Impact of External Factors on Seychelles

PESA Editorial - Seychelles - 1Q2017/18

The top two trade agreements signed by this small island are the Common Market for Eastern and Southern Africa (COMESA), and the Cotonou Partnership Agreement (CPA). COMESA is a free trade area that was formed in December 1994, taking the place of a Preferential Trade Area (PTA) which was in existence since 1981. It is made up of 19 member states and the Seychelles joined in 2009. During 2008, COMESA reached an agreement to have an expanded free trade zone by including members of two other African trade blocs, which is the East African Community (EAC) and SADC1.

 

In a recent state-visit by the president of Seychelles, Danny Faure, to Kenya, an agreement between Kenya and Seychelles was signed which will lead to the expansion of the two countries’ trade and security. The president of Kenya, Uhuru Kenyatta, said that they reached a deal with Seychelles to have the two countries participating in tourism development through the partnership of the agencies that manage these sectors in the two countries. Seychelles has also shown interest in employing Kenyan teachers who will add value to the education sector of this island nation.

 

Kenyan Airways has also reached a decision to increase its flights to Seychelles, this is for the purpose of enhancing the close-cooperation between the two countries2. While delivering his speech, President Faure said that it is efficient to import beef and poultry from Kenya rather than going all the way to Brazil, they are also committed to help Kenya develop its maritime sector, more especially the fishing industry and also developing its blue economy so as to improve the security of its Exclusive Economic Zone. A framework for a two-centre destination will be developed for the country where they will work together to promote their tourism products3.

 

These two countries have also reached an agreement to fight illegal fishing in the Indian Ocean, which borders the two countries. They have agreed to share intelligence and ways to fight drug trafficking, piracy and terrorism in the Indian Ocean. This agreement is important because it helps develop the two countries’ strong contributors to economic growth and well-being of their citizens. It makes economic sense to create strong ties and trading relationships. Due to this relationship, we can expect an improvement in the tourism, regional trade and investment for Seychelles.

 

The CPA is a treaty which was signed between the European Union and the African, Carribean and Pacific Group of states (ACP countries) on 23 June 2000 in Cotonou by 79 ACP countries. The fundamental principles of this agreement are global participation, making sure that there is equality amongst the partners, dialogue and regionalisation. This agreement was later revised in March 20104. The European Union (EU) has recently funded a project to build a fish market and gear store on La Digue, which is the third most populated island of Seychelles. The cost of this project is USD 201 000 (SCR2.7 million) and is expected to benefit over 60 fishermen on the island. The fishermen will now have proper infrastructure to display the fish that they are selling instead of selling directly from their boats. The EU has also agreed to finance the building of four fish processing units at Bel Ombre and the cost of the project is about USD 669 000 (SCR9 million) and is in its final stage. These projects will basically make the lives of the fishermen easier when they are executing their duties, add value to their products and improve the benefits their customers5.

 

Since 2008, Seychelles’ public debt stock has been on a downward trend. There was a decrease in the total debt stock from 150% of GDP at the end of 2008 to 68% of GDP (SCR13.130 million) at the end of October 2016. Compared to the average total public debt of emerging markets and developing economies, the Seychelles total public debt is about 21% higher. Seychelles’ government must introduce new policies to maintain its debt in order to ensure that it is at least consistent with the level of debt of the rest of the region.

 

As at the end of October 2016, external debt stock, with the inclusion of guarantees was USD 421.01 million, this represents 29% of GDP in 2016, whereas in 2012 this debt was 42% of GDP. The country’s four main groups of creditors are the multilateral and bilateral organisations, commercial banks and private creditors. Private creditors are form the largest group and account for 38.1% of external debt. Multilateral organisations are the second largest group, making up 31.4% of external debt. The African Development Bank and the World Bank being the largest multilateral banks make up 68% (SCR1.2 billion) of the multilateral debt. Bilateral organisations, in the form of debts to sovereign countries, make up 21% of external debt, while, commercial banks only account for 9.5%6. During 2016, the rupee traded at SCR13.3199 against the US dollar and SCR0.9096 against the South African Rand, reflecting a depreciation of the Seychelles Rupee against both currencies7.

 

With the US interest rate hike announced in 2015, the depreciation of the Rupee against the US dollar, and Seychelles’ external debt being denominated in US dollars, means that Seychelles is now faced with rising debt repayments.

 

In the year 2016, the Seychelles’ current account was in a deficit, largely attributed to the fact that most of what is being consumed or utilised as input locally is imported. Estimates reveal a deficit of USD 261 million or 18% of GDP. Financing of the current account deficit from the financial account in 2016 was USD 195 million, which is an increase of USD 21 million when compared to 2015, with foreign direct investment (FDI) as its main components. The inflows of FDI in 2016 are forecast at about USD 10 million less than 2015. The tourism industry and fisheries sector represent a large share of foreign investments, but offshore companies also contribute to FDI in the country8.

 

Seychelles’ economy is expected to perform well in 2017, especially with regard to tourist arrivals and increasing foreign investment. However, the country still suffers inefficiencies when it comes to diversifying its economy and vulnerability to external shocks, due dependence on tourism and fisheries as the main drivers of the economy. As a small archipelagic country, Seychelles is becoming increasingly prone to natural disasters as a result of climate change. Because the economic costs of such events could be large and unpredictable, authorities, with the help of the international community, need to come up with a medium-term strategy that would create additional fiscal space for the purposes of undertaking the necessary climate change mitigation and adaptation measures. The IMF suggests that climate change needs to be incorporated into public financial management and the options for risk sharing have to be carefully considered. All in all, growth in Seychelles needs to become greener so as to protect its fragile natural environment.

 

Current Affairs Update

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IMF staff visits Seychelles

From 22 March to 4 April, an IMF staff team paid a visit to Victoria for the sole purpose of discussing the 2017 Article IV consultation, and the sixth review under the Extended Fund Facility (EFF) arrangement with Seychelles. The IMF is monitor Seychelles’ progress in terms of meeting its obligations under the EFF agreement. Being as prone as Seychelles is to natural disasters and climate change, the IMF has also assisted in with recommendations in dealing with the economic costs of such disasters, such as a medium-term strategy to create additional fiscal space to undertake necessary climate change mitigation and adaptation measures. The macroeconomic outlook proved to be strong in 2016 and the growth outlook for 2017 remains positive due to an increase in tourist arrivals and foreign investments9.

 

Seychellois President Faure Visits Kenya

In a recent state-visit by the president of Seychelles, Danny Faure, to Kenya, an agreement was signed, which will lead to the expansion of the two countries’ trade and security. The president of Kenya, Uhuru Kenyatta, said they reached a deal with Seychelles to participating in tourism development through the partnership of the agencies that manage these sectors in the two countries. Furthermore, Seychelles has shifted to importing beef and poultry from Kenya rather than going all the way to Brazil. Seychelles also committed to assisting Kenya to develop its maritime sector, more especially the fishing industry and its blue economy, so as to improve the security of its Exclusive Economic Zone. A framework for a two-centre destination will be developed where they will work together to promote their tourism products10. This agreement will help foster economic growth in both countries and improve the well-being of their citizens. It makes economic sense to create such a strong trading relationship, from which we can expect an improvement in tourism, regional trade and investment for Seychelles. Therefore, an overall positive growth outlook for 2017 is forecast, given the fact that most of the revenues come from tourist arrivals and foreign investment.

 

Seychelles to Maintain Tight Monetary Policy in 2Q2017

Because of the inflationary implications of some of the policies that were announced in the 2017 Budget, the anticipated surge in international commodity prices coupled with developments in the domestic foreign exchange market, the Central Bank of Seychelles (CBS) has decided to maintain a tight monetary policy stance for the second quarter of 2017, for the purpose of achieving stability in the domestic prices11. Even though in 2016 there was an increase in interest rates in the hopes of encouraging people to save, there were still rapid price increases due to the increase in demand for credit and foreign exchange. In 2016, the commercial banks have had to increase their interest on savings so as to make savings more appealing to the citizens in order to reach the reserve target. Due to this, interest rate on loans increased as a way to compensate the reduced volume of demand. The CBS is taking into consideration the people’s concern of the rate of interest in the country and assures them that in their next meeting they will discuss this issue and reach a decision on whether to ease or continue to tighten its monetary policy, taking into consideration the state of the economy at that time.

 

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1 Common Market for Eastern and Southern Africa
2-3 Seychellois State House
4 European Parliament
5 European Commission
6 Seychellois Ministry of Finance
7-8 Central Bank of Seychelles
9 International Monetary Fund
10 Seychellois State House
11 Central Bank of Seychelles


 

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