*This analysis was produced by the team at Signal Risk 

The International Monetary Fund (IMF) concluded two weeks of virtual discussions with Seychellois authorities on 06 July. Following the conclusion of the meetings, the IMF confirmed that it had reached a staff-level agreement on an Extended Fund Facility (EFF) with local officials, which is estimated at roughly USD 107 million and expected to extend over a 28-month period. The agreement is awaiting final approval from the IMF’s executive board, which is expected to convene in the coming weeks.

Arrivals on the up

Following the discussions, IMF mission head Boriana Yontcheva noted that the local economy is showing signs of recovery following an unprecedented GDP contraction of 13.5 percent in 2020. According to Yontcheva, the return to growth is driven by an uptick in the local tourism industry (which, in conjunction with related industries, accounts for up to two thirds of annual output).

This uptick was most clearly evidenced in a report released by the National Bureau of Statistics (NBS) on 12 July, which described a six-fold increase in tourist arrivals from the first to second quarters of 2021. As per the NBS, the country recorded 44,000 visitors in the second quarter, compared to 7,000 in the first.

The NBS data also revealed another positive development for the sector. Since Seychelles re-opened its borders in March, the majority of visitors have been from non-traditional markets (namely Russia, the United Arab Emirates (UAE) and Israel). This is largely believed to reflect the recent resumption of airlinks – such as those operated by Russian carrier AEROFLOT and the UAE’s Emirates airlines – between Seychelles and these markets.

According to a spokesperson for the tourism department, officials are hoping that arrivals from Seychelles’ main markets – Germany, France and the United Kingdom – will pick up towards the end of the year. Should the projected rally in the tourism sector proceed as planned, the IMF notes that the local economy could grow by over 7 percent in 2021.

Bridging the gaps

The government is hoping that the projected recovery will grant it some breathing room to shore up both internal and external buffers. The tourism department estimated that revenue from the sector shrunk by 61 percent (USD 322 million) in 2020. Combined with a substantive increase in healthcare, stimulus, and social protection spending, IMF data indicates that Seychelles recorded a 16.3 percent budgetary deficit in 2020 (compared to a 2.8 percent surplus recorded in 2019). Financing the sizeable deficit saw a historic increase in public debt to 98 percent of GDP in 2020, up from 58 percent in 2019.

The external position saw a similar deterioration amid a fall in foreign earnings; the current account deficit expanded to 28 percent of GDP in 2020, from the 16 percent deficit recorded in 2019. Seychelles was able to bridge the balance of payments shortfall through external credit, such as a USD 31 million emergency loan secured through the IMF in May 2020.

Shot success

The recent rebound in tourist arrivals reflects efforts by authorities to promote Seychelles as a safe travel destination amid the ongoing coronavirus pandemic. To this end, Seychelles became the first African country to roll out a coronavirus vaccination programme in January. Since then, health officials have administered 140,000 doses of either the Chinese-manufactured Sinopharm or United Kingdom-developed AstraZeneca (Covishield) vaccines, and have fully inoculated 68,000 citizens (equivalent to 70 percent of the population) – a higher proportion of its population relative to most countries in the world.

Exposure

Despite the extent of inoculations, Seychelles was unable to ward off a marked uptick in coronavirus infection rates that began in January and peaked in mid-May. Coronavirus cases increased from 275 recorded on 01 January to 17,005 on 14 July. According to authorities, the uptick in case numbers is

due to a number of factors, including the reopening of the economy to tourist arrivals in March and the emergence of the more virulent Delta variant of coronavirus in the archipelago.

The increase in infection rates was accompanied by an elevated mortality rate. Seychelles recorded its first coronavirus-related death in early January; as of 14 July, this figure stands at 77. As a result, authorities tightened certain containment measures in early May. These included the three-week closure of schools; shortening the operating hours of stores; and a ban on group sporting activities and conferences. The tourism department was quick to reassure potential visitors that the regulations would not impinge on travel and tourist activities.

Assessment

A return to pre-pandemic levels of GDP will take several years to achieve. Due to the extent of the 2020 recession, the best-case scenario is that the economy will be able to return to its pre-pandemic output level by end-2022/early 2023. For the most part, this is on account of the rate at which tourists are expected to return to the country. Current estimates suggest that, by end-2021, arrivals are only expected to reach roughly 40 percent of the 428,000 visitors received in 2019. The pace of the arrivals is expected to pick up in 2022, with estimates that monthly arrivals could reach 2019 levels by the end of the third quarter of 2022. While Seychelles’ economic outlook is positive, it remains vulnerable to external shocks due to its dependency on tourism. Possible risks include lower-than-expected demand in key markets and disruptions in the global aviation industry.

Authorities are expected to embark on a package of economic reforms over the short-to-medium term. These will prioritise fiscal and structural measures and will be conducted in step with the Extended Fund Facility (EFF) that the International Monetary Fund (IMF) board is expected to approve in due course. Budgetary and debt sustainability will be particularly important in this regard. This was confirmed on 06 July by finance minister Naadir Hassan when he stated that “reforms are needed to ensure that the government becomes more disciplined with its finances, which in other words, means that we will have to do more with less”. As a result of consolidation efforts, the internal deficit is expected to contract to 9.7 percent of GDP in 2021 (compared to the 16.3 percent deficit in 2020). Relatedly, public debt is set to hover around 100 percent of GDP in 2021 before beginning to decline in 2022. In a similar vein, increased foreign exchange earnings from tourism are expected to see the current account deficit narrow to 22 percent of GDP in 2021, from a deficit of 28 percent in 2020. The notion that the economy is beginning to stabilise is supported by a statement issued by Fitch Ratings on 28 May, in which it maintained Seychelle’s sovereign rating at sub-investment grade B with a stable outlook.

The government has displayed the necessary competence to contain the coronavirus outbreak over the long term. At present, the local outbreak appears to be stabilising. Total active cases have declined to 856 as of 14 July, down from 2,739 recorded on 16 May at the peak of the recent wave. Although active case numbers remain relatively elevated, the country’s health system does not appear to have come under any undue pressure. Despite the increase in transmission rates and deaths witnessed in the first half of the year, the national coronavirus vaccination programme is still regarded as among the most effective in the world. As noted by President Wavel Ramkalawan in a May interview, the majority of people who had been hospitalised for coronavirus had not received the vaccination prior to being infected. On the whole, a combination of targeted containment measures and an extensive vaccination campaign should equip Seychelles to weather future waves.

The local political landscape will remain stable following President Ramkalawan’s victory in the 2020 general elections. Ramkalawan achieved a convincing victory in the general election held in October 2020; he defeated incumbent Danny Faure in the presidential leg, while his LDS party secured a two-thirds majority in the 35-seat National Assembly. Speaking to the overall credibility of the elections, Faure conceded defeat on 25 October 2020 after the electoral commission had confirmed the results. Due to the clear mandate received by Ramkalawan in the recent polls, his administration is not expected to face any significant political challenges until the next general elections in 2025.