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.
The Executive Board of the International Monetary Fund (IMF) today approved a two-year Stand-By Arrangement (SBA) to support Seychelles’ bold economic reform effort, with total access equivalent to SDR 17.6 million (about US$26.1 million). An amount equivalent to SDR 6.16 million (about US$9.13 million) will be made available immediately. The balance will be disbursed in seven quarterly installments over the next two years, subject to the Executive Board’s reviews of performance under the arrangement.
Following the Executive Board's discussion on the Seychelles, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chairman, made the following statement:
“The Seychelles authorities are to be commended for their strong commitment to, and good start in, implementing a far-reaching reform program to address the macroeconomic imbalances that have built up over the past decades.
“The authorities’ fundamental liberalization of the exchange regime, involving the elimination of all exchange restrictions and a float of the rupee, is a critical reform step to address the underlying causes of the balance of payments crisis. The availability of foreign exchange at a market-determined price should, in due time, facilitate a rebound of economic activity. In the near term, however, activity is likely to be subdued due to both the necessary domestic adjustment effort as well as the worsening international outlook.
“The authorities’ reform program includes a marked tightening of fiscal policy, but leaves significant room for targeted social programs. 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. The public sector employment retrenchment exercise, together with the replacement of indirect product subsidies by a targeted social safety net, are important reform components.
“Even with the significant fiscal tightening envisaged, Seychelles’ public debt would remain unsustainable. Good faith negotiations with official bilateral and commercial external creditors are critical in order to secure a debt restructuring aimed at reestablishing public debt sustainability, consistent with Seychelles’ long-term payment capacity.
“The Central Bank of Seychelles (CBS) has strengthened its ability to manage liquidity, through the introduction of indirect market-based instruments. The program includes measures to contain the risks to the financial system by bolstering supervision and a fiscal provision for potential recapitalization needs by state-owned financial institutions.
“The comprehensive and bold nature of the authorities’ reform program merits the support of the international community. While there are risks to the program, including from a global downturn, the early and important policy reforms the authorities have already undertaken are indicative of their strong ownership of the reform effort,” Mr. Kato said.
ANNEX
Background and Program Summary
Seychelles is in the midst of an acute balance of payments and public debt crisis, which jeopardizes the population’s living standard and the country’s economic development.
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 exchange rate was pegged at a level incompatible with fundamentals. In combination with a complex system of exchange restrictions and controls this resulted in economic dislocation, a parallel exchange market, and pervasive dollarization of the domestic economy.
The authorities have requested Fund assistance in support of a comprehensive reform program. Acknowledging that past reform efforts have been insufficient to address imbalances and vulnerabilities, the authorities have begun implementing a package of major macroeconomic and structural reforms, including:
A fundamental liberalization of the exchange regime, involving the elimination of all exchange restrictions and a float of the rupee was introduced in early November;
A significant and sustained tightening of fiscal policy backed by a reduction in public employment and the replacement of indirect subsidies by a targeted social safety net;
A reform of the monetary policy framework to focus on liquidity management based on indirect instruments; and
A reduction in the role of the state in the economy to boost private sector development, through further privatization, enhanced fiscal governance, and a review of the tax regime.
However, to close external financing gaps and put public debt on a sustainable path, these strong reform efforts will need to be complemented by a comprehensive public debt restructuring, involving a substantial reduction in public debt service obligations over the long term to levels consistent with the country’s payments capacity.
The reforms are heavily frontloaded, with the bulk of the fiscal adjustment and other key measures implemented in the fourth quarter of 2008. The projected turnaround in the primary fiscal balance from 2007 amounts to about 8 percent of GDP in 2008, with sustained annual primary surpluses of about 6½ percent through 2011. Fiscal reforms also include the removal of tax exemptions, a strengthening of tax administration and public financial management.
Seychelles: Selected Economic and Financial Indicators, 2005-08
Annual averages. The official retail price index is believed to understate substantially the rate of inflation.
M2 plus domestic currency balances earmarked for pending import requests (“pipeline”).
In annual percentage change.
Including arrears.
Seychelles: Selected Economic and Financial Indicators, 2005-08
| 2005 | 2006 | 2007 | 2008 | |||
|---|---|---|---|---|---|---|
| Est. | ||||||
| (Annual percentage change, unless otherwise indicated) | ||||||
| National income and prices | ||||||
| Nominal GDP (in millions of Seychelles rupees) | 4,861 | 5,342 | 6,113 | 7,878 | ||
| Real GDP | 7.5 | 8.3 | 7.3 | 3.1 | ||
| Retail price index 1 | 0.8 | -1.4 | 5.7 | 32.2 | ||
| Annual change in percent of beginning-of-period broad money, unless otherwise indicated) | ||||||
| Money and credit | ||||||
| Domestic credit | 1.8 | -9.6 | 8.9 | 6.2 | ||
| Broad money (M2(p)) 2 | 1.7 | 3.0 | -14.9 | 2.6 | ||
| Reserve Money3 | 3.4 | 32.7 | -23.1 | 3.4 | ||
| Interest rate (average during period, 91-day bill) | 2.8 | 3.2 | 3.6 | … | ||
| (Percent of GDP) | ||||||
| Savings and investment | ||||||
| Gross national savings | 14.6 | 14.2 | 9.1 | 4.9 | ||
| Gross investment | 34.3 | 28.1 | 32.5 | 33.6 | ||
| Government budget | ||||||
| Total revenue, excluding grants | 41.1 | 42.0 | 35.9 | 35.4 | ||
| Identified expenditure and net lending | 40.4 | 49.6 | 46.0 | 37.6 | ||
| Current expenditure | 35.1 | 41.5 | 40.8 | 32.2 | ||
| Capital expenditure and net lending | 5.3 | 8.0 | 5.1 | 5.4 | ||
| Overall balance, including grants (above the line) | 1.7 | -6.2 | -9.8 | -1.8 | ||
| Primary balance | 7.3 | -0.6 | -2.3 | 7.1 | ||
| Total public debt4 | 147.1 | 139.5 | 146.0 | 151.3 | ||
| Domestic | 100.5 | 85.8 | 74.1 | 53.5 | ||
| External | 46.6 | 53.7 | 71.9 | 97.8 | ||
| External sector | ||||||
| Current account balance after official transfers | -19.7 | -13.9 | -23.4 | -28.8 | ||
| (US$ millions, unless otherwise indicated) | ||||||
| Gross official reserves (end of year) | 56.1 | 112.7 | 9.8 | 18.7 | ||
| In months of imports, c.i.f. | 0.7 | 1.3 | 0.1 | 0.2 | ||
| In percent of broad money | 6.3 | 13.0 | 8.0 | 35.0 | ||
Annual averages. The official retail price index is believed to understate substantially the rate of inflation.
M2 plus domestic currency balances earmarked for pending import requests (“pipeline”).
In annual percentage change.
Including arrears.
Seychelles: Selected Economic and Financial Indicators, 2005-08
| 2005 | 2006 | 2007 | 2008 | |||
|---|---|---|---|---|---|---|
| Est. | ||||||
| (Annual percentage change, unless otherwise indicated) | ||||||
| National income and prices | ||||||
| Nominal GDP (in millions of Seychelles rupees) | 4,861 | 5,342 | 6,113 | 7,878 | ||
| Real GDP | 7.5 | 8.3 | 7.3 | 3.1 | ||
| Retail price index 1 | 0.8 | -1.4 | 5.7 | 32.2 | ||
| Annual change in percent of beginning-of-period broad money, unless otherwise indicated) | ||||||
| Money and credit | ||||||
| Domestic credit | 1.8 | -9.6 | 8.9 | 6.2 | ||
| Broad money (M2(p)) 2 | 1.7 | 3.0 | -14.9 | 2.6 | ||
| Reserve Money3 | 3.4 | 32.7 | -23.1 | 3.4 | ||
| Interest rate (average during period, 91-day bill) | 2.8 | 3.2 | 3.6 | … | ||
| (Percent of GDP) | ||||||
| Savings and investment | ||||||
| Gross national savings | 14.6 | 14.2 | 9.1 | 4.9 | ||
| Gross investment | 34.3 | 28.1 | 32.5 | 33.6 | ||
| Government budget | ||||||
| Total revenue, excluding grants | 41.1 | 42.0 | 35.9 | 35.4 | ||
| Identified expenditure and net lending | 40.4 | 49.6 | 46.0 | 37.6 | ||
| Current expenditure | 35.1 | 41.5 | 40.8 | 32.2 | ||
| Capital expenditure and net lending | 5.3 | 8.0 | 5.1 | 5.4 | ||
| Overall balance, including grants (above the line) | 1.7 | -6.2 | -9.8 | -1.8 | ||
| Primary balance | 7.3 | -0.6 | -2.3 | 7.1 | ||
| Total public debt4 | 147.1 | 139.5 | 146.0 | 151.3 | ||
| Domestic | 100.5 | 85.8 | 74.1 | 53.5 | ||
| External | 46.6 | 53.7 | 71.9 | 97.8 | ||
| External sector | ||||||
| Current account balance after official transfers | -19.7 | -13.9 | -23.4 | -28.8 | ||
| (US$ millions, unless otherwise indicated) | ||||||
| Gross official reserves (end of year) | 56.1 | 112.7 | 9.8 | 18.7 | ||
| In months of imports, c.i.f. | 0.7 | 1.3 | 0.1 | 0.2 | ||
| In percent of broad money | 6.3 | 13.0 | 8.0 | 35.0 | ||
Annual averages. The official retail price index is believed to understate substantially the rate of inflation.
M2 plus domestic currency balances earmarked for pending import requests (“pipeline”).
In annual percentage change.
Including arrears.