Seychelles' macroeconomic outlook is favourable but challenges remain as the spillover effects from the Russia-Ukraine conflict are expected to weigh on the external and fiscal balances due to a surge in commodity prices, said the IMF head of mission to the island state on Monday.

A team from the International Monetary Fund (IMF) headed by Boriana Yontcheva was in Seychelles from April 26 to May 9 to conduct discussions on the second review of Seychelles' economic and financial programme supported by the Extended Fund Facility (EFF) arrangement.

The IMF is supporting the economic reform programme of Seychelles, an archipelago in the western Indian Ocean, with a $107 million lending arrangement.

Yontcheva told reporters that the economy of Seychelles strongly recovered in 2021 with real GDP growth to an estimated 8 percent, driven by a swift rebound of the tourism sector.

"In spite of the deterioration of the international environment associated with the war in Ukraine, tourism earnings in March 2022 surpassed the 2019 level and GDP growth is expected to reach 7 percent in 2022," she said.

"In the long run, Seychelles' open economy remains highly vulnerable to external shocks and climate change. Maintaining the buildup of buffers against shocks remains critical in the current global environment and requires the continuation of prudent macroeconomic policies and the safeguarding of international reserves," she said in her statement to the press.

According to the IMF, price inflation in Seychelles rose to 10.1 percent in December 2021, a huge jump from 1.2 percent in 2020. This reflected the impact of the large depreciation of the rupee in 2020 as well as pandemic-related cost-push factors. In March, it dropped to 2.2 percent due to the impact of the 2021 appreciation of the currency.

"Looking ahead, the surge of global prices is expected to bring inflation to 5.7 percent at the end of the year," Yontcheva added.

The team also discussed the diversification of the economy with officials of Seychelles' finance ministry, the Central Bank and other local partners.

"This subject is one of the longer-term challenges for the country and we have discussed the blue economy, the digitisation of the economy and also about diversifying the sources of tourism," said Yontcheva.

She added that it is important to ensure that tourists do not all come from the same place as well as looking into different types of tourism.

The Minister for Finance, National Planning and Trade, Naadir Hassan, said there are numerous external factors that could have a further impact on Seychelles' economy and these include rising fuel prices as well as its unavailability, which is affecting global prices and transportation.

He said that the biggest concern for Seychelles remains the war in Ukraine. 

"Things have improved a lot faster than was predicted, but the main risk factor now is the situation in Ukraine, and that can have an impact on the tourism sector as well as the cost of living," said Hassan.

Following the visit to Seychelles, the IMF will prepare a report that, subject to management approval, will be presented to the IMF executive board for decision and approval.

The third disbursement of the EFF - $19 million - is expected to be made this year and the same amount will be disbursed in 2023.