The central bank for the Indian Ocean archipelago of the Seychelles kept its monetary policy rate steady for the second quarter of 2021 to continue the accommodative policy stance and support economic activity which remains weak due to the impact of the COVID-19 pandemic.
The Central Bank of Seychelles (CBS) left its monetary policy rate at 3.0 percent, unchanged since it was cut in June last year as the central bank lowered the rate for the second time following a similar-sized cut in March.
In 2020 CBS cut its key rate by a total of 200 basis points and has cut it 250 points since the start of 2019. The Republic of Seychelles, which comprises 115 islands off the coast of Africa in the Indian Ocean, relies heavily on tourism that was devastated by the closure of borders in most countries as the pandemic swept the globe.
Although the country’s tourism industry remains subdued and overall growth dependent on fisheries and manufacturing – which can’t make up for tourism – CBS said it expects a gradual recovery of tourism activity in coming months as the rollout of vaccines in some of its key markets and interest by airlines in resuming flights, has “heightened hopes of a potential recovery, albeit at a slow but promising pace.”
The economy of Seychelles contracted 18.5 percent year-on-year in the third quarter of 2020 after a 19.8 percent contraction in the second quarter, with revenue from tourism plunging 78 percent in the January-November 2020 period from the same 2019 period, CBS said in January.
Tourism is also the main contributor of foreign exchange to the Seychelles and a decline in foreign exchange has hit the exchange rate of the Sechellois Rupee, which then raises import prices and inflation. The rupee was hit hard twice in the last year. First after the outbreak of the pandemic, with the rupee falling 13 percent in April, and then by another bout of weakness in late 2020.
This year the rupee has been steady and was trading at 21.15 to the U.S. dollar today but down 35 percent since the start of 2020. The impact of currency depreciation and higher global commodity prices has pushed up inflation in recent months to 8.68 percent in February – the highest since June 2012 – from 7.62 percent in January.
“The weakened domestic currency and the rise in external commodity prices are expected to lead to higher inflationary pressures in the short to medium term,” the central bank said, adding labour market frictions and challenges faced by the private sector pose an increasing threat to financial stability.
“Despite the short-term inflationary risks, CBS foresees the need to support the economy and aliviate the financial challenges that may result from the above developments,” the bank said.
