(Seychelles News Agency) - The Central Bank of Seychelles (CBS) has cut the Monetary Policy Rate (MPR) to three per cent down from 4 per cent. The governor of the bank said Monday that the cut was made to support the domestic economy which due to the COVID-19 pandemic is facing significant challenges that could compromise financial stability.

Caroline Abel explained that economic activity has weakened to unprecedented levels following a shutdown of the tourism sector with a rebound being conditional on global economic recovery and a revival of the travel industry.

“The main aim of the reduced MPR is to support a decline in interest rates as a means of alleviating future stress on borrowers, improve short-run liquidity conditions and thus, sustain economic activity,” explained Abel.

According to the Central Bank inflationary pressures are expected to rise in the short to medium term mainly as a result of the depreciation of the domestic currency, a development that followed a decline in the level of foreign exchange inflows.

The Seychelles – 115 islands in the western Indian Ocean –is facing complex challenges brought about by COVID-19. These include the fall in domestic economic activity, direct loss of income from the services sector, private sector revenue constraints, and labour market frictions.

Consequently, it is expected that there will be greater reliance on the fisheries and manufacturing sectors as the main drivers of the economy in the short run, although earnings from these activities cannot fully compensate for the loss in revenue from tourism.

“We are closely monitoring the pandemic in all aspects economically and financially, with a restriction on movement, the closure of the airport, financial impact on businesses in the tourism sector as well as on activities related to tourism,” said Abel.

The governor added that “this weekend I was on Praslin and La Digue, it was really visible that on Praslin and La Digue that nothing is happening, activity there is on a standstill.”

Considering the high levels of external uncertainty with regards to a rebound of the tourism sector, a significant decrease in consumption at a national level and a shift in social behavior are critical to dampening demand for foreign currency, maintaining stability in the exchange rate and prices, and setting optimal conditions for a recovery.

Abel is warning everyone to act responsibly and to avoid unnecessary spending. The governor reminded public sector employees that they should not to take things for granted and think that their jobs are secure and that only private-sector employees risk losing their jobs.

The governor made it clear that it is the private sector which sustains the government financially.