2022 economic outlook |30 December 2022

Overview

Following the dire economic contraction of 2020 resulting from the Covid-19 pandemic and its aftershocks, Seychelles’ and the global economy saw promising recovery over 2021. Momentum of recovery persists as Seychelles’ 2022 real gross domestic product (GDP) growth pushes to double digit levels, however, signs of rising price levels looms over the country as inflation soars worldwide as economies endure this period of economic and geopolitical challenges.

Following 2021’s strong commencement of recovery, 2022 economic performance projections remain very positive as this year’s GDP growth is estimated at 10.6 per cent, mainly supported by the rebounding tourism industry. Year-to-date tourism arrivals have surpassed that of 2021 as a whole, while total 2022 growth is estimated at 75 per cent, translating into double digit growth for the main tourism sectors and a positive impact on overall economic activity across all productive sectors. ‘Information and communication’ activities have remained buoyant and is estimated to grow by 10 per cent in 2022 spurred by increasing data traffic, while the ‘Financial and insurance’ activities sector growth remains steady at 2 per cent. Despite the momentum in manufacturing of beverages and tobacco, and some resurgence in the manufacturing of concrete products, the production of fishery products is estimated to contract by 8 per cent following continued challenges.

Tourism

The tourism outlook for Seychelles remains positive following the pick-up in ‘Accommodation and food service’ followed by ‘Administrative and support service’ activities as well as the increase in global travel which has already reached 250 million for the first five months of 2022. These performances have been buoyed by strong growth in tourism arrivals in 2022, as at October 16 arrivals stood at 259,693 reflecting an increase of 94 per cent compared to the same period last year. This performance has surpassed initial expectations. With Europe remaining as the main market region, France replaced Russia as the top market in 2022 with a share of 14 per cent of total arrivals year-to-date. The total arrivals estimate for 2022 is about 320,593 and that represents a 75 per cent growth over 2021. This is still below the 2019 pre-pandemic levels by about 17 per cent. As a result of this faster than expected recovery in tourism arrivals, higher growth is expected in the main tourism-related activities in the national accounts, namely ‘Accommodation and food’ by 58 per cent, ‘Administrative and support’ by 65 per cent, and ‘Transportation and storage’ by 36 per cent.

As at September 2022, tourism earnings stood at US $729 million (approximately R10.570 billion), this represents a growth of 113 per cent over the same period in 2021.

Despite the Russian-Ukraine invasion, which was expected to have pernicious impacts on the tourism economy, tourism arrivals and tourism-related activities have showed resilience and continual growth.  Tourism arrivals are expected to reach 2019 levels by 2023 with a total of 387,918. In the medium term, tourism is expected to grow at an average of 8 per cent for the period of 2023-2027, given the planned hotel projects which will subsequently boost capacity allowing Seychelles to accommodate more visitors, also anticipating that this will also lead to greater connectivity.

Monetary sector

Overview

The primary mandate of the Central Bank of Seychelles (CBS) is to promote domestic price stability.  The Monetary Policy Rate (MPR) is the key rate used to signal monetary policy stance.  It lies at the midpoint of the interest rate corridor whereby, the Standing Deposit Facility (SDF) and Standing Credit Facility (SCF) serve as the floor and ceiling, respectively. 

During 2021, CBS maintained an accommodative monetary policy stance to support the economy as businesses and households faced the effects of the Covid-19 pandemic.  Notably, in the third quarter of 2021, there was a structural shift in interest rates and the MPR was set at 2.0 per cent.  Consequently, the interest rate on the SDF and SCF was set at 0.5 per cent, and 3.5 per cent, respectively.

Throughout 2022, CBS kept the above-mentioned interest rates unchanged to continue supporting the domestic economy which was facing notable external challenges caused by supply and demand imbalances.  These were exacerbated by the conflict in Ukraine and the associated geopolitical tensions. 

In line with the monetary policy stance, short-term market yields remained relatively low for the first half of the year.  However, as of July 2022, there were slight increases in Treasury yields due to higher amounts offered by the government to smooth its cash balance in preparation for interest payments on Treasury bonds.  As a result, the average yields on Treasury bills stood at 0.92 per cent, 1.58 per cent, and 2.20 per cent on the 91-day, 182-day, and 365-day bills in August 2022.  The average interest rate on saving deposits was 1.50 per cent, while the average return on fixed-term deposits stood at 2.09 per cent.  Lastly, the average lending rate was 9.09 per cent.

Looking ahead, continued support remains essential to encourage economic activity for a more robust recovery.  However, if global commodity prices remain elevated, foreign inflationary pressures are expected to filter into the economy.  Therefore, mindful of its objectives, CBS may adjust its policies if necessary.

External sector

Balance of payments

Preliminary estimates suggest an improvement in the country’s external position in 2022 relative to 2021. The current account deficit for the year is projected at 7.2 per cent, compared to a deficit of 11 per cent in 2021. Whilst the cost of imports has increased, partly owing to higher global commodity prices in 2022, the better-than-anticipated performance of the tourism sector has led to a rise in tourism earnings, thus contributing towards an improved balance of payments for the year. 

Exchange rates

On the domestic front, the rupee was on an appreciating trend since the start of 2022 until July.  This outcome was supported by sustained inflows of foreign exchange brought about by better-than-expected performance in the tourism industry, in spite of the conflict in Ukraine. Notable increases in tourists from the traditional western European markets helped to partially offset the reduction in arrivals from other parts of Europe, particularly Russia and Ukraine. The stronger rupee helped to cushion the impact of the higher commodity prices abroad and higher foreign inflation.

However, the domestic currency weakened against the major currencies in August 2022 relative to July 2022. This was largely on account of higher demand for foreign exchange relative to supply. The increase in demand was mainly associated with the higher commodity prices abroad coupled with an increase in imports ahead of the festivities in the fourth quarter of the year. 

Of note, whilst the rupee continued to maintain the depreciating trend against the USD in September, the local currency strengthened against both the Euro and GBP in the same month.  The appreciation of the rupee vis-à-vis the two aforementioned currencies were linked to developments in the international currency markets whereby, both the Euro and the GBP weakened relative to other counterparts.

Nonetheless, a comparison with the same period in 2021 shows that the rupee remains stronger in 2022.  As at October 20, 2022, the SCR/USD stood at 14.4347 which was an appreciation of 33 cents relative to the same period in 2021.  The local currency strengthened by R2.90 against the Euro and by R4.24 vis-à-vis the GBP, respectively. 

The weakening of the rupee against the USD is anticipated to persist in the fourth quarter of 2022 relative to the preceding quarter.  However, from an annual perspective, the rupee is forecasted to be stronger than in 2021, as a result of the appreciating trend observed in the first seven months of the year.

Budget outlook

2022 marks another year of solid budget performance supporting the government’s plan of returning towards the fiscal sustainability path it had embarked upon prior to the Covid-19 crisis. Fiscal consolidation efforts since the pandemic in 2020 has seen the size of the primary deficit contract from -15.5 per cent of GDP in 2020 to about 1.1 per cent by the end of 2022.

In comparison to the mid-year revisions, the end of year budget outlook has seen a slight worsening of the primary balance by about R43 million (0.2 per cent of GDP) brought about by a 1 per cent lower tax outturn estimate following year to date under-performances in some tax lines. This has been partially offset by a 3 per cent shortfall expected in capital expenditure spending given execution delays. For the 2023 budget, the primary balance target is about 1.1 per cent of GDP, or R330 million in level terms. This will be achieved by stronger revenue collection, in line with continued economic growth, as well as the introduction of revenue gaining policies, as well as slower growth in planned primary expenditure.

Revenue and grants

Total tax and non-tax revenue collection, as well as grant receipts for 2022 is estimated at R9.2 billion, equivalent to about 33.2 per cent of GDP. This estimate is consistent with the mid-year budget revision, however, in comparison to the 2021 outturn, this represents an increase of about R845.5 million or 10 per cent. The improved revenue envelope is driven almost entirely by the increase in tax receipts for the year.

Tax revenue

As a whole, tax revenue performance has been positive in 2022, with the end of year estimate standing at R7.78 billion, a decrease of R56.7 million or 0.7 per cent when compared to the mid-year budget but nonetheless 16 per cent greater than 2021 actual collections. The largest revisions have been made in the VAT and Property tax estimates which are collectively R44.7 million lower than the mid-year estimates. Despite a 1 per cent downward revision from the mid-year estimate, 2022 VAT is estimated at R3.05 billion, about R100 million above the initial budget forecast (and about R727 million or 31 per cent greater than 2021 collections). VAT’s positive performance is a good indication of the strong recovery of the Seychelles tourism industry, which accounts for about half of domestic VAT collections. While increased imports drove the growth of excise tax in 2022, revised nominal growth assumptions and low year-to-date collections have led to a R6 million downward revision resulting in an end of year estimate of R1.45 billion. The income tax estimate sits just under R1.1 billion as year-to-date under-performances have also resulted in a decrease of R5 million or 0.4 per cent following the mid-year revision.  The EOY business tax projection stands at R1.45 billion after a minor R1.5 million downward revision, and remains only R12 million lower than 2021, which is rather positive considering the generally lower tax rates and fewer arrears collection initiatives of 2022. Remaining tax lines remain more or less the same as the mid-year projections with other tax, customs duties and tourism marketing tax estimated at R337 million, R285 million and R67 million respectively. Estimates of arrears from abolished tax lines ‒ corporate social responsibility (CSR) and goods and services tax (GST) ‒ total R7.7 million.

Expenditure

                Summary of Expenditure, SR'000            

Source: MoFNPT, Financial Planning and Control Division estimates.

Debt Outlook

As at the end of September 2022, the total government and government guaranteed debt amounted to R17.6 billion, representing about 63.2 per cent of GDP. As shown in below the debt stock is mainly dominated by domestic debt, R9.8 billion or 55.7 per cent, whilst external debt amounts to R7.8 billion, or 44.2 per cent.

In comparison to the same period last year, the debt stock increased by R169 million attributed to a new loan undertaken and further disbursements under existing loans and budget support. On the other hand, despite the quarterly issuances of T-Bonds and new guarantees issued, the total domestic debt decreased by R754 million, or 7.7 per cent or compared to the same period last year.

Total debt by residency of creditors.

Source: MoFNPT Debt Management Office.

Selected economic indicators

Contributed by the Ministry of Finance, National Planning and Trade