Seychelles holds rate, sees gradual recovery of tourism

     The central bank for the Indian Ocean archipelago of the Seychelles kept its monetary policy rate steady for the second quarter of 2021 to continue the accommodative policy stance and support economic activity which remains weak due to the impact of the COVID-19 pandemic.

     The Central Bank of Seychelles (CBS) left its monetary policy rate at 3.0 percent, unchanged since it was cut in June last year as the central bank lowered the rate for the second time following a similar-sized cut in March.

     In 2020 CBS cut its key rate by a total of 200 basis points and has cut it 250 points since the start of 2019.

     The Republic of Seychelles, which comprises 115 islands off the coast of Africa in the Indian Ocean, relies heavily on tourism that was devastated by the closure of borders in most countries as the pandemic swept the globe.

     Although the country's tourism industry remains subdued and overall growth dependent on fisheries and manufacturing - which can't make up for tourism - CBS said it expects a gradual recovery of tourism activity in coming months as the rollout of vaccines in some of its key markets and interest by airlines in resuming flights, has "heightened hopes of a potential recovery, albeit at a slow but promising pace."

     The economy of Seychelles contracted 18.5 percent year-on-year in the third quarter of 2020 after a 19.8 percent contraction in the second quarter, with revenue from tourism plunging 78 percent in the January-November 2020 period from the same 2019 period, CBS said in January.

     Tourism is also the main contributor of foreign exchange to the Seychelles and a decline in foreign exchange has hit the exchange rate of the Sechellois Rupee, which then raises import prices and inflation.

     The rupee was hit hard twice in the last year. First after the outbreak of the pandemic, with the rupee falling 13 percent in April, and then by another bout of weakness in late 2020.

     This year the rupee has been steady and was trading at 21.15 to the U.S. dollar today but down 35 percent since the start of 2020.

     The impact of currency depreciation and higher global commodity prices has pushed up inflation in recent months to 8.68 percent in February - the highest since June 2012 - from 7.62 percent in January.

      "The weakened domestic currency and the rise in external commodity prices are expected to lead to higher inflationary pressures in the short to medium term," the central bank said, adding labour market frictions and challenges faced by the private sector pose an increasing threat to financial stability.

     "Despite the short-term inflationary risks, CBS foresees the need to support the economy and aliviate the financial challenges that may result from the above developments," the bank said.

     The Central Bank of Seychelles issued the following statement:

     

"The Board of the Central Bank of Seychelles (CBS) has decided to maintain the Monetary Policy Rate (MPR) at 3.0% for the second quarter of 2021. This is to further support domestic economic activity, which remains relatively weak due to the unprecedented impact of the COVID-19 pandemic. The performance of the tourism industry thus far has remained subdued with sluggish growth in both tourist arrivals and earnings, mainly due to continued restrictions on travel in the key tourism markets and slow global economic recovery. The weakened domestic currency and the rise in external commodity prices are expected to lead to higher inflationary pressures in the short to medium term. In addition, labour market frictions and the challenges faced by the private sector pose an increasing threat to financial stability. Despite the short-term inflationary risks, CBS foresees the need to support the economy and alleviate the financial challenges that may result from the above developments. Consistent with the unchanged MPR, the interest rate on the Standing Deposit Facility (SDF) and Standing Credit Facility (SCF) will remain at 1.0% and 6.0%, respectively.

The domestic economy is still facing the disruptive effects of the global pandemic since its onset in December 2019 and in general, economic activity remains weak. The second-round effects of the pandemic have resulted in an under-performance of the tourism industry as well as a moderation in credit extended to the private sector. In addition, policy decisions such as the cessation of the Unemployment Relief Scheme (URS) at the end of February and the Financial Assistance for Job Retention (FA4JR) as of April 01 have led to intensified labour market frictions with an increasing number of locals being made redundant and, in some cases, there has been a reduction in wages and salaries. The loss of income from the services sector has also resulted in acute financial difficulties for the private sector. Considering the persistent sluggish performance of the tourism industry, the fisheries and manufacturing sectors remain the main drivers of the economy. Nonetheless, revenue generated from these two sectors is not sufficient to offset the loss in revenue from the tourism industry.

However, with the announcement of the relaxation of entry requirements for visitors (with the exception of South Africa) as of March 25, and following interest shown by airlines to resume flights to Seychelles, a gradual recovery in tourism activity is anticipated in the coming months. Whilst this is also subject to easing of restrictions on travel abroad, vaccination rollouts in some tourism markets have heightened hopes of a potential recovery, albeit at a slow but promising pace. In line with such developments, a rebound in economic activity is projected for 2021.

Thus far, an increase in supply of foreign exchange coupled with a reduction in demand has led to some degree of stability in the exchange rate. Should this trend continue, it may alleviate some pressures on import costs. However, in the short term, the weakened domestic currency, coupled with higher prices abroad, would still result in some upward pressures on prices. Considering this, the stability in the exchange rate and domestic prices remains conditional on a further reduction in demand for foreign currency at a national level.

On the external front, international commodity prices have been on the rise as global demand picks up in anticipation of a faster than projected rebound in world economic activity, subject to successful vaccination campaigns. Commodity prices are expected to maintain an upward trend. In particular, recent developments in the Middle East coupled with the decision of the Organisation of the Petroleum Exporting Countries (OPEC) to cut back production, have heightened fears of a potential oil price shock.

Although the recovery of the domestic economy is heavily reliant on external developments such as the revival of the global travel industry and the general response to COVID-19 vaccines, particularly in key markets, interlinked domestic factors such as fiscal and debt sustainability, policy alignments and labour market conditions are also critical elements going forward. Whilst the above pose some degree of uncertainty, the outlook for a gradual recovery seems promising. Domestically, businesses have started to pick up momentum. With the relaxation of health measures, the ongoing vaccination campaign and strict implementation of Standard Operating Procedures (SOPs), it is anticipated that economic activity will improve in the remaining months of the year.

The decision to maintain an accommodative policy stance was taken by the Board at its Monetary Policy Meeting held on March 22, 2021. The MPR remains at 3.0% and the interest rates on the SDF and SCF will be kept at 1.0% and 6.0%, respectively. The Minimum Reserve Requirement (MRR) remains unchanged at 13 per cent of applicable deposit liabilities. However, as approved by the Board on June 22, 2020, the MRR may be reduced to 10 per cent should liquidity conditions warrant the adjustment.

In line with its objectives, the Central Bank remains vigilant and stands ready to adjust its policies if necessary."

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