Outlook for 2011-12

With the incumbent president, James Michel, having comfortably secured a third term on May 19th-21st, the next ballot is not due until 2017. Parliamentary elections are due in 2012. With the macroeconomic picture having stabilised due to extensive and continuing reform, real GDP growth is expected to remain buoyant in 2011-12 at 4% and 4.9% respectively. Inflation will return to positive, averaging 2.8%, supported by a much more stable, 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

Mr Michel secured a third presidential term with 55% of the vote in the ballot held on May 19th-21st, cementing the hold of the Parti Lepep (or People's Party-PP) on Seychelles' political scene. Mr Michel won a majority in 23 of the country's 25 constituencies on a platform of ongoing reform, putting the PP in a strong position ahead of legislative elections next year.

Economic policy

The IMF remains pleased with Seychelles' progress under its extended fund facility, with all benchmarks having been met for the third review in March. The next instalment, ofUS$5.5m, was expected to have been approved in late May. Heavy losses at the state-owned Air Seychelles have forced a restructuring, but there are no plans to privatise the firm. However, the government has sold off 40% of Seychelles Savings Bank to accountholders and staff, and is looking for strategic investors for 20% of another state-owned bank, Nouvobanq.

The domestic economy

After a record year in 2010, visitor arrivals in the first four months of 2011 were 9.9% up on the same period in 2010, pointing to another record, supported by a stronger euro and growth in new markets. Such volumes and increasing flight frequency have exposed capacity limitations at the international airport, however, which the government plans to address with a SRs45m (US$3.8m) investment in 2011-12. Production of canned tuna-Seychelles' main export-grew by 4.2% to 30,338 tonnes in 2010, but fish catches continue to dwindle, falling by 14.1% to 2,597 tonnes, highlighting pressure on regional fish stocks. Inflation, returning to positive territory, will be restrained by official subsidies despite pressures from rising external prices and lower domestic lending rates.

Foreign trade and payments

Seychelles has received a number of low-cost loans and grants over the quarter, including US$23m from the African Development Bank and the European Investment Bank for a submarine fibre-optic cable, and US$8m from China for house- and school-building.

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: ,942

Praslin: 320

La Digue & outer islands: 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

May 2011 (presidential); May 2007 (legislative); next elections 2017 (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

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James Michel, re-elected by a comfortable 55:41% margin in the presidential election on May 19th-21st, will now start a second five-year term. The victory-by a larger margin than in 2006-will cement the hold of the president and the long-term ruling People's Party (PP; also known as Parti Lepep) on the Seychelles' political scene, although parliamentary elections scheduled in 2012 will provide an additional test. The presidential election was free of violence and conducted in a transparent manner, according to observers from the Southern African Development Community (SADC) and the Commonwealth-and turnout was high at about 83%, lending legitimacy to the outcome. Wavel Ramkalawan, the losing candidate of the opposition Seychelles National Party (SNP), whose share of the vote slipped from 46% in 2006, claims that voters were bribed. However, this is a perennial complaint and largely reflects the PP's control of government, including the state-run media and the civil service, rather than outright fraud. Relations between the two parties will remain fractious but peaceable, and squabbling does not post a threat to political stability. The electorate clearly rewarded Mr Michel for the rebound in the economy following a severe debt crisis and the launch of tough sweeping reforms in 2008. The PP's decision to embrace reforms, which had long been advocated by the SNP-and their success in terms of robust growth, a debt write-off, lower inflation, a now stabilised currency and higher foreign-exchange reserves-removed a key campaigning weapon from the opposition's armoury.

The SNP will retain the support of a significant portion of the electorate but, having lost ground since its high-water mark in 2006, faces a challenging future. Mr Ramkalawan, defeated by the ruling-party candidate in four consecutive elections, may step aside, although will probably not make a final decision until prior to or immediately after next year's parliamentary ballot. The SNP will continue to campaign for a non-politicised civil service and for liberalisation of the media. For Mr Michel, the election is a positive endorsement of his personality and policies, and will make it easier for him to impose his will on the PP (which still harbours both quasi-socialist and mercantilist elements opposed to free markets) and push ahead with reforms. This, in turn, will ensure that Seychelles maintains good relations with key donors. 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 won the presidential election with an increased share of the vote, the PP will approach legislative elections scheduled for 2012 with a degree of confidence. The SNP, which captured 11 out of 34 seats in 2007 with 44% of the vote, will struggle to add to this total and is vulnerable in several constituencies. Indeed, the SNP's Mr Ramkalawan won a majority in only two of the archipelago's 25 constituencies in the recent presidential election. The PP is highly likely to retain control of the National Assembly in 2012 (having dominated, including in its previous guise as the Seychelles People's Progressive Front, since 1979) and 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 debate on constitutional change will gather pace after next year's ballot.

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, and 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, with a number of countries such as India, China, the UAE and the EU providing money, materiel and support. Seychelles' membership of SADC 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. Seychelles has continued to meet all programme conditions under the EFF (apart from minor delays to some structural reforms), according to the most recent IMF assessment in March 2011. 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 tolerable following the 2009 and 2010 Paris Club write-off of 45% of Seychelles' obligations to the group, and the conversion of Seychelles' commercial debts (about 60% of the total) 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 49% of GDP in 2010, and will remain in this region in 2011-12. Debt owed to China and India is also in the process of being restructured.

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, according to the IMF, slightly below our own calculations-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-needed 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 0.3% of GDP in 2011, even accounting for potential election-related spending, before improving to 1.5% 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, having drifted lower in 2010 and the first quarter of 2011, have been cut dramatically in April at the two state-owned banks, with other lenders likely to follow suit.

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Real GDP grew by an estimated 6.2% 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 facilitated the rebound. Growth will remain fairly brisk during the forecast period, at about 4% in 2011 and 4.9% in 2012, supported by lower lending rates, 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 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 positive in March and edged higher in April to 2.1%, an 18-month peak. Inflation will drift upwards in the months ahead, driven by higher food and fuel prices, stronger domestic demand (spurred by tax cuts and lower interest rates) and the gradual depreciation of the rupee, which will push up import costs. Pent-up liquidity in the public and banking sectors could translate into additional demand-side pressure, and we expect year-on-year inflation to approach 5% by December 2011. However, monetary and fiscal discipline and conservative bank lending will help to contain the pressures, and we expect average inflation to remain comparatively subdued, at about 2.8%, in 2011. Inflation will accelerate to 3.1% in 2012, despite lower global commodity prices, supported by robust domestic demand and the introduction of VAT in mid-2012.

The rupee strengthened by 12.7% in 2010 to average SRs12.1:US$1, buoyed by the success of economic reforms. The currency has remained stable in 2011 to date, averaging SRs12.3:US$1 in the first quarter (6.7% weaker year on year but around the same as the final quarter of 2010), underpinned by growth in tourism earnings and foreign-exchange reserves. The rupee has drifted higher since mid-2010, buoyed into 2011 by sustained dollar weakness (and euro strength-despite ongoing sovereign debt concerns-due to the European Central Bank raising rates). Although this may continue into 2011, the effect on the rupee is likely to be limited, owing primarily to Seychelles' gaping, if narrowing, current-account deficit and higher world oil prices. However, the large currency swings witnessed following the rupee's free flotation in October 2008 are unlikely during the forecast period, reflecting confidence in Seychelles' reform programme and the rebuilding of foreign-exchange reserves. These totalled US$240m in February 2011-equivalent to more than 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 SRs12.10:US$1 in 2010 to SRs12.30:US$1 in 2011, firming slightly in 2012 to SRs12.25:US$1 as the current-account deficit narrows, shocks notwithstanding.

After widening to an estimated 47.3% of GDP in 2010, the current-account deficit will narrow steadily during the forecast period-to about 39.6% of GDP in 2011 and 26.8% of GDP in 2012, driven primarily by growth in tourism. The trade deficit, however, will widen in 2011 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), before narrowing in 2012 on easing commodity prices. Although Seychelles re-exports a significant amount of refined oil products, the net effect of elevated oil prices will be negative and will 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.

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James Michel was re-elected president by a comfortable margin in the presidential ballot held on May 19th–21st for a third term, cementing the hold of the Parti Lepep (or People's Party—PP) on Seychelles' political scene. Mr Michel assumed the presidency in 2004, after his predecessor, Albert René, resigned, facing his first election in 2006, when he defeated Wavel Ramkalawan of the Seychelles National Party (SNP). Mr Michel improved on this performance in 2011, capturing 55.5% of the total—thereby avoiding a second-round run-off—while Mr Ramkalawan's vote slipped to a 41.4% share. The two minor candidates, Ralph Volcere of the New Democratic Party (NDP) and Phillip Boullé (an independent), both won less than 1,000 votes each for a combined 3.1% share. The electorate clearly rewarded the incumbent for steering the sweeping economic reforms and recovery since the 2008 debt crisis. The success of the reforms, which the SNP had long advocated, also removed a major campaigning tool from the opposition's armoury.

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Turnout was high at about 85% (although it was slightly lower than the 88% recorded in 2006) and there were no incidents of violence, with observers from the Southern African Development Community and the Commonwealth deeming the process to have been largely free and fair. The SNP has nevertheless accused the ruling party of bribery, and refused to attend the official declaration of the results (but it is likely to attend the president's inauguration). The SNP's gripes are probably exaggerated, although there is little doubt that Mr Michel benefited yet again from controlling the levers of power, including the local state media and the civil service. The result was a disappointment for Mr Ramkalawan, who won 1,748 fewer votes than in 2006, bringing to four his tally of consecutive election defeats as the ruling party candidate (in 1998, 2001, 2006 and 2011), which raises a question mark over his future as party leader. The SNP's slippage is only partly explained by the decision of the New Democratic Party (NDP) to field a separate candidate for the first time since 1998 (after the party's forerunner backed Mr Ramkalawan in 2006) and the increased vote for the independent candidate, Mr Boullé, which both ate into the SNP's share. The SNP still represents a significant proportion of the Seychelles' electorate but its support has fallen from a high-water mark in 2006 and its dream of returning to power has faded. The PP, by contrast, which won a majority in 23 of the country's 25 constituencies in the presidential ballot on a platform of ongoing reform, can now look forward to legislative elections scheduled for 2012 with a greater degree of confidence.

An IMF mission in March, undertaking a third review of the three-year extended fund facility (EFF), which started in December 2009, noted that Seychelles remained broadly on track with reforms and that macroeconomic performance was satisfactory. All quantitative benchmarks had been met as at the end-December cut-off point for the third review, although there had been some "technical" delays in government payments to a single (unnamed) parastatal, according to the mission leader, Jean Le Dem. The Fund expressed concern about the impact of rising global food and fuel prices, which could push up inflation, put pressure on the balance of payments and slow down the ongoing process of fiscal consolidation, especially if the government failed to pass on rising costs to consumers and increased subsidies. Higher prices for basic foodstuffs are currently being absorbed by the parastatal Seychelles Trading Company, but local fuel prices have risen steadily this year. The government has pledged to cap the use of a price stabilisation fund at 0.4% of GDP in 2011, which will limit the fiscal impact at the expense of higher consumer prices.

However, in a boost to public finances, the ongoing modernisation of the tax system is yielding benefits, and revenue from the new income tax has exceeded targets so far in 2011, giving the government scope to increase spending while still meeting the 2.7% of GDP fiscal surplus target in 2011. On the monetary front, the IMF endorsed Seychelles' plans for policy tightening, to deal with excess liquidity in the banking system and to forestall inflationary pressure.

The IMF projects that real GDP growth will slow to about 4% in 2011, from an estimated 6% in 2010, because of heightened global uncertainty, the euro-zone debt crisis, higher oil prices and a decline in foreign direct investment (after a surge in 2010), although growth will remain fairly robust, underpinned by tourism. The Fund also noted that external debt had fallen to US$455m as at end-2010 (about 49% of GDP), from US$763m two years earlier (94% of GDP) following restructuring of private and official loans-which has taken Seychelles to the brink of sustainability. The IMF executive board, meeting in late May, is expected to approve the third review and sanction the release of the next EFF instalment, worth US$5.5m, taking disbursements to date to US$19.8m under the US$30.9m package. China, meanwhile, restructured Seychelles' debts in April, worth US$26m, providing for a 20-year repayment period with ten-year grace and a low, 2%, rate of interest, which will help to reduce both debt levels and interest payments. In addition, Germany has agreed to allow Seychelles to pay off its EUR3.4m (US$4.8m) debt-some of which goes back to the 1980s-over 49 years at 0.2% interest and a grace period of 16 years. Discussions over a similar restructuring programme with India have also begun, which will further assist the government's aim of keeping annual borrowing to US$47m.

A significant threat to the fiscus stems from the burden imposed by loss-making parastatals, especially Air Seychelles, which is experiencing financial difficulties owing to competition from the UAE-based Emirates airline, rising fuel costs and weak management. With Air Seychelles losing US$14m in the nine months to end-January, the government in March embarked on a management overhaul and installed a new board, chairman and acting chief executive officer, Maurice Loustau-Lalanne, who has temporarily stepped down as principal secretary for foreign affairs and as chairman of the Seychelles Civil Aviation Authority. Routes are also being reconfigured and "unsuitable" contracts renegotiated. The government has no plans to privatise the firm because of its strategic importance-it carries more than half of all visitors to the archipelago-but the burden has risen and the state was obliged to lend the carrier SRs255m (US$21m) in the six months to January 2011, including SRs30m from the budget and R225m in the form of two loans from the state-owned Nouvobanq.

As part of the reform agenda, the government is part-privatising the Seychelles Savings Bank (SSB), in a two-stage process that started with the sale of shares to around 25,000 eligible account holders and staff. The SSB offered 240,000 shares-a 40% stake-for SRs100 (US$7.7) each, valuing the stake at SRs24m (US$2.1m) in total, with a ceiling of 250 shares per customer. The sale opened on April 20th and closed on May 5th, although the results had not been announced at the time of writing. Any unsold shares will be offered to the wider public during a second phase, with the government potentially offloading an additional stake in the future. The government is also seeking a strategic investor for a 20% stake in a second state-owned bank, Nouvobanq, with the International Finance Corporation (the World Bank's private-sector arm) a possible suitor. According to the SSB prospectus, the Seychelles International Business Authority (SIBA) plans to set up a central market for trading the privatised shares pending the launch of a stock market in Seychelles.

To facilitate the development of the financial sector in Seychelles, the government hopes to launch the archipelago's first stock exchange by 2012. However, plans remain at a draft stage, and recent reports that SIBA has already licensed a South African firm, Anglorand, to set up the exchange appear to be premature. Anglorand is, nevertheless, one of the main contenders and has been working on the project since 2008, before plans were derailed by the global recession and Seychelles' debt crisis. A local bourse would be small and illiquid at first, with a few counters only, including perhaps the SSB, the State Assurance Company (SACOS) and the privately owned Seychelles Breweries, but it could over time attract other enterprises, including in tourism. A stock exchange would, in theory, offer a new and cheaper source of corporate financing (via listings and bonds), a new avenue for investment by households and institutions, a platform for the secondary trading of government securities and an alternative route for privatisation.

Tourist arrivals grew strongly in 2010-by 10.8% to 174,529, an all-time high-but growth ebbed in the first quarter of 2011. Visitor numbers rose by 8.1% year on year in January, in a promising start to the year, but February arrivals were 0.2% lower and March arrivals 3.1% lower, resulting in growth of just 1% (to 45,574) in the first quarter. Slower growth partly reflected uncertain economic conditions in Europe, which continues to account for three in every four visitors, although weakness in the German and Italian market was offset by a rise from France. April, however, was a boom month, with arrivals surging by 39% year on year to 19,182, possibly spurred by the recent UK royal wedding and the newlyweds' decision to honeymoon in Seychelles, which could boost tourism in the months ahead. Owing to the April surge, cumulative visitor numbers were nearly 10% higher in the first four months of 2011 compared with a year earlier, suggesting that 2011 may prove to be another record year despite the constraint of Europe's slow economic growth, especially if alternative markets such as India, China, the Far East and the Gulf-where the Seychelles Tourism Board is increasingly focusing-grow.

In good news for tourism, the UAE-based Emirates airline announced in April that flight frequencies on the Dubai to Seychelles route had been increased from seven per week to 12 per week as of end-March, and would rise further, to 14 per week-twice a day-by end-2011. Emirates has captured a significant slice of the market since coming to Seychelles in 2005, adding to the pressure on the state-owned Air Seychelles, although the national carrier continues to bring the majority of visitors to Seychelles, accounting for about 90,000 in 2010 (52% of the total). Other competitors in the market are Air France (via a code share with Air Seychelles), Qatar Airways, Condor and Kenya Airways. However, the increase in the number of flights is exposing bottlenecks at Seychelles International Airport. To deal with this, the government plans to invest SRs45m (US$3.7m) in 2011-12 to reconfigure, renovate and expand existing facilities before, in the longer term (in five to six years), starting work on a brand new domestic terminal costing SRs1.9bn (US$158.3m).

Buoyant tourism in 2010 was a significant contributor to real GDP growth during the year, estimated to be about 6%, although several other sectors and subsectors also performed strongly, including manufacturing, utilities and telecoms, as the economy rebounded from the global recession and a local debt crisis. Various manufacturing sectors grew strongly in 2010, helped by the much-improved availability of foreign exchange for imports. Soft-drink production jumped by 27% to 5,936 kilolitres (kl) after three years of decline, while beer production increased by 13% to 4,780 kl after a two-year downturn. Mineral water also posted a steep rise (by 34% to 5,995 kl), although milk and juice production contracted. In non-food manufacturing output of paint and construction materials such as blocks and aggregates posted solid gains. Supporting the rise in economic activity, electricity generation jumped by 13% to 301m kwh, a record high, while the number of mobile-phone subscribers climbed by 36% to 173,049, approximately twice the size of the population.

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Production of canned tuna-Seychelles' main export-by the Thai-owned Indian Ocean Tuna grew by 4.2% to 30,338 tonnes, the fastest rise since 2005, according to the latest production indicators from the National Bureau of Statistics. However, growth was hardly spectacular and output remains much lower than the peak of 40,606 tonnes achieved in 2005, because of a lower regional catch, greater competition for available tuna (from other regional canneries, for example) and a lack of new investment. Indeed, the volume of fish caught continues to fall, down by 14.1% in 2010 to 2,597 tonnes, following a 37% fall in 2009. Volumes are less than half their 2005 peak. A new fishing development scheme is under way at Ile du Port to help to diversify fish processing and value-added products both for local use and export, as well as boat servicing. This may help to boost volumes in the short term but risks exacerbating pressures on stocks-around a quarter of the world's tuna is caught in the Indian Ocean-unless a regional sustainability plan can be achieved.

Consumer price inflation has finally moved back out of negative territory, rising by 2% year on year in March and by 2.1% in April-the fastest rate for 18 months-because of costlier food and fuel. Food prices (25.5% of the index) rose by 3.1% in April and non-food prices (71.1% of the index) by 1.2%, spurred by costlier transport: fish prices (the remaining 3.3% of the index), which are more volatile, jumped by 14.6%. However, inflation remains very subdued, despite the surge in global food and fuel prices, helped by subsidies on basic foodstuffs imported by a parastatal, Seychelles Trading Company-which amount to about SRs500,000 a month at present-and by the stability of the rupee.

The currency stabilised at SRs12.24:US$1 in the four-month period from November to February, before strengthening a little in March/April. The rupee, in turn, is being supported by an increase in foreign-exchange reserves, which amounted to US$240m in February, 15% higher than a year earlier. Import cover of 2.4 months remains below the recommended three months minimum, but is maintaining an upward trend, helped by buoyant tourism inflows. In spite of recent price rises, the 12-month moving average inflation was still negative in April, at -0.8%, although this is likely to turn positive in mid-year. Further inflationary pressure will stem from the government's move to lower borrowing interest rates at the two state-owned banks in order to boost growth. Interest rates for businesses with turnover between SRs1m and SRs5m fell in April from around 13-16% to under 10%, and loan arrangement fees were slashed. Secured personal loans such as mortgages or for cars have seen rates fall from over 20% to around 5%.

The plan to lay a 1,900-km submarine fibre-optic cable between Victoria and Dar es Salaam, Tanzania, on the African mainland-the Seychelles East Africa System (SEAS) cable-received a recent boost when two multilateral financiers agreed to fund the debt component of the US$36m project (March 2011; Economic performance). The African Development Bank in May approved a US$12m low-cost loan for the SEAS, the first to a public-private partnership in Seychelles, following a decision in March by the European Investment Bank (EIB) to provide US$11m for the project. The two loans will be disbursed to the cable's owner, Seychelles Cable Systems (SCS), a joint venture between the government and the archipelago's two telecoms providers, Airtel and Cable & Wireless: the state and the private operators will provide the remaining finance of approximately US$13m in the form of equity. The EIB also sanctioned a US$5.6m grant from the EU-Africa Infrastructure Trust Fund to support the government's shareholding in the project, and the dividend earned from the stake will be used to provide free Internet access for schools, hospitals and libraries. Survey work on the cable, to be laid by a French telecoms infrastructure company, Alcatel, is now under way and start-up is scheduled for mid-2012.

The EIB is also considering funding a US$14m project to improve water supply and sanitation on the islands of Mahé, Praslin and La Digue. Recent data show that supply of treated water edged up by just 0.7% to 10.9m litres in 2010, much slower than the rate of both GDP and population growth, highlighting a potential constraint on economic development. Seychelles also secured a US$37m grant package from the Abu Dhabi Fund for Development in April, including US$28m for an 8-mw wind-power plant (to be built by a UAE firm, Masdar, at a site still to be determined) and US$9m for a housing project. The UAE also handed over a new diagnostic unit at the main hospital in April, worth about US$10m, and is funding a new base for the Seychelles coastguard worth about US$15m. China, meanwhile, gave a grant of US$8m in March for house- and school-building, promised to supply two aircraft for anti-piracy patrols and opened a new 50-bed hospital at Anse Royale, built and funded at a cost of about US$3.5m.