Monetary policy rate cut to 4.0 percent for Q2, 2020 | 24 March 2020
Prudent spending and consumption is imperative from here on out, said Governor of the Central Bank of Seychelles (CBS) Caroline Abel yesterday afternoon, as she announced the board’s decision to cut the Monetary Policy Rate (MRP) to 4 percent, as from April 1.
The decision taken is in view of the substantial macroeconomic risks presented by the COVID-19 pandemic in the short to medium term, as well as its implications on long run economic growth, financial stability and social coherence.
“We take into account in the following months, the economy will be severely affected and the Seychellois public, business and government need to take disciplined decisions, to ensure that we minimise some of the reduction in our economic activities,” Govenor Abel started off, urging prudent spending and cut-backs, on account that the country’s resources will be much reduced and thus needs to be better managed until the situation improves.
Governor Abel went on to note the efforts of other Central Banks around the world to implement additional measures with the aim of sustaining national economies through the crisis and maintaining their financial systems. As for the CBS’ revision in the MPR this forms part of the policy impulse under CBS’ recovery package, representing the first phase of the Bank’s response to the challenges of COVID-19.
These include resource allocation issues, the direct loss of income from tourism and other related economic activities as well as labour capacity conditions. This implies high levels of uncertainty in all sectors of the economy. Given these challenges, economic growth is forecasted to contract by double-digits in 2020. It must be noted the MRP has for the first time been reduced by 1 percent (since it was introduced in January 2019), as opposed to the usual 0.5 percent change, and was set at 5 percent for the first quarter of the year.
As such, coordinated and urgent policy responses are needed in moderating the impacts of COVID-19. However, even with the alignment of monetary, financial and fiscal policies, large drops in consumption and shifts in social behaviour are critical in maintaining economic stability given the external uncertainty.
“In view of the degradation in the level of economic activities, we want to bring some relief in terms of loans, so interest on loans will reduce,” she said.
The decision applies to all current loans as well as anticipated loans, although the Minimum Reserve Requirement remains unchanged at 13 percent of applicable deposit liabilities.
With regards to the information on which the decision was taken, Governor Abel noted a significant reduction in economic activities across external markets from which Seychelles attracts the majority of visitors year on year. Moderate inflationary pressure is likely in the short run, due to a general decline in global demand as a result of the COVID-19 pandemic and a large shock in oil prices. However, in view of the closure of borders in most counties, limited inflows are forecasted as from the second quarter from the services sector, with uncertainty pertaining to the duration of its effects. This is likely to place severe pressure on the exchange rate and requires a significant decline in national consumption if the economy is to sustain a stable exchange rate.
On the domestic front, preliminary estimate shows that the annual growth in tourism earning is to contract by 70 percent in Euro terms relative to 2019. It is unclear whether the current capacity of the fisheries industry and other export-oriented sectors can compensate for the loss of earnings in tourism.
“2019 was a really good year and we recorded record inflow of foreign exchange so it sustained other activities, most notably, imports. But as we step into 2020, where travel started slowing down and travel restrictions were imposed, we observe a significant reduction in the inflow of foreign exchange in the country. We are estimating that up to March end, a dip in visitor arrivals by 50 percent and our earnings again in Euro, almost 15 percent,” Governor Abel added.
As for the local telecommunications sector, although not much impacted thus far, are expected to be hit by revenue losses from the reduction in visitors. With regards to IOT, the tuna-processing factory has experienced a surge in demand from export markets, mainly Europe, where many states have imposed lockdowns and suspensions on non-essential movement, leading people to stock up on food and supplies. Governor Abel warned that commerce has also been impacted globally, noting that IOT will have to recruit further to meet demands. Other sectors too, including construction and wholesale and retail are likely to be impacted by the disruptions in shipping and commerce.
“When there is panic buying, it can cause the cost of products to increase so we need to be mindful sometimes when the adjustments in price happen. As for the retail and wholesale sector, from Q2, they will see a reduction in demand for goods because as I said, we need to be prudent about what we consume based on how much foreign exchange is flowing in,” she further urged.
The decision to lower the MRP to 4.0 percent was taken at the Monetary Policy meeting held yesterday.