Seychelles
2008 Article IV Consultation and Request for a Stand-By Arrangement: Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for Seychelles

This paper presents Seychelles’ 2008 Article IV Consultation and Request for a Stand-By Arrangement. Large macroeconomic imbalances and vulnerabilities resulting from longstanding unsustainable macroeconomic policies, combined with recent external shocks, culminated in mid-2008 with the near-exhaustion of foreign reserves and missed payments on public debt obligations. Growth is declining, and inflation has risen sharply. The pegged exchange rate that was incompatible with fundamentals, together with a complex system of exchange restrictions and controls, has resulted in economic dislocation, a parallel exchange market, and pervasive dollarization.

Abstract

This paper presents Seychelles’ 2008 Article IV Consultation and Request for a Stand-By Arrangement. Large macroeconomic imbalances and vulnerabilities resulting from longstanding unsustainable macroeconomic policies, combined with recent external shocks, culminated in mid-2008 with the near-exhaustion of foreign reserves and missed payments on public debt obligations. Growth is declining, and inflation has risen sharply. The pegged exchange rate that was incompatible with fundamentals, together with a complex system of exchange restrictions and controls, has resulted in economic dislocation, a parallel exchange market, and pervasive dollarization.

I. Background and Recent Developments

1. Seychelles is in the midst of an acute balance of payments and public debt crisis, which jeopardizes its high living standards and economic development. Expansionary fiscal and monetary policies have been incompatible with the maintenance of the pegged exchange rate for some years and despite step devaluations in 2006-07. A system of complex exchange controls and restrictions were progressively introduced and foreign exchange shortages ensued. The parallel exchange market flourished (the parallel market premium was over 50 percent) and dollarization rose. Competitiveness and growth deteriorated as the real effective exchange rate exchange became increasingly overvalued (Figure 1).

Figure 1.
Figure 1.

Seychelles: Selected Economic Indicators, 2001-08 1

Citation: IMF Staff Country Reports 2008, 365; 10.5089/9781451836226.002.A001

Sources: Seychelles authorities; and IMF staff estimates, UNDP, Human Development Indicators, and World Bank, World Development Indicators.12007 and 2008 data are estimates.

2. The authorities introduced a number of reforms starting in 2003 with a fiscal adjustment and a gradual liberalization of the economy. In October 2006, they issued a US$200 million Eurobond and began a sizable depreciation of the rupee over the next twelve months. In 2007, the authorities launched the medium-term development plan “Seychelles Strategy 2017”, aiming at a doubling of nominal per-capita income in ten years and a reduction of public debt to 60 percent of GDP. In late 2007 they issued a private placement note for €54.7 million and a US$30 million supplement to the Eurobond to pay for the clearance of the backlog of unremitted profits by foreign investors.

3. However, the gradual and piecemeal reform effort has been insufficient to address longstanding macroeconomic imbalances. The fuel and food price shocks and the global economic slowdown exacerbated existing vulnerabilities (Table 1):

  • Foreign exchange shortages—disrupting manufacturing output—and less buoyant tourism growth are expected to lead to a sharp decline in real GDP growth in 2008, to 3.1 percent from an average of about 7.5 percent of GDP in 2005-07.

  • Inflation has risen rapidly, in part as a result of the 2006-07 nominal depreciation of the rupee, up to 37.5 percent (year-on-year) at end-August 2008, compared to 5.2 percent in August 2007, and virtually zero in 2005-06.

  • The external current account deficit is projected to widen in 2008, from 23 percent of GDP in 2007 to almost 29 percent, due to lower growth in tourism receipts, the petroleum an food price shock, and higher costs of transportation services. As of mid-October official reserves had fallen to about US$14 million, and the balance of payments is increasingly financed by external arrears accumulation (Table 2).

Table 1.

Seychelles: Selected Economic and Financial Indicators, 2005-13

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Sources: Central Bank of Seychelles; Ministry of Finance; and IMF staff estimates and projections.

M2 plus domestic currency balances earmarked for pending import requests ("pipeline").

The CBS transferred SR 175 million (2.2 percent of GDP) in profit to the government in March 2008. Of this amount SR 118.7 million (1.5 percent of GDP) was revaluation gains. Account taken of this correction, the primary surplus would be 5.6 percent of GDP in 2008.

Including arrears.

The 2005 current account balance reflects the import of two tankers. High inflows of FDI associated with specific projects in 2005 and 2006 also contribute to high CA balances in those years.

Includes external debt of the central bank.

2008 figures refer to June.

Starting with 2007, refers to CBS gross international reserves net of blocked deposits and project accounts.

Table 2.

Seychelles: Balance of Payments, 2007-09

(Millions of U.S. dollars)

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Sources: Central Bank of Seychelles; Ministry of Finance; and IMF staff estimates and projections.

In 2008, includes accelerated promissory notes. In 2008–09, includes repayment of accrued investor profits.

Starting with 2007, refers to CBS gross international reserves net of blocked deposits and project accounts.

Debt service projections are based on exhisting stock of debt and identified new borrowing, assuming no debt restructuring and no repayment of arrears.

Preliminary and subject to reconcilliation with creditors.

4. In light of these developments, in 2008 the authorities began to tighten fiscal and monetary policy:

  • The 2008 budget has been implemented broadly as approved, and further tightened in October, implying a substantial correction (Table 3). Compared to a 2.3 percent deficit in 2007, the primary surplus is now projected at 5.6 percent of GDP in 2008 (excluding a 1.5 percent of GDP transfer of valuation gains from the central bank).

  • In June 2008, the Central Bank of Seychelles (CBS) raised reserve requirements significantly. However, the local asset ratio (LAR—met only by holding domestic treasury securities) was reduced, offsetting in part the increase in reserve requirements. Broad money growth remained high at end-September 2008 (20.4 percent, year-on-year) (Table 4).

Table 3.

Seychelles: Consolidated Government Operations, 2007-10 1

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Sources: Ministry of Finance; Social Security Fund; Pension Fund; Central Bank of Seychelles (CBS); and IMF staff estimates and projections.

Includes the central government and the social security system.

The CBS transferred SR 175 million (2.2 percent of GDP) in profit to the government in March 2008. Of this amount SR 118.7 million (1.5 percent of GDP) was revaluation gains. Account taken of this correction, the primary surplus would be 5.6 percent of GDP in 2008.

Includes debt service on existing debt and on identified financing.

This is created to cover potential losses in state-controlled financial institutions.