- Seychelles Growth to Slow Sharply to 1% as Middle East War Hits Tourism — IMF
Seychelles’ economic growth is projected to slow to 1% in 2026 from 5.8% a year earlier as the war in the Middle East weakens tourist arrivals and places pressure on the balance sheets of state-owned enterprises, according to the International Monetary Fund.
An IMF staff team led by Todd Schneider said the external shock had been most visible between March and June, when visitor numbers declined significantly.
Tourist arrivals have since begun to recover, but the improvement has not been sufficient to prevent a sharp slowdown in the island economy.
“The effects of the Middle East conflict have been visible in a reduction in tourist arrivals, particularly during March-June,” Mr Schneider said after a mission to Victoria from September 21 to 30.
“Subsequent months have seen a nascent recovery in arrivals, but real GDP growth for 2026 is projected at 1% compared with 5.8% in 2025.”
The slowdown illustrates the vulnerability of small tourism-dependent economies to external disruptions that originate far beyond their borders.
Seychelles depends heavily on international visitors for employment, foreign-exchange earnings, tax revenue and demand for supporting industries. Disruptions to air travel, household confidence or disposable income in major tourist markets can therefore transmit rapidly through the domestic economy.
A nascent recovery in arrivals offers some relief. However, the Fund’s projection suggests that the lost activity earlier in the year will weigh heavily on full-year performance.
Headline inflation remained at 0.9% through August despite higher international commodity prices.
That stability would ordinarily suggest that Seychelles had avoided much of the global price shock. The IMF, however, said the limited increase in domestic prices reflected subsidies provided through state-owned enterprises.
“Headline inflation remained moderate at 0.9% through August, reflecting a subsidy through state-owned enterprises to limit the pass-through of rising international commodity prices to domestic markets,” Mr Schneider said.
The policy has protected households and businesses from the full effect of increases in global prices. But it has shifted part of the cost from consumers to the balance sheets of public companies.
“The cost of these subsidies has deteriorated some SOE balance sheets and reduced dividend payments to the government budget,” the mission chief said.
This presents the government with a difficult policy choice.
Allowing international prices to pass directly into the domestic economy could increase inflation and weaken household purchasing power. Maintaining broad subsidies, however, places pressure on public enterprises and reduces the revenue they transfer to the state.
If the financial position of those companies deteriorates sufficiently, the government may ultimately have to recapitalise them or assume their liabilities. Costs initially kept outside the central budget could therefore return as public debt or emergency financial support.
The apparent success of low inflation must consequently be weighed against the fiscal risks accumulating within the state-enterprise sector.
Despite the tourism shock and higher international prices, the IMF said Seychelles’ external sector had remained broadly stable.
The Seychelles rupee was broadly unchanged against the US dollar, while the central bank’s foreign-exchange reserves remained equivalent to about four months of imports.
Stress in the financial system also appeared limited.
“The external sector has remained broadly stable despite the recent shock,” Mr Schneider said.
“The rupee has been broadly stable vis-à-vis the US dollar, and central bank foreign-exchange reserves remain at about four months of import cover. Stress on the financial sector also appears to have been limited.”
The reserve position provides a measure of protection against external volatility. But four months of import cover does not leave unlimited room for policy intervention if tourism receipts weaken for an extended period or international commodity prices remain elevated.
Maintaining reserve adequacy will require the authorities to balance exchange-rate stability against the need to preserve foreign currency for essential imports and external obligations.
The mission was conducted under the IMF’s Post-Financing Assessment framework rather than as a review of an active lending programme.
A Post-Financing Assessment applies to countries that have IMF credit above specified absolute or quota-based thresholds but do not have a Fund-supported programme or staff-monitored arrangement.
The process examines whether government policies and the broader macroeconomic framework are consistent with medium-term economic viability and the country’s ability to repay the IMF.
Seychelles’ assessment is expected to be discussed by the IMF Executive Board in December 2026.
The review means the Fund’s attention will extend beyond the immediate fall in tourist arrivals. It will also examine whether the authorities can protect debt sustainability, maintain external stability and manage the fiscal risks associated with state-owned enterprises.
For Seychelles, the immediate policy challenge is to support the tourism recovery without exhausting the buffers needed to manage future shocks.
The authorities will also have to decide how long state enterprises can continue absorbing international price increases and whether subsidies should be better targeted towards the most vulnerable households.
A broad subsidy can suppress inflation quickly, but it benefits consumers regardless of income and obscures the actual cost of imported goods. A more targeted system could reduce fiscal pressure while continuing to protect lower-income households.
The IMF’s findings present a mixed picture. Seychelles has maintained low inflation, a stable currency, adequate reserves and a resilient financial sector despite a material external shock.
But those headline strengths conceal weaker growth and rising pressure within public enterprises.
The durability of the recovery will depend not only on tourists returning, but on whether the government can unwind or redesign its price-support measures before the financial strain on state companies becomes a wider fiscal problem.
