Analysis of Price Structure in Seychelles by the Central Bank of Seychelles |04 March 2022
Increase in global commodity and freight costs impacting the domestic price level
Seychelles being heavily dependent on imports which amounted to 109 per cent of Gross Domestic Product (GDP) in 2019, it is therefore unavoidable that the global developments and movements in the exchange rate are critical factors influencing the domestic price level, thus influencing a rise in the price of commodities.
This came out yesterday during a press conference hosted by the Central Bank of Seychelles (CBS) to give results of a research work done on the price structure for the domestic economy in light of the bank’s prime objective for price stability.
The research was aimed at investigating the factors impacting prices in Seychelles by analysing the pricing structure of wholesalers and retailers and the external factors influencing the domestic price level.
The results reflect the period of 2019 to 2012.
Based on information gathered for this analysis, the main reason why the appreciation of the rupee did not translate into lower domestic prices relate to the significant increase in global commodity and freight costs.
This is mainly because for most of the commodities that were investigated, global commodity and freight costs had a larger impact on the final price level than the observed exchange rate movements, while the appreciation of the domestic currency did help in dampening the full impact of the rise in international commodity prices on the domestic price level.
Governor of the CBS Caroline Abel explained that the exchange rates have a pass-through to local prices, while the other significant factor that equally plays considerable roles in the prices of goods are the international prices – concentration being on food fuel – and supply chain constraints, particularly to shipping which has significantly increased during the past year, heightening the prices of commodities landing in the country, while eroding the benefit from an appreciating currency.
This, Governor Abel said, is an important element for the economy and also for how policies are done and amended so that Seychelles become a bit less dependent on those commodities.
She also added that it is important to make the public aware that there are significant forces, especially the current event involving Russia and Ukraine, and that they should be mindful that the increase in the commodity price being presently observed, will definitely have an impact on domestic prices, despite of an actual stable exchange rates.
During a slide presentation facilitated by economists Ragul Pillay and Andrey Rath, it was revealed that reasons for price stickiness include increase in freight and commodity prices in international markets, dampening the impact of the stronger currency, and fluctuations in exchange rates and payment structure to international suppliers slowing the transmission of the appreciation to domestic prices, as well as the inclusion of exchange rate risk in the pricing of products.
Mr Pillay explained that container freight rates have risen drastically since March 2021 – by 150 percent – mainly due to disruptions to the global supply chain caused by the Covid-19 pandemic (port congestions and container shortages), faster-than-anticipated global recovery from Covid-19 (ports unprepared), shift in consumer spending from services to goods and also inventory re-building by businesses.
As direct domestic implications, the extent of higher shipping and freight costs was amplified due to non-availability of direct shipping routes to Seychelles coupled with longer and more delayed shipping duration, while the existence of an oligopolistic market in regards to shipping lines has resulted in a lack of competition on the shipping route to Seychelles.
Speaking on the developments in international commodity prices, Ms Rath explained that consumer prices globally, and in Seychelles, were considerably higher in 2021 when compared to 2020, partly as a result of the increase in international food and energy prices.
She noted that in terms of oil prices, Brent Crude oil prices have been on an increasing trend since May 2020, following a sharp decline in prices in the first quarter of 2020, while the demand exceeded supply throughout 2021 given production challenges and reluctance of the Organisation of the Petroleum Exporting Countries (Opec) to increase supply to the market in light of persisting uncertainties surrounding the pandemic.
In terms of the developments in international food prices, Ms Rath explained that
Global food prices in the first few months of 2020 reflected falling demand relative to over-supply conditions, while the supply constraints in food production and transportation challenges were more pronounced in 2021 relative to the previous year.
This was in view of higher global demand for food relative to supply, in addition to the slow vaccination progress in developing and low income food producing countries.
It has also been observed that the exchange rate seemed more reflective in domestic prices in 2019 and 2021, while the ‘Other Food’ sub-index did not reflect the significant year-on-year depreciation in 2020, with the effects of the appreciation of the domestic currency as of the second quarter of 2021 helped dampen the impact of soaring food prices globally.
As general conclusion, based on information gathered for this analysis, the main reason why the appreciation of the rupee did not translate into lower domestic prices relate to the significant increase in global commodity and freight costs, while for most of the commodities that were investigated, global commodity and freight costs had a larger impact on the final price level than the observed exchange rate movements.
As a whole, the appreciation of the domestic currency did help in dampening the full impact of the rise in international commodity prices on the domestic price level.