commodity prices, there was a moderation in both oil and food prices in 2023 relative to the previous year. Oil prices maintained a downward trend during the first half of the year under review. Brent crude oil spot price averaged US $78 per barrel in Q2 2023 from US $114 per barrel in Q2 2022. However, it rebounded as of July 2023, mainly on account of the oil production cuts effected by the Organisation of the Petroleum Exporting Countries plus selected non-member countries (OPEC+). In addition, there were further voluntary reduction in oil production by Saudi Arabia and Russia. Brent crude oil spot price averaged US $87 per barrel in Q3 2023. Despite the higher prices in the second half of the year, in annual terms, Brent crude oil spot price is expected to end the year at US $84 per barrel, from US $101 per barrel in 2022. As for food prices, there has been a gradual decline, largely due to the normalisation of supply chains. According to the Food and Agricultural Organisation’s food price index, as at November 2023, food prices reduced by 14 percent in year-to-date terms compared to the same period in 2022.
The year 2023 was also marked by a moment of significant financial instability and uncertainty for the global banking sector. The banking turmoil that occurred in the United States (US), which saw the closure of three US banks and the collapse of Credit Suisse in Switzerland in March 2023, shook the global financial sector and exposed the vulnerabilities of banks. Fortunately, regulators reacted swiftly to prevent these incidents from spreading in the global financial sector. Nonetheless, the two events have highlighted the need for more regular compliance and risk management checks within the banking system.
Domestic developments
On the domestic front, tourism remained the main driver of economic activity. As at December 24, 2023, total visitor arrivals amounted to 342,306, a growth of 5.6 per cent compared to the same period in 2022. This was mainly driven by a notable increase in the number of tourists from the traditional western European markets, namely Russia and Germany. Conversely, the number of visitors from other regions, such as the United Arab Emirates and Israel, declined. In the latter’s case, this was mainly attributed to the impact of the conflict in Gaza.
In regard to tourism earnings, it is estimated at US $873 million from January to November 2023, an increase of 1.3 per cent compared to US $862 million recorded over the same period in 2022. Nonetheless, the average yield per tourist as at November 2023 was 3.4 per cent lower than for the same period last year. This outcome was due to a reduction in the number of tourists from the high yielding markets that were dominant during the period most impacted by the Covid-19 pandemic.
Nevertheless, tourism remained the primary source of foreign exchange in Seychelles. In year-to-date terms, both supply and demand for foreign exchange were higher relative to 2022. In the first quarter of 2023, total supply exceeded demand for foreign currency, supporting an appreciation of the Seychelles rupee (SCR) against the US dollar. However, the seasonal pick-up in demand led to a depreciation of the SCR vis-à-vis the US dollar as of the second quarter of the year. The rise in demand for foreign currency was mainly associated with increased level of imports in preparation for the end-of-year festivities. From an annual average perspective, the rupee traded at a rate of R14.02 to the US dollar as at December 27, an appreciation of 26 cents (1.8 per cent) compared to the same period in 2022. In relation to the Euro, the domestic currency traded at a yearly average of R15.17 over the same period. This was a depreciation of 11 cents (0.7 per cent) relative to the same period last year – partly reflective of developments in international currency markets.
According to preliminary projections, the country’s external position improved in 2023 relative to the previous year. The current account deficit narrowed from 8.0 per cent of gross domestic product (GDP) in 2022 to 5.6 per cent of GDP in 2023. This was largely attributed to an increase in the total value of goods and services exports for the year, which was US $21 million higher than in 2022, primarily on account of a higher value of canned tuna exports. In regard to tourism earnings, which is the main component of export of services, it rose by US $2.0 million compared to the preceding year. As for the gross international reserves (GIR), this stood at US $692 million as at December 12, 2023, equivalent to 3.9 months of import cover. This was an increase from end-2022 reserves level of US $639 million (or 3.4 months of import cover).
Regarding movements in the general level of domestic prices, there was a gradual decline in inflationary pressures as of May 2023 and this is expected to persist till the end of the year. Such outcome was on account of several factors, namely, the stronger domestic currency in year-to-date-terms, the moderation in international commodity prices as well as the normalisation of freight cost.
In terms of statistics, in November 2023, the consumer price index was 2.6% lower than the same period in 2022. As for the 12-month average, it reflected a decrease of 0.6%.
The Central Bank of Seychelles (CBS) maintained an accommodative monetary policy stance in 2023. Notwithstanding the improvement in economic activity, the bank was cognisant of the country’s susceptibility to external shocks and the need to provide continued support to the domestic economy.
The monetary policy rate was kept at 2.0% and the interest rate on the standing deposit facility and standing credit facility stood at 0.5% and 3.5%, respectively. As at October 2023, the average interest rates on savings and lending stood at 1.5% and 9.6%, correspondingly, compared to 1.5% and 9.3% at the end of 2022. Credit disbursed to the private sector was higher in 2023 compared to 2022, on account of increased loans extended to non-traditional sectors such as ‘Telecommunications, Computer an Information’ and ‘Health’. As a result, in October 2023, the stock of private sector credit grew by 8.8 per cent compared to the same period in 2022.
On the fiscal front, the improved economic performance allowed the Seychelles government to collect higher revenue through taxes compared to the previous year. Notwithstanding this, there was also an increase in expenditure relative to 2022. Overall, total revenue is projected at 33 percent of GDP from 31 percent in 2022. As for expenditure and net lending, it is anticipated to be higher in 2023, at 37 per cent of GDP from 33 percent in the previous year. However, developments related to the disasters in the first week of December 2023 may impact revenue and expenditure in the coming months, given policies being introduced to assist affected households and businesses. The explosion has caused significant structural damage to several buildings at the Providence Industrial Estate and households within the surrounding areas and disrupted the operations of many businesses, causing them to be financially impaired in the short term. The resulting impacts of the blast, coupled with the effects of the adverse weather conditions on several households in the north of Mahé have brought forth many challenges and uncertainties. This relates to reconstruction works and the resumption of operations for businesses impacted by the explosion. In addition to the banking sector’s offering of a three-month moratorium on debt repayments for affected businesses and case-by-case consideration of moratorium periods for individuals impacted by the disasters, the government is also extending fiscal support to those affected. This is expected to increase government expenditure; conversely, lower fiscal revenue is anticipated in light of the reduced economic activity in the first half of 2024.
The government remained committed to fiscal consolidation in 2023 in line with its strategy to reduce public debt to sustainable levels by lowering short-term debt exposure while increasing the issuance of longer-term securities in the form of Treasury bonds. As a result, total public debt is projected to fall to 64 per cent of GDP in 2023, from 65 per cent in 2022. The government remains committed towards achieving a debt target of around 50 per cent of GDP by 2030. Furthermore, in September 2023, Seychelles maintained a credit rating of ‘BB- ‘with a stable outlook from Fitch Ratings. According to the credit rating agency, the rating was supported by relatively high-income levels,strong World Bank Governance Indicators, support from multilateral creditors, and stable policymaking.
In 2023, the government introduced a new salary structure for the public sector. In addition, there was a 10 per cent increment in salaries for public sector employees. Furthermore, given the improvement in economic activity in 2022, government resumed payment of the 13th month salary in January 2023, of which 50 per cent was guaranteed and the other 50 per cent was performance based.
In its quest to continue supporting sustainable growth and maintaining good international relations, the authorities also continued to engage with its key partners, notably the IMF, World Bank and other regional bodies. On December 4, 2023, the IMF executive board completed its first review of the current arrangement under the Extended Fund Facility (EFF) and the Resilience and Sustainability Facility (RSF). Following such, Seychelles benefitted from a disbursement of US $12.3 million. Such funds, along with other budget support programmes, help to bridge the financing gaps in the short to medium term. Additionally, the funds received under the RSF are anticipated to open more avenues for financing and investment in climate-related projects.
Outlook
Looking ahead, the domestic economy is forecasted to grow by 4.0 percent in 2024, mainly supported by the tourism and fishing industries. Nevertheless, given the economy’s vulnerability to external developments, several global economic challenges may impact this outlook. Despite the lower international commodity prices observed in 2023, they are subject to many upside risks. In the case of oil prices, the main driver is the OPEC+ production cuts, which may cause an increase in prices. Additionally, the possible escalation of Gaza conflict may further put upward pressure on oil prices, in view that the region consists of major oil exporting nations. Food prices are also subject to several upside risks. Supply reductions attributed to export restrictions of key commodities by various countries, the cessation of the Black Sea Grain Initiative as of July 2023 as well as climate-related phenomenon, such as the severe dry weather conditions associated with the El Niño event may affect the production of food and thereby cause a rise in international food prices. In turn, this may trickle down to the domestic economy in the form of higher prices of goods and services.
The contraction in European economies, which resulted from the tighter monetary conditions have affected household income. More so, the escalation of the conflict in Gaza has reduced the propensity to travel, particularly for visitors in the Middle East such as Israel. Should such conditions persist, this may affect the tourism industry in Seychelles, and given the significance of the sector, it could in turn impact the domestic economy.
Aside from international factors, domestically, the December disasters have impacted the improved recovery of economic activity and indicate a new challenge for the Seychelles economy. While there is a concerted effort by various local stakeholders as well as bilateral partners to assist this endeavour, the full restoration of the damages caused will be dependent on several factors, such as the timing and extent of insurance claim pay-outs and the availability of construction materials.
Mindful of these realities and risks, appropriate policy alignment may help address the challenges ahead and ensure macroeconomic stability.
Contributed