Seychelles - Economy
Seychelles' economy relies on tourism and foreign direct investments. Employment, foreign earnings, construction, banking, and commerce are all largely dependent on these. Although the World Bank has designated Seychelles as a “high income” country, its wealth is not evenly distributed. The United Nations Development Program’s Human Development Report for 2016 found that Seychelles still experiences income inequality, with a Gini coefficient of 46.8. However, this is a significant improvement from 2015.
Since independence in 1976, per capita output in this Indian Ocean archipelago has expanded to roughly seven times the pre-independence, near-subsistence level, moving the island into the upper-middle-income group of countries. Growth has been led by the tourist sector, which employs about 30% of the labor force and provides more than 70% of hard currency earnings, and by tuna fishing.
The services sector--including transport, communications, commerce, fishing, and tourism--has accounted for close to 70% of GDP in recent years. The share of manufacturing has been between 15%-20% of GDP, although it fluctuates from year to year owing to changes in output from the Indian Ocean Tuna cannery. Public investment in infrastructure and strong foreign direct investment inflows in the tourism sector have kept construction buoyant, with its share of GDP at around 10%. Given the shortage of arable land, agriculture, forestry, and fishing (excluding tuna) make only a small contribution to national output.
GDP in 2009 was estimated at $656 million (official exchange rate), and GDP per capita was $8,335 ($19,400 calculated by purchase power parity - PPP), putting the island in the World Bank's "upper middle-income" bracket. For that reason, Seychelles is low on the agenda of international donors and aid flows are limited. Given the small size of the economy and its heavy dependence on tourism, the island remains vulnerable to external shocks, including the threat of piracy from the nearby Horn of Africa. There is some offshore banking activity and now the prospect of oil in Seychelles’ waters.
Economic growth was strong in 2006 and 2007, with real GDP growing by 5.4% and 7.3%, respectively. Growth slowed to 3.1% and 0.7% in 2008 and 2009, respectively, due to external shocks, lower tourism earnings, and the persistence of structural constraints reflected in a rising debt burden and foreign exchange shortages. Real GDP is expected to have grown by 6.2% in 2010, driven mainly by tourism and foreign direct investment. Inflation, which reached a historic high of 32% in 2009, has been brought under control and is estimated at less than 1% for 2010. Foreign exchange reserves were estimated at U.S. $211 million compared to U.S. $169 million in 2009, equivalent to more than 2 months’ import cover. The budgetary surplus, which was initially estimated at 7%, will now be 9.4% of GDP for 2010.
Seychelles had years of socialist-oriented economic policy during single-party rule, characterized by price, trade and foreign exchange controls, a prominent role for parastatal companies, and robust debt-funded development spending. This led to rapid economic development, but also created serious economic imbalances. These problems included large fiscal and external deficits and mounting debt arrears, which contributed to the persistent foreign exchange shortages and slow growth of recent years. Persistent and widespread press reports indicate that high-level corruption contributed substantially to these problems.
For some years the main feature of the economy has been a chronic shortage of foreign exchange. In the past, the International Monetary Fund (IMF) has urged devaluation of the Rupee and expressed concern about the wide fiscal and balance of payments deficits that have been financed, in the main, by accumulating large external debt arrears totalling $800m. Following the issue of a $200m sovereign bond in 2006, the Government of Seychelles repaid all of its debts to multilateral institutions, and repaid some outstanding arrears to bilateral creditors through the Paris Club.
In October 2008, facing the near-depletion of official foreign exchange reserves, Seychelles defaulted on interest payments due on a U.S. $230 million Eurobond issued 2 years previously, severely damaging its credibility as a borrower. The government subsequently turned to the International Monetary Fund (IMF) for support, and in an attempt to meet the conditions for a stand-by loan, began implementing a program of radical reforms. These included a fundamental liberalization of the exchange rate regime, involving the devaluation and floatation of the rupee, and the elimination of all foreign exchange controls.
In November 2008 the Government adopted an IMF-endorsed reform program with support for an IMF standby arrangement. The reforms included floating of the rupee, the abolition of foreign exchange controls and a reduction in public sector work force. In light of the economic and financial reforms, the IMF approved a 2-year U.S. $26 million stand-by loan in November 2008, which represents the Fund's first-ever formal program in Seychelles.
Seychelles’ program implementation has received praise from the IMF, helped by the committed implementation of reforms and broad-based support for the process. Reflecting this, the IMF converted Seychelles’ 2-year stand-by agreement into a 3-year fund facility, worth U.S. $31 million, in December 2009. An IMF mission in May 2010, visiting for an initial review of the extended fund facility, commended Seychelles for meeting all of the program conditions to date. The IMF’s endorsement will continue to facilitate the engagement of other key donors, including the World Bank, which approved a U.S. $9 million policy support loan for Seychelles in October 2009 as a prelude to a 2-year interim country assistance strategy.
The IMF’s seal of approval will also facilitate the rescheduling of Seychelles’ large foreign debt burden. In a key breakthrough, Seychelles’ commercial creditors (which hold about 60% of Seychelles’ debt) gave their approval in January 2010 to a restructuring offer from the Government of Seychelles that will see the amount owed cut by 50%, with repayments taking place between 2016 and 2026. In combination with the 45% debt write-off agreed by the Paris Club of creditors in April 2009, it is estimated that Seychelles’ debt burden should fall from about 98% to a more sustainable 56% of GDP for 2010. However, the IMF notes in its latest review that Seychelles remains highly exposed to external shocks, including piracy threats and risks to the European economic outlook (source of most tourists).
Seychelles is ranked 8th in Africa and 95th worldwide in the World Bank's Ease of Doing Business report, and comes in at 142nd in the Heritage Foundation Index of Economic Freedom. In February 2011, global rating agency Fitch assigned Seychelles a Country Ceiling of 'B' (from ‘B-‘ in 2010) and a short-term foreign currency Issuer Default Rating of 'B'. According to Fitch, Seychelles' revised ratings “reflect Seychelles' outperformance, by a wide margin, of the fiscal targets set for it by the International Monetary Fund (IMF) programme, for a second consecutive year.”
Although Seychelles is eligible for the African Growth and Opportunity Act (AGOA), it has been unable to take advantage of AGOA thus far. Seychelles is not qualified for apparel benefits under AGOA and, in any case, its apparel manufacturing capacity is negligible.
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