Seychelles’ economy expected to contract in 2020 due to Covid-19 |31 December 2020
In 2020, the main international development centred around the outbreak of a new virus – the coronavirus disease named Covid-19 – that first appeared in Wuhan, China, at the beginning of December 2019. To contain the spread of the virus, most countries have imposed restrictions on the movement of people. While such decisions have helped save lives, restrictions on people’s movements have had immediate adverse effects on economic activity across the globe with the tourism and travel trade among the first to be impacted. According to the World Economic Outlook (WEO) published by the International Monetary Fund (IMF) in October 2020, the Fund’s near-term forecast show a contraction of 4.4 per cent in the global economy in 2020. The WEO analysis, which predicts subdued medium-term growth prospects, concluded that this implies “a severe setback to the projected improvement in average living standards across all country groups”. The IMF also cautioned that “the pandemic will reverse the progress made since the 1990s in reducing global poverty and will increase inequality”.
Seychelles’ economy was off to a good start
Prior to the spread of Covid-19 across the globe, the year 2020 had started on a positive note for Seychelles. The early general expectation was that the economy would improve on most fronts, notwithstanding the notable performance already achieved in 2019. Real GDP was projected to grow by 3.5 per cent in real terms, supported by an upbeat services sector on the back of a buoyant tourism industry that was on its way to outperform the new record of 384,204 visitors and income of US $590 million registered in 2019. Consistently, inflows of foreign exchange into the economy were strong after reaching an annual peak of US $721 million, which resulted in a positive annual net inflow for the first time in ten years. Such developments had allowed the country to enhance its external resilience with a further accumulation of official reserves to a new high of US $580 million on a gross basis and US $430 million on a net basis. Moreover, foreign currency deposits held by residents in domestic banks had grown to US $569 million in February 2020.
The economic setbacks
The impact of the Covid-19 pandemic on Seychelles became prominent in April. A total of 11 positive cases were recorded including one case of the virus being contracted locally. To prevent community transmission, a partial lockdown was imposed as from April 09, during which only essential services were allowed to continue. The resulted restriction on movements led to a drastic drop in overall economic activity as many businesses had to temporarily cease their operations. The restrictions were removed on May 04, when most businesses were able to re-open their doors to the public but under new guidelines imposed by the Public Health Authority.
Although such development brought some form of relief, overall, economic activity remained significantly weak. The key reason was that the International Airport was still closed and consequently, activity in the tourism industry, the main pillar of the Seychelles economy, remained at a standstill. Given such development, the fisheries and manufacturing sectors became the main drivers of the economy, although foreign exchange earnings from these activities were unable to fully compensate for the loss in revenue from tourism.
The resulted shutdown of the tourism industry saw a reduction of 12 per cent in visitor arrivals in the first quarter of 2020 compared to the same period in 2019, and close to zero arrivals in the second quarter. Despite the reopening of the Seychelles International Airport for commercial, scheduled flights in August 2020, tourism has continued to perform notably less than normal. As at December 20, 2020, a total of 112,151 visitors had disembarked in Seychelles which represents a decline of 70 per cent compared to the same period of the previous year. Tourism earnings, which in 2019 contributed 76 per cent of the country’s foreign exchange supply, is expected to be at the most, 50 per cent less than in the previous year, in US dollar terms. Based on latest assessments, the economy is projected to contract by at least 14 per cent in 2020.
Since April 2020, foreign exchange inflows converted into the domestic economy has, in general, fallen to around half of the normal daily average of US $3.0 million. As for the stock of residents’ foreign currency deposits in domestic banks, the reduction has been from US $565 million end-December 2019 to US $520 million in October 2020. For a small open island economy that depends heavily on imports, which makes the availability of foreign exchange critical, such developments necessitate some adjustments to the economy. This is particularly important since the drop in tourism-related foreign exchange inflows is not expected to be compensated for by foreign exchange generated by the fisheries sector and other export activities.
Consistent with the market conditions and as expected under a floating exchange rate regime, the Seychelles rupee depreciated against its main trading partners. Against the US dollar, the rupee which traded at an average of R14.06 in the first quarter of 2020 has depreciated to above R21 thus far in December 2020. In relation to the euro, the depreciation of the domestic currency has been from an average of R15.55 in the first quarter of 2020 to above R26 for most days in December 2020 thus far.
The response to COVID-19
To support the foreign exchange market, the Central Bank has, when required, supplied US dollars to ensure that the country’s payments are guaranteed. So far, foreign exchange supports have been in the form of direct sales to the Seychelles Petroleum Company (Seypec) and Seychelles Trading Company (STC) for an aggregate sum of US $22 million, as well as through auctions to commercial banks for a total of US $29 million. Considering the uncertain environment, the Central Bank aims for international reserves, which on December 28, 2020, stood at US $401 million on a net basis, to be available over the longest possible timeframe. This calls for a downward adjustment in expenditure at a private and government level, which should help contain the demand for foreign exchange, limit further depreciating pressures on the domestic currency and, therefore, inflationary threats. Such adjustment is imperative to preserve macroeconomic stability, in view that foreign exchange generated by fisheries and other export activities cannot fully compensate for the drop in tourism-related foreign exchange inflows.
The relative non-existence of international tourism activity also implies a pronounced reduction in aggregate demand in the domestic economy. While many businesses have started to feel such impact, the full extent is difficult to predict given the high level of uncertainty surrounding such development, both locally and across the globe.
To assist businesses impacted by Covid-19, the government has provided financial support to the private sector including to cover loss of income through the Financial Assistance for Job Retention (FA4JR) Scheme introduced in April 2020. In addition, the Board of the Central Bank approved two credit line facilities under a private sector relief scheme to support critical operating expenditures. One amounts to R500 million and is available to Micro, Small and Medium Enterprises (MSMEs).
The facility is administered by the commercial banks and Development Bank of Seychelles (DBS) where financial assistance is provided at an interest rate of 1.5% with a 70 per cent government guarantee. The size of the approved second facility is R750 million targeting larger businesses, where financial assistance is provided by the commercial banks administering the scheme at an interest rate of 4.5% with a 50 per cent government guarantee. Financing provided under both credit line facilities are presently payable over three years, pending approval by the National Assembly to extend the tenor to five years.
To support domestic economic activity and reduce financial stability risks, the Central Bank has cut its policy rate by 100 basis points in the second quarter and a further 100 basis points for the three months ending September 2020, with the latter level maintained at 3.0 per cent for the remainder of the year. Given the slowdown in economic activity and high level of uncertainty, credit from financial institutions has fallen significantly. Additionally, in general, commercial banks have offered a moratorium on loan repayments for both capital and interest offered, as well as access to relevant debt restructuring measures. In order to ensure that financial stability is maintained, should the need arise, commercial banks can call on the emergency lending facility available at the Central Bank.
Consistent with the monetary policy stance, statistics show a decline in interest rates at financial institutions. From 12.36% in December 2019, the average lending rate has fallen to 11.85% in June 2020, with further decline observed in the second half of the year to reach 11.26% in October 2020. The savings rate declined from an average of 2.88% in December 2019 to 2.19% in October 2020.
In terms of fiscal policy, a re-look at the original approved 2020 budget was required, particularly in view that a significant decline in tax collection was anticipated across most categories as a result of the expected fall in economic activity due to Covid-19. Moreover, taking into consideration the government’s inability to achieve a surplus, the strategy to reduce overall public debt to below 50 per cent of GDP by 2021 was reassessed with the target pushed forward by a minimum of five years. At the end of October 2020, total public debt stood at 89 per cent of GDP and is projected to end the year at above 100 per cent of GDP. To cater for possible deficiencies in government revenue and consistent with the Central Bank Act, the Board has approved R500 million as advances to government at an interest rate of 0.0 per cent.
Given the strong correlations between exchange rate movements and domestic prices, the significant depreciation of the domestic currency was expected to filter through domestic prices and, therefore, result in inflation. Higher prices of goods and services have been observed across the country. According to the consumer price index (CPI) published by National Bureau of Statistics (NBS), the overall increase was by 2.2 per cent in November 2020 compared to the same month in 2019, while the 12-month average rate of inflation was by 1.0 per cent.
Path to recovery uncertain and dependent on the course of the pandemic
In terms of outlook, global economic activity is expected to remain uncertain and conditioned on the containment of the Covid-19 pandemic. Significant hope lies in the widespread acceptance and access to an effective vaccine, which should help boost economic activity. In the Seychelles context, growth prospects would depend on a recovery in the tourism industry and therefore, a pick-up in world tourism and travel trade. Nevertheless, the extent of the anticipated 2021 pick-up in activity in Seychelles remains unclear with most analysts being of the view that it will take more than a full year recovery before the 2019 performance is achieved.