Tourism is driving a strong economic recovery in Seychelles. Real GDP growth is expected to accelerate to 10.6 percent in 2022, up from 7.9 percent in 2021. However, the recovery is uneven across sectors of the economy. The authorities have already begun to rebuild policy buffers and have taken measures to protect the poorest as the country transitions from the COVID-19 outbreak. The primary fiscal deficit in 2022 is expected to narrow to 1.1 percent of GDP, reflecting an extraordinary consolidation of 13.6 percentage points over the last two years. Risks to debt sustainability have been significantly reduced with the public debt-to-GDP ratio projected at around 68 percent at end-2022, thereby registering a 21-percentage-point reduction in two years.
Seychelles’ economic recovery in 2021 vastly outperformed projections, fueled by a faster-than-expected rebound of the tourism sector. The recovery is expected to continue in 2022 with projected real GDP growth of 7.1 percent as the tourism sector shows resilience to COVID-19 waves and geopolitical tensions. The recovery has been accompanied by a significant fiscal overperformance.
Seychelles has made noticeable progress toward economic stability and sustainability under successive Fund programs through prudent macroeconomic policies and bold reforms since the crisis in 2008. Despite significant headway, the country remains vulnerable to external shocks as a small, open, and tourism-dependent economy. Seychelles could face challenges to reconcile its goals to reduce its infrastructure gap, enhance its resilience to climate change, and bolster its medium-term fiscal and external sustainability.
This Selected Issues paper focuses on the prospects of growth in São Tomé and Príncipe (STP). This case study seeks explanations for STP’s relative under-performance and draws lessons for the future. It compares past economic developments in the islands and recommends policies that could most effectively foster future growth in STP. Country-specific characteristics as well as weak institutions contributed to STP’s relative underperformance since independence. Initial conditions, particularly regarding human capital and natural resources, contributed to STP’s relative underperformance, especially in the first decade after independence. Experience in the four island-states suggests that fiscal discipline, revenue mobilization, and a more active private sector, particularly in the tourism sector, may be key to tap STP’s growth potential. Fiscal discipline is needed to contain the fiscal deficit and bring the debt to a sustainable level. Continuing to strengthen public financial management, including implementing multiannual fiscal framework as recommended by the IMF technical assistance, would help.
This Selected Issues paper discusses measures to enhance resilience to climate and natural disasters in Seychelles. Rising sea levels, changing rainfall patterns, increasingly intense and frequent tropical cyclones, and massive coral bleaching are compounding economic and social risks in Seychelles. A policy mix focused on combining adaptation and mitigation strategies is ideal for Seychelles. Such policies should not only be aligned with Seychelles’ Nationally Determined Contribution, but also with the technical and financial capacity of the government. Experience from other small states suggests that small policy changes can still have a significant impact. To the extent adaptation and mitigation measures are inadequate, insurance policies and innovative financial instruments need to be exploited further.
Context: The robust recovery from the 2008 balance of payments and debt crisis has resulted in improved economic and social outcomes. Continued policy discipline and reforms are needed for the microstate to mitigate its geographical and population constraints and maintain momentum in developing a diversified and resilient economy. Focus: With the fiscal stance anchored by the authorities’ debt reduction objective, macroeconomic discussions concentrated on the smooth functioning of monetary and exchange rate policies. On the structural agenda, the dialogue focused on policies to promote sustained and inclusive growth, particularly on the appropriate role for state-owned enterprises (SOEs). Review: The program is on track. The authorities met the end-December quantitative performance criteria except for narrowly exceeding the ceiling on reserve money. The structural agenda remains broadly on track despite some delays. Staff recommends completion of the second review under the Extended Arrangement and modification of the performance criteria for end-June and end-December 2015, and supports the authorities’ request for a waiver for the end-December 2014 performance criterion for reserve money. Outlook and risks: With the external position having stabilized since the last review, fundamentals are strengthening. However, the economy remains highly vulnerable to global developments, including weakness in the key European markets, while domestic risks center on the role of the SOEs. Recommendations: The authorities’ objective of reducing public debt below 50 percent of GDP by 2018 remains an appropriate and attainable anchor for fiscal policy. The monetary policy framework should be further enhanced by increasing its forward orientation in the context of a flexible exchange rate. Structural measures should focus on fostering inclusiveness and private sector-led growth, while improving economic governance and the focus of SOEs. Data: Data provision is broadly adequate for surveillance. Priority areas include improved GDP statistics, strengthening external sector statistics, and extending coverage of the international investment position.
This paper discusses Seychelles’ Request for an Arrangement Under the Extended Fund Facility (EFF). In the five years following the 2008 balance of payments and debt crisis, the authorities have successfully enacted a comprehensive program of reforms. Despite the success of the program, important risks and challenges remain. To face these challenges, the authorities have requested a successor EFF arrangement with the IMF. This program will help support their macroeconomic policies and protect reserve coverage over the extended period, while they carry out wide-ranging structural reforms necessary to support improvement in macroeconomic conditions, lock-in stabilization, and reduce the country’s vulnerabilities.
The paper estimates the impact of macroeconomic supply- and demand-side determinants of tourism, one of the largest components of services exports globally, and the backbone of many smaller economies. It applies the gravity model to a large dataset comprising the full universe of bilateral tourism flows spanning over a decade. The results show that the gravity model explains tourism flows better than goods trade for equivalent specifications. The elasticity of tourism with respect to GDP of the origin (importing) country is lower than for goods trade. Tourism flows respond strongly to changes in the destination country’s real exchange rate, along both extensive (tourist arrivals) and intensive (duration of stay) margins. OECD countries generally exhibit higher elasticties with respect to economic variables (GDPs of the two economies, real exchange rate, bilateral trade) due to the larger share of business travel. Tourism to small islands is less sensitive to changes in the country’s real exchange rate, but more susceptible to the introduction/removal of direct flights.
This Selected Issues paper for Seychelles argues that sound fiscal policies and smaller governments can be conducive to growth and help reduce a country’s economic vulnerability. Growth in Seychelles has been volatile and underperformed most small states from 1998 to 2005. Seychelles’s revenues, expenditures, and total public debt are higher after an improvement in 2003. Its fiscal balance has worsened and has been weaker in comparison with most small states for most of the period. Seychelles’s expenditure composition is most similar to that of low-growth small states.