Outlook for 2011-12

The president, James Michel, can expect to secure a second term at the presidential election scheduled for May 19th-21st. Parliamentary elections are not due until 2012. With the macroeconomic picture having stabilised owing to extensive and continuing reforms, real GDP growth is expected to remain buoyant in 2011-12 at 4.4% and 4.9%, respectively. Inflation will return to positive territory, averaging 3.2%, supported by a much less volatile, if still slightly depreciating, rupee and rising global commodity prices. The authorities will continue to run a fiscal surplus, albeit a narrowing one as public investment spending rises.

The political scene

The presidential election has been set for May 19th-21st. The incumbent, James Michel of the People's Party (Parti Lepep) is expected to secure a second term. Mr Michel appointed a new seven-member media commission to act as watchdog, deal with complaints, and encourage the development of the press and media freedom. The struggle against Somali piracy continues, with a failed attempt by the Seychelles Coast Guard to rescue a ship in its waters in January. The Ministry of Finance puts the immediate costs of piracy at US$17m in 2011.

Economic policy

The 2011 budget presented in December maintains a tight fiscal stance, running a surplus, albeit a narrowing one as investment rises, for a third consecutive year. The IMF has released a further US$2.7m from its US$30m extended fund facility, but has noted that Seychelles' rapid repayment of domestic debt has generated excess liquidity within the financial system, which poses a risk to inflation. A number of financial and fiscal reforms are planned for 2011.

The domestic economy

Seychelles' economy rebounded strongly in 2010, with real GDP growing by 6.2% according to the IMF, underpinned by a record year for tourism as visitor numbers climbed by 11% to 174,529, an all-time high. Inflation continues to edge up month on month and is set to accelerate in 2011. In November Seychelles Cable Systems signed a US$30m contract to lay a 1,900-km submarine fibre optic cable linking Victoria with Dar es Salaam in Tanzania, and thereby connecting Seychelles to the global fibre-optic system for the first time.

Foreign trade and payments

In mid-January a new three-year fisheries protocol with the EU came into effect The EU will pay EUR3.4m (US$4m) a year for the rights to catch 52,000 tonnes of tuna while sector support grants will rise from EUR1.2m to EUR2.2m. Marine exports reached SRs2.5bn (US$205.6m) in 2010, down from SRs3bn (US$215.9m) in 2009.

Land area

455 sq km, of which Mahé has 153 sq km and Praslin 38 sq km

Population

86,525 (official estimate, 2010)

By island

Mahé: 75,942

Praslin: 7,320

La Digue & outer islands: 3,265

Main town

Victoria, on the island of Mahé

Climate

Tropical

Weather at Seychelles international airport (sea level)

Hottest month, April, 26-31°C; coldest months, July-August, 24-29°C; driest month, June, 54 mm average rainfall; wettest month, January, 405 mm average rainfall

Languages

Creole, English, French

Measures

Metric system

Currency

Seychelles rupee (SRs)=100 cents

Time

Four hours ahead of GMT

Public holidays

Fixed date: January 1st, New Year's Day; May 1st, Labour Day; June 5th, Liberation Day; June 29th, Independence Day; August 15th, Assumption; November 1st, All Saints' Day; December 8th, Immaculate Conception; December 25th, Christmas Day

Variable date: Good Friday, Easter Sunday, Easter Monday, Corpus Christi

Official name

Republic of Seychelles

Form of state

Unitary republic

Legal system

Based on English common law, the Napoleonic Code and the amended 1993 constitution

National legislature

National Assembly of 34 seats, elected by universal adult suffrage-25 seats are decided by simple majority, nine seats by proportional representation

National elections

July 2006 (presidential); May 2007 (legislative); next elections May 2011 (presidential) and May 2012 (legislative)

Head of state

President, elected by universal suffrage, empowered by the 1993 constitution to rule by decree, serves a five-year term; currently James Michel

National government

The president and his appointed Council of Ministers; last reshuffle in June 2010

Main political parties

The People's Party (also known as Parti Lepep; formerly the Seychelles People's Progressive Front-SPPF), the majority party, holds 23 seats in the National Assembly and was previously the sole legal party; the Seychelles National Party (SNP) holds the remaining 11 seats

President, defence, legal affairs, information & tourism: James Michel

Vice-president & finance, trade, public administration & ICT: Danny Faure

Key ministers

Designated minister, community development, youthKey ministers

Education, employment & human resources: MacSuzy Mondon

Foreign affairs: Jean Paul Adam

Health: Erna Athanasius

Home affairs, environment & transport: Joel Morgan

Investment, natural resources & industry: Peter Sinon

Land use & housing: Jacquelin Dugasse

Social development & culture: Bernard Shamlaye

Central Bank governor

Pierre Laporte

Download the numbers in Excel

Download the numbers in Excel

Download the numbers in Excel

Please see graphic below

In the upcoming presidential election scheduled for May 19th-21st 2011-the president, James Michel, the leader of the ruling People's Party (PP; also known as Parti Lepep), will face the electorate for the first time since the economic crisis and subsequent sweeping economic reforms in 2008-09. Mr Michel won the last presidential ballot in 2006, defeating Wavel Ramkalawan of the Seychelles National Party (SNP) by a narrow margin. However, he will approach the next election with greater confidence, given the improved outlook for the economy following the extensive reforms initiated in late 2008. Despite the pain of adjustment and a decline in living standards, the economy is now rebounding and is likely to remain buoyant in the pre-election period. This will boost further Mr Michel's re-election prospects, provided that the reform process remains on track and there are no exogenous shocks. Although economic liberalisation represents a reversal of the PP's quasi-socialist heritage, and is closer to SNP policy, the opposition will find it hard to capitalise on the shift in political terms, and the ruling party (and Mr Michel) will seek to take advantage of the economic recovery. The SNP, by contrast, is struggling to reformulate its policy platform in order to differentiate its message from that of the ruling party. It seems likely that Mr Ramkalawan will remain as party leader to fight the election and will emphasise the party's long-standing support for labour rights and a non-politicised civil service. Although official campaigning only begins after the nomination deadline on April 27th, partisan press is already stirring up support for their preferred candidates. While media sympathetic to the SNP are accusing the election commission of facilitating what it alleges will be a rigged poll, the election is in fact expected to be free and fair. Mr Ramkalawan's claims that Seychelles could follow in the footsteps of the uprisings in North Africa are more a sign of hysterical campaigning than a comment on the state of the islands' political freedom.

Nonetheless, the difference between the two parties has shrunk and, even in the unlikely event of a SNP victory there are unlikely to be any significant policy shifts, especially given Seychelles' dependence on external support. The socio-economic reform process should help to turn Seychelles into a more transparent and less partisan society, although some key challenges remain, notably those of building a more independent judiciary and continuing tentative steps towards improving press freedom.

Having achieved a broad political and popular consensus in support of the sweeping and painful economic reforms since 2008-and with the economy already beginning to rebound strongly-Mr Michel is the likely victor come the election, although he has until April 27th officially to submit his nomination. Speculation that Mr Michel may yet call legislative elections early, to coincide with the presidential poll-given his cabinet reshuffle in June 2010 and civil service reforms-seems increasingly unlikely to come to pass. It is possible that the electorate-having clung to the PP in times of economic difficulty-will feel more confident about embracing change in an improved climate, but the PP, and in its previous guise, the Seychelles People's Progressive Front (SPPF), remains dominant on the archipelago, having controlled the legislature and presidency since 1979.

The parliamentary elections are scheduled to take place in 2012. The SNP, which captured 11 out of 34 seats in 2007, will struggle to add to this total and is, in fact, vulnerable in a few constituencies. The PP will cross the two-thirds threshold needed to amend the constitution unilaterally if it wins one extra seat (the PP speaker does not vote). Indeed, perhaps anticipating such a result, Mr Michel is publicly discussing the need to update various laws and provisions in the constitution following an official constitutional review concluded at the end of 2009. However, the attorney-general, Ronnie Govinden, has stressed the importance of a national referendum on any changes, even if the PP does attain a super-majority.

The government's ongoing commitment to comprehensive fiscal, monetary and structural reforms initiated in late-2008 will continue to facilitate closer relations with key partners. Seychelles has remained on track with a three-year IMF programme approved in late-2009, while World Bank support will increase. Donor funding will remain intact provided that Seychelles stays on track with reforms. IMF approval of the reforms undertaken to date has allowed for substantial debt relief from the Paris Club of international creditors and from commercial creditors, which has cut the debt burden by half, bringing it down to a sustainable level. The process is now largely complete and there will be no further write-downs. Seychelles will develop closer military ties with the US and the EU owing to its strategic location in the Indian Ocean near the Middle East. The spread of Somali-based piracy to Seychelles' waters will ensure that the archipelago becomes an increasingly important hub for anti-piracy operations. Seychelles' membership of the Southern African Development Community will facilitate ties with the African mainland.

The Economist Intelligence Unit expects Seychelles to continue the implementation of major reforms during 2011-12 as part of an IMF-backed programme. The first two years of reform-which began in November 2008 with the free flotation of the rupee, the removal of exchange controls and the adoption of much tighter monetary and fiscal policy-have yielded impressive results to date. The rupee has stabilised, inflation has fallen, the perennial shortage of foreign-exchange reserves has started to ease and the economy has rebounded. Seychelles' programme implementation continues to receive praise from the IMF, helped by broad-based public support for the process. Reflecting this, the IMF converted Seychelles' two-year stand-by agreement into a three-year extended fund facility (EFF), worth US$31m, in December 2009. More recently, in December 2010 the IMF said that Seychelles had continued to meet all programme conditions under the EFF (apart from delays to two small structural reforms), releasing a US$2.7m tranche of funds. The EFF envisages deeper structural reforms in 2011-12, including an overhaul of the tax system, the restructuring of parastatal enterprises (and privatisation in some cases), strengthening the financial sector and deregulation, with the broad aims of putting public finances on a sustainable footing and encouraging private-sector development.

The IMF's endorsement will continue to facilitate the engagement of other key donors such as the World Bank, which is currently preparing a two-year interim country assistance strategy-the first in Seychelles for 17 years, following the Bank's support for three loans totalling US$19.7m from the International Bank for Reconstruction and Development (IBRD) in April 2010. The strategy will focus on civil service reform, providing a safety net for the poor, statistical capacity-building and boosting the private sector. Seychelles' debt burden will remain low following the 2009 and 2010 Paris Club write-off of 45% of Seychelles' obligations while, in a key breakthrough, Seychelles' commercial creditors (which hold about 60% of the archipelago's debt) converted their debts into new discount notes in early 2010, which cut the sum owed by about 50%: repayment will take place between 2016 and 2026. As a result, Seychelles' external debt burden fell from 93% of GDP in 2009 to a more sustainable 45% of GDP in 2010, and will remain in this region in 2011-12.

Strong fiscal discipline, including strict spending controls imposed as part of an IMF adjustment programme, produced a primary budget surplus (excluding interest payments) of 9.4% of GDP in 2010-and an overall surplus of 2.8% of GDP-comfortably ahead of the EFF targets. Seychelles will continue to post a budget surplus in 2011-12-albeit a smaller one-enabling additional debt repayment and further spending on much-need infrastructure improvements. Better expenditure management and the ongoing reform of parastatal enterprises will reduce the drain on the public purse. Revenue will benefit from sweeping tax reforms intended to make the system clearer and fairer, including the establishment of a unified revenue commission, cuts in business taxes and the introduction of personal income tax in 2010 (to replace social security contributions)-which was cut from 18.75% to 15% last October. A value-added tax (VAT) will follow in mid-2012, to replace the goods and services tax. The adjustments may restrain the overall tax take in the near term, but will encourage economic activity and help to place public finances on a sustainable footing in the medium term. The budget surplus will narrow to about 2.5% of GDP in 2011, even accounting for potential election-related spending, before shrinking further to 1.9% of GDP in 2012.

The Central Bank of Seychelles (CBS) will benefit from greater autonomy from the Treasury during the forecast period, as part of an IMF-sponsored reform process, which will assist in meeting specified monetary targets. Until recent reforms the CBS relied on exchange-rate management to tackle inflation, as most consumer goods are imported. However, since exchange controls have been lifted, the CBS-with technical help from the IMF-is instead turning to indirect instruments, including new-style Treasury-bill auctions, to help to manage liquidity and reserve money supply. Monetary policy was tightened sharply when the reforms began in late 2008, but was loosened in 2009 when inflation eased: the CBS scrapped the local asset ratio requirement (freeing banks from mandatory investment in Treasury securities) and reduced banks' minimum reserve requirement from 12% to 10%. The 91-day T-bill rate peaked at 29.3% in January 2009, but fell below 0.5% by the end of 2010, reflecting deflation. Rates will drift higher as inflation turns positive again in 2011-12, but will remain relatively stable during the forecast period. Average commercial lending rates are much higher (11.5% in December), leaving scope for reductions in 2011-12 pending more competition in the banking sector.

Download the numbers in Excel

Real GDP grew by an estimated 6% in 2010, ahead of expectations, because of strong growth in tourism, the largest sector, which has important links to the rest of the economy. Visitor arrivals jumped by 11% to an all-time high of 175,000 and receipts climbed even faster, pushing up domestic demand, directly and indirectly. Extra government spending and income tax cuts in October facilitated the rebound. Growth will remain fairly brisk during the forecast period, at about 4.4% in 2011 and 4.9% in 2012, although the pace of expansion will be slower than in 2010 when the economy rebounded from a contraction. Tourism, which accounts for about 25% of GDP, will remain the key growth engine in 2011-12, stimulating the wider services sector and encouraging investment in tourism projects. The improved availability of foreign exchange and investment in power and water supply will underpin expansion in manufacturing and construction. The impact of the sweeping reforms implemented since late 2008 will be felt in terms of low and steady inflation, greater currency stability and a more welcoming business environment. The debt restructuring concluded with commercial and official creditors in 2009-10 will free resources for investment and consumption in 2011-12. However, tuna canning (the main export activity) will be constrained by falling catches, and tourism will remain vulnerable to exogenous developments, including factors such as terrorism and prolonged economic weakness and lingering sovereign debt concerns in the euro zone. There is also a danger that super-luxury tourism developments will become increasingly isolated from the mainstream economy, thereby limiting the wider trickle-down effects of tourism on growth. Growth will also suffer if the government fails to stay on track with reforms.

Average consumer prices fell by -2.4% in 2010-after soaring in 2009-but will move back above zero during 2011. Year-on-year inflation turned negative again in January 2011, at -0.7% (after two months above zero), because of last year's high base level, but will turn positive in the months ahead (probably from March onwards), spurred by higher global food and fuel prices, stronger domestic demand (helped by tax cuts) and the gradual depreciation of the rupee (which will push up import prices). The introduction of VAT in mid-2012 will add to price pressures, while pent up liquidity in the public and banking sectors could see demand-side pressures increase. We therefore forecast that inflation will increase to 3.3% in 2011, before decreasing to 3% in 2012-the official ceiling-as external price pressures ease. That said, inflation will remain comparatively subdued, helped by monetary and fiscal discipline and conservative bank lending.

The rupee strengthened in the first half of 2010 and stabilised in the second half to average SRs12.1:US$1 for the year, 11.3% stronger than in 2009, buoyed by the success of economic reforms. The rupee averaged SRs12.3:US$1 in January 2011, unchanged from December, although we continue to forecast gradual rupee depreciation, not only because of US-dollar strength resulting from global-especially euro zone-economic uncertainties, but also because of Seychelles' gaping current-account deficit, even if it is set to narrow slightly and foreign reserves are expected to accumulate. However, the large currency swings witnessed following the rupee's flotation in October 2008-which saw the rupee slump to SRs16.8:US$1 before rebounding to a peak of SRs10.3:US$1 in October 2009-are unlikely during the forecast period. This reflects confidence in Seychelles' reform programme and the rebuilding of foreign-exchange reserves. These totalled US$211m in November 2010-equivalent to about two months' import cover (compared with less than two weeks at the height of the debt crisis in 2008)-although holdings remain below the recommended three months minimum. We expect the rupee to slide gently from SRs12.1:US$1 in 2010 to SRs12.5:US$1 in 2011, recovering to SRs12.4:US$1 in 2012 as the current-account deficit narrows, shocks notwithstanding.

After widening to an estimated 47.5% of GDP in 2010, the current-account deficit will narrow steadily during the forecast period-to about 41.6% of GDP in 2011 and 31.4% of GDP in 2012, driven primarily by growth in tourism. The trade deficit, however, will widen in 2011-12 because of rising global commodity prices and faster economic growth, which will increase imports while export earnings, principally from canned tuna, will be held back by volatile fish catches (and uncertainty about new investment). Although the Seychelles re-exports a significant amount of refined oil products, the net effect of elevated oil prices will be negative and weigh on the trade deficit. Receipts from services will grow strongly in 2011-12, driven by tourism, although trade-related service outflows and income payments to foreign investors will also increase. Although the current-account deficit will narrow, the gap will remain large, leaving Seychelles reliant on foreign direct investment inflows to finance the shortfall.

Download the numbers in Excel

This year's presidential election will take place over three days, between May 19th-21st, according to a recent announcement by the election commissioner, Hendrick Guppy. Voting will start on the outer islands on the first two days, followed by the main islands of Mahé, Praslin and La Digue on the third day. Mr Guppy also declared that the formal nomination of candidates would take place on April 27th, followed by an 18-day campaign period. There is little doubt that the incumbent, James Michel, will stand again for the People's Party (PP, also known as Parti Lepep), which has ruled Seychelles since a coup in 1977-and that his vice-president, Danny Faure, will be his running mate. Mr Michel took over the presidency when his predecessor, Albert René, retired before the end of the official term in 2004-and secured his first victory in 2006, beating Wavel Ramkalawan of the Seychelles National Party (SNP) by a relatively narrow 54 to 46 margin. It is also a near certainty that Mr Ramkalawan will stand again for the SNP-his fourth such attempt The smaller Democratic Party (DP) is expected to field party leader, Ralph Volcere, while three or more candidates may run as independents. The DP and the independent parties will struggle to capture more than a small share of the vote, but these are more likely to come at the expense of the SNP rather than the PP, which will work in the incumbent's favour. Mr Michel will hope that the current economic recovery-following a period of fundamental reforms and deep austerity that won bipartisan support-will boost his re-election prospects, whereas the SNP will hope that voters blame Mr Michel for leading Seychelles into an economic crisis in the first place.

President Michel appointed a new, seven-member media commission in January, which will serve a dual role of serving as a watchdog and dealing with complaints, and encouraging the development of the press by, for example, ensuring that official press releases and invitations to press conferences are sent to all media, not just state-run outlets. Headed by Ibrahim Afif, the commission is a toothless body with no legal powers, but will mediate in disputes in a bid to prevent clashes going to court by requesting that apologies be issued or statements retracted. The commission is also charged with protecting constitutional rights to freedom of expression and access to information, which is a positive step-if carried through-as these rights have been abused in the past. However, while some of the commission's nominees were well-received by all sides, the SNP, which has fought a long but not always successful battle for media freedom (including a failed bid to win permission to open a radio station)-was highly critical of other nominees, alleging them to be PP partisans. One further slot on the commission has been allocated to the Seychelles Media Association launched in May 2010 to bring together individuals in the sector.

Despite intensive efforts by global navies and the Seychelles Coast Guard (SCG), the threat to the Seychelles from Somali-based piracy is increasing. This is not simply because the high season is approaching, but also because a change in pirates' strategies has allowed them to strike at greater distances from the shore through the use of captured motherships. Naval patrols, private guards on ships and more effective anti-piracy strategies means that less than half of attacks are successful, but pirates are still capturing numerous ships and hostages, some in Seychelles waters. The SCG and EU vessels have thwarted several attacks, rescued captives and arrested pirates (who are being tried in Seychelles). However, the risks were highlighted in January when the SCG fired on a seized vessel, the Germany-based Beluga Nomination, killing one of the pirates, who responded by executing a seaman. Alongside reports of hostages being mistreated, this is a clear sign of the pirates' increasing ruthlessness. Two of the ship's 12-strong crew died during the fighting, but the rest and the vessel-which carried numerous goods for Seychelles-were taken to Somalia. Although successful, the SCG was criticised for a lack of restraint and the EU task force for not responding in time. Vessels are increasingly employing private guards, or re-routing via the Cape of Good Hope in South Africa. Coupled with rising insurance, this is imposing a high cost on trade and the local economy (see Economic performance).

Seychelles now has nearly 50 pirates in detention, some convicted and some awaiting trial. In the latest prosecution, in December, a judge sentenced nine pirates to 22-year terms, using new anti-piracy powers in Seychelles law, while another trial of ten pirates is currently underway. Some 10% of Seychelles' prison population now comprises pirates, which is putting a strain on the system, despite external assistance. In a key development, the government and judicial representatives from Somaliland (the breakaway entity in the north of Somalia), Puntland and Somalia's Transitional Federal Government (TFG) signed agreements in February, under the auspices of United Nations Office on Drugs and Crime (UNODC), to repatriate pirates to serve their terms in Somalia. However, Somalia's prisons will need to be upgraded and inspected before actual transfers take place. Several "pirates" have already been repatriated to Puntland because of insufficient evidence to prosecute. On the military side, the United Arab Emirates donated five patrol boats to the SCG in December, as part of a US$15m defence package agreed last year, which also includes constructing a new coast guard station and radar network.

The economic costs of Somalia-based piracy have been estimated by the Ministry of Finance. Trade costs-mainly freight and insurance-are expected to be around US$4.5m; tourism will lose out on US$8m because of cancellations and fewer cruise ships and yachts; and fishing will lose US$4m because of reduced activity. This could bring the total bill to almost US$17m in 2011-about 1.8% of GDP-excluding losses suffered by private businesses such as goods seized on captured vessels. Also excluded are higher outlays on defence and the judiciary (to try captured pirates), although these will mainly be covered by foreign assistance.

The government will maintain a fairly tight fiscal stance in 2011, according to the budget presented in December, by running a surplus for a third year running in order to continue repaying domestic and foreign debt. Spending in 2011 will still be higher and the (primary) budget surplus smaller than originally envisaged under the ongoing IMF programme because of Seychelles' strong fiscal performance in 2010, when brisk GDP growth (estimated by the IMF to be 6.2%) drove revenue higher than original projections. The estimated 2010 fiscal outcome sees the primary surplus (which excludes debt interest) at 9.4% of GDP and an overall surplus (including external grants) at 2.7% of GDP-both 2 percentage points higher than initial targets. Revenue is estimated to have reached 37% of GDP (2.5 percentage points above target) because of strong tax collection, despite a shortfall in expected grants. This allowed for spending rising to 34.3% of GDP, 0.5 of a percentage point above target, and a larger budget surplus. The public debt burden plummeted in 2010 owing to restructuring and rescheduling after default in 2008, and net repayment of domestic creditors. Foreign debt halved to an estimated 45% of GDP from 93% of GDP in 2009, while domestic debt shrank to 31% of GDP (from 36%), cutting total public debt to 76% of GDP (compared with an initial IMF target of 82%).

The 2011 budget envisages a sharp rise in total revenue to 40.5% of GDP, owing to a surge in project-based external grants to 4% of GDP. Domestic revenue will rise, but will be constrained by reforms such as last October's cut in income tax from 18.75% to 15%. Spending will also rise quickly in 2011, to 37.8% of GDP, driven by a sharp rise in capital outlays on infrastructure, including power, water, fuel storage and telecoms, which will boost future economic potential and security. Although not an overtly political budget, the extra spending can be expected to provide a fillip for the incumbent, James Michel, in this year's presidential election. The 2011 budget targets a much smaller primary surplus, of 5% of GDP, as Seychelles' debt burden has now shrunk. Foreign debt may edge up a little in 2010 (to 46% of GDP) as restructuring is now largely complete and new project finance is secured, but domestic debt will continue falling to 26% of GDP, cutting the total burden to 72% of GDP. While considerably more manageable than before-especially with the average life of the country's debts having increased from six months to 13 years-this is still near the limit of sustainability so will need to be watched carefully: the IMF's debt-stress tests show that Seychelles remains vulnerable to shocks, an unsurprising conclusion given the small size and openness of the economy.

As expected, the IMF approved the second review of Seychelles' 2009-12 US$30m extended fund facility (EFF), in December (December 2010, Economic policy). The Fund said that all performance criteria at the end-September deadline were met comfortably (and were still on target by end-November) and that structural reforms are advancing. This allowed for the immediate disbursement of US$2.7m, taking the total to date to US$14.2m. However, two structural benchmarks were delayed because of capacity constraints. These were the submission of a new customs management act to the national assembly (which was three months late) and the slightly more problematic introduction of a new budgetary chart of accounts, which has been put off until the 2012 budget.

The Fund was impressed by the archipelago's strong fiscal performance, but the rapid repayment of domestic debt has generated excess liquidity within the financial system, which poses a risk to inflation. The Fund therefore recommends that monetary policy be tightened a little in 2011, primarily by mopping up excess liquidity via Treasury bill auctions (despite the cost in interest). However, the IMF advised against lifting banks' minimum reserve requirements, as the liquidity "overhang" will gradually dissipate as credit growth quickens. Despite a rise in non-performing loans in 2010-and lower interest earnings from government securities, especially as rates have fallen-the banking system is essentially sound and adequately capitalised (although still vulnerable to rare but "extreme" interest rate shocks). However, there is inadequate competition in the sector, which means that lending rates have not fallen as quickly as other rates-while private-sector credit (at 25% of GDP) is low compared with its island peers, despite excess liquidity. To help promote competition, the IMF recommends stronger disclosure requirements and a reduction in state involvement in the sector, as represented by Nouvobanq, Savings Bank and the Housing Finance Corporation (which has a virtual monopoly in mortgages).

Key reforms envisaged for 2011 include:

• amending the Financial Institutions Act to promote competition and risk management (April);
• reforming house financing to reduce the role of the state (June);
• launching a plan to reform the social security system (June);
• passing a new value added tax (VAT) act (June);
• developing a plan to privatise non-strategic enterprises (September);
• passing a new public finances bill to extend national assembly oversight (September); and
• reforming two key parastatals, the Public Utilities Corporation (PUC) and Air Seychelles, following strategic assessments by outside consultants.

Seychelles' solid performance in 2010, especially in the fiscal and debt spheres-coupled with the positive assessment by the IMF-convinced Fitch, a ratings agency, to upgrade the archipelago in February 2011. Fitch hiked Seychelles' long-term foreign-exchange rating from "B-" to "B", and its local currency rating from "B" to "B+", with a stable outlook. However, the wide current-account deficit (47% of GDP in 2010 according to the IMF) is a risk; a further ratings upgrade would require a larger hard-currency stockpile-although this has risen to US$211.3m by November 2010 from US$190.6m in 2009, it offers only two months of import cover-or a lower level of debt.

Seychelles' economy rebounded strongly in 2010, with real GDP growing by 6.2% according to the IMF, underpinned by a record year for tourism (which accounts for about 25% of GDP), strong foreign direct investment (FDI), macro-economic stability following deep reforms and the strengthening global recovery. Visitor numbers climbed by 11% to 174,529 in 2010, an all-time high-and well ahead of the previous peak of 161,273 in 2007-helped by new hotel openings, more competitive pricing and more frequent flights to the archipelago, despite the currency strengthening somewhat in 2010. Combined with a slight increase in the average length of stay to 10.4 days in 2010 (another record), the total number of visitor nights rose by 17%. Tourism earnings (narrowly defined) followed a similar trajectory, rising by 22% in rupee terms to SRs2.45bn and by 32% in US dollar terms to US$203m-giving a significant boost to the economy.

Arrivals from Europe grew relatively slowly, by 8% to 131,589 in 2010, held back by continued economic weakness within the euro zone, which cut Europe's share to 75% (from 77%). Arrivals from the Americas fell, but those from non-traditional destinations grew rapidly, especially Africa (up by 20% to 22,353, a 13% share) driven by South Africa and Reunion, and the Middle East/Asia (up by 34% to 15,534, a 9% share) driven by the United Arab Emirates and India. By country, the six leading markets in 2010 were France (35,026, up by 12%), Italy (25,602, down by 2%), Germany (21,314, up by 8%), the UK (12,390, up by 10%), South Africa (10,425, up by 27%) and Russia (8,942, up by 10%). Preliminary figures for 2011 show that growth in tourism remains brisk, and arrivals were 12% higher in January than a year earlier.

Adding to Seychelles' appeal, Saudi Arabia's Kingdom Hotel Investment opened a new super-luxury resort on Praslin Island in February under the Raffles brand and management. The US$145m development boasts 86 villas including residential property for sale (with a minimum US$3.5m price tag). Separately, the Hilton group has taken over the 110-room Labriz resort on Silhouette Island (the archipelago's third largest) and plans to reopen in March after refurbishment. Labriz becomes Hilton's second property in Seychelles, alongside the Northholme hotel on Mahé (the main island). Meanwhile, South Africa's Wilderness Safaris sold North Island (and its tourist villas) to a Cyprus-registered Russian outfit, Groval Holdings, for US$47.5m in late-2010. The IMF estimates that FDI, which is primarily directed towards tourism, surged to a record US$411m in 2010 (a massive 44% of GDP) from US$223m in 2009, which helped to finance the current-account deficit.

Download the numbers in Excel

Inflation remains subdued in Seychelles, helped by the appreciation of the rupee in 2010 (by 11.3% to SRs12.1:US$1) and the currency's stability so far in 2011 (at about SRs12.25:US$1), which is helping to contain import prices. Nevertheless, consumer prices rose by 0.3% month on month in January, the fastest since August, driven by a rise in fuel prices for the first time since last June. The Seychelles Petroleum Company (Sepec) hiked the cost of petrol by 2.9% to SRs17.5/litre and that of diesel by 5.9% to SRs18/litre because of rising world prices. However, year-on-year inflation dipped back into negative territory in January-falling by 0.7% after two months of positive price growth-but this was primarily due to base effects. Average annual inflation remained in negative territory in January at -2.3%, compared with -2.4% in December 2010, but is now moving back towards zero. While inflation is currently subdued there are risks ahead, especially those posed by rising global fuel and food prices-and by the likely depreciation (albeit gradual) of the rupee. However, the Economist Intelligence Unit still expects inflation to remain below the government's official 3% target in 2011.

In November Seychelles Cable Systems (SCS)-a special purpose vehicle set up by the government and the archipelago's two operators, Cable and Wireless and Airtel-signed a US$30m contract with a French telecoms infrastructure company, Alcatel, to lay a 1,900-km submarine fibre optic cable between Victoria and Dar es Salaam, Tanzania. The Seychelles East Africa System (SEAS) cable-with a capacity of 320 gigabit-will link Seychelles to the global fibre-optic system for the first time and reduce dependence on costly satellite links (although these will be retained as back-up). The cable will greatly increase available bandwidth and reduce costs, leading to the faster uptake of high-end services (such as Internet TV and video streaming) and facilitating government services, e-health and e-commerce-thereby giving a boost to the wider economy. SEAS is expected to become operational in mid-2012. The latest data from the National Bureau of Statistics show that subscriber numbers continue to grow rapidly, making Seychelles one of the best-connected locations on the continent, with almost two mobile subscriptions for every resident on average. Mobile subscribers reached 159,701 in the third quarter of 2010 (up by 37% year on year) while fixed lines reached 28,676 (up by 12% year on year).

A new three-year fisheries protocol with the EU came into effect in mid-January 2011 (after being approved by the EU's council of ministers in December), which provides for an increased financial contribution to Seychelles but a lower allowable catch-reflecting pressures on stocks and the reality of Somalia-based piracy, which has made fishing in the region more costly and dangerous. The EU will pay Seychelles EUR3.4m (US$4m) a year for the rights to catch 52,000 tonnes of tuna, down from EUR4.1m for 63,000 tonnes under the previous deal. Any fish caught above the limit will be charged at EUR65/tonne. However, the EU has increased its development grant, designed to boost the sustainability and development of Seychelles' fishing, to EUR2.2m a year from EUR1.2m previously, thus raising the total payment by 5% to EUR5.6m a year. Seychelles will also earn EUR1.3m a year in ship owner licence fees. The deal allows for 48 purse seiners and 12 surface longliners (mainly Spanish and French).

Tuna caught in Seychelles' exclusive economic zone (EEZ) accounts for about 25% of the total Indian Ocean catch made by European vessels and is used to supply processing plants in Seychelles, Mauritius, Madagascar and Kenya. The latest data show that the Thai-owned company, Indian Ocean Tuna, produced 23,358 tonnes of canned product in the first three quarters of 2010, fractionally lower than a year earlier. However, full-year output is likely to exceed the 2009 level because a two-week maintenance closure in December 2009 was not repeated in 2010. The IMF expects tuna exports to have generated US$213m in 2010 (down from US$221m in 2009) to remain Seychelles' largest goods export earner by a large margin. According to the National Statistics Bureau however, total marine exports reached SRs2.5bn (US$205.6m) in 2010, down from SRs3bn (US$215.9m) in 2009.

Download the numbers in Excel