By George Thande
VICTORIA (Reuters) – The International Monetary Fund has agreed a two-year $26-million rescue package for the deeply indebted Seychelles’ economy, but the country’s central bank warned on Saturday it would not be enough on its own.
The Indian Ocean islands, best known as a luxury tourism destination but reeling from the global financial crisis, will receive some $9.1 million now as they struggle with a foreign debt burden previously valued at $800 million.
Annual inflation is expected to climb to 40 percent this month from 30 percent previously due to a fall in the local currency after it was floated. Residents say food prices have been rising fast and accuse some local traders of hoarding.
“It is certainly not enough but the important thing is the IMF serves as a catalyst and will open doors to other donors to come in,” Pierre Laporte, central bank governor, told Reuters.
Analysts predict a painful path to recovery while the central bank sees the economy slowing to 3.1 percent growth this year, and possibly contracting in 2009. The palm-fringed islands have a population of just 85,000.
The archipelago relies heavily on imports, but the turmoil on world financial markets has left foreign reserves severely depleted. Last month, the government failed to service an interest payment on $230 million of bonds maturing in 2011.
The Fund said late on Friday that it had approved the plan to support the Seychelles’ “bold economic reforms”, but that its disbursements would be subject to performance.
FOCUS ON REFORMS
As part of its reform package, the government lifted long-standing currency exchange controls earlier this month, prompting a 48 percent slide in the value of the rupee
The IMF said the authorities had made a good start, and it praised the archipelago for its commitment to far-reaching measures aimed at tackling macroeconomic imbalances that have built up over years. But it said further steps were needed.
“Strong fiscal policy reforms, including the removal of tax exemptions and strengthening of public financial management, need to be sustained in order to secure substantial primary surpluses over the medium term,” it said in a statement.
Laporte said the IMF funds would help consolidate the country’s international reserve target of $19 million for the end of December.
“We are already above that target. This immediate $9.1 million will allow us to cement that reserve and maybe inject a little into the system,” he said.
Finance Minister Danny Faure said the challenge was to stimulate a financial system that remains largely reliant on tourists from rich nations — many of whose own economies are now on the brink of recession.
“The programme we have with the IMF is adjustable,” Faure told Reuters in Victoria. “If, for example, tourism drops there is room to negotiate again.” (Additional reporting by Richard Lough in Port Louis; Editing by Daniel Wallis and Janet Lawrence)
– Reuters