The welfare impact of the exchange rate adjustment in Seychelles and possible mitigation mechanisms

This paper analyzes the likely welfare impact of devaluation in Seychelles. The presented analysis uses the analytical framework that allows for estimating the potential welfare impacts of devaluation ex ante, i.e. before the policy change has taken place. To analyze the impact of devaluation on the incidence of poverty and inequality, the estimated devaluation-induced changes in prices and wages are applied to the unit record household survey data. We also investigate the effectiveness of various mitigation policies. Our analysis indicates that the poverty headcount would likely increase immediately after the devaluation. In terms of per capita expenditure, the relative loss will be larger for the richer population, thus causing a slight decrease in inequality. To mitigate the transitory adverse effects on the most vulnerable people, the policy of strengthening the social safety nets through increased transfers to poor households is found to be most effective (per money spent). However, the ultimate poverty reduction impact is estimated to come through the resumption of economic growth following devaluation.