Statement by Christopher Legg, Executive Director for Seychelles and Simon Duggan, Advisor to Executive Director

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.


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.


Following independence in 1976, Seychelles pursued a development model centered around the creation of a social welfare state that successfully raised standards of health, education and housing to amongst the best in Africa. While successful in raising social capital and per capita income, this development model became financially unsustainable, with achievements in social development increasingly funded through the accumulation of public debt at commercial rates.

In 2003 the Government embarked on a reform and modernization effort (the Macro-Economic Reform Program) that promoted Seychelles’ transition toward a market-based economy, and in 2007 launched a strategy (Seychelles Strategy 2017) for doubling nominal per capita income and achieving a substantial reduction in public sector debt. By early 2008 achievements included: a large fiscal adjustment; the removal of most universal subsidies; privatization of many state-owned enterprises; and a substantial reduction in the pegged exchange rate (from 5.5 to 8 rupees to the US dollar over a 12-month period). These reforms had some success, with economic growth averaging above 7 per cent from 2005 to 2007. The pace of reform was not sufficient, however, to address the magnitude of Seychelles’ macroeconomic imbalances, so vulnerabilities remained high.

In the midst of this transition, Seychelles has been hit very hard by the food and fuel crisis and global slowdown, exposing economic fragilities and placing enormous pressure on Seychelles’ external position. Inflation has risen to over 35 per cent, foreign exchange shortages intensified and economic growth slowed abruptly. As a percentage of GDP, Seychelles’ current account deficit has doubled from 14 per cent in 2006 to a projected 29 per cent in 2008, driven by higher global food and fuel prices and lower tourism earnings due to the slowdown in Europe. Seychelles’ overall balance of payments position has deteriorated from a small surplus in 2007 to a substantial deficit in 2008, funded through a reduction in foreign exchange reserves and increased arrears to both official and commercial creditors. Seychelles’ debt and balance of payments crisis came to a head in July 2008 when the Government missed a payment due on a privately-placed external debt issue, and in October 2008 when the Government was unable to make a coupon payment on a Eurobond, prompting Standard and Poor’s to downgrade Seychelles to SD (Selective Default).

Seychelles’ Minister of Finance, Mr. Danny Faure, wrote to the Managing Director at the end of June 2008 requesting an IMF-supported program. The support provided by Fund staff since that time on the design of Seychelles’ economic reform program has been outstanding. Following open and constructive dialogue with Fund staff, Seychelles is now seeking a two-year Stand-By Arrangement to support a comprehensive reform program directed at achieving macroeconomic and sustainable private sector led growth.

Economic Reform Program

The key pillars of the Government’s economic reform program are: full liberalisation of the exchange regime; a significant tightening of fiscal policy; tighter monetary policy under a new market-based operating framework; the replacement of universal subsidies with a targeted social safety net; and a smaller and more efficient public service. The Government has substantively put these reforms in place - a tangible demonstration of their resolve–and is committed to taking additional measures as necessary to achieve program objectives.

Exchange Regime and Exchange Rate Policy

Seychelles’ external vulnerabilities are manifested in a misaligned exchange rate, sustained by pervasive foreign exchange restrictions. Lack of confidence in the rupee has fostered an active parallel market. In 2007 the Central Bank of Seychelles (CBS) started to gradually remove exchange restrictions, shifting foreign exchange dealing to the commercial banks and allowing individuals to open foreign exchange accounts. While these were important steps in the right direction, extensive restrictions remained–including a system of foreign exchange retention and rationing operated by the CBS at the official rate to ensure that essential foreign exchange needs could be met - and excess demand for foreign currency persisted at the official exchange rate.

The CBS reduced the pegged exchange rate by 45 per cent against the $US over the 12 months to October 2007; however, most restrictions remained in place and the nominal depreciation was compromised by loose liquidity conditions and increased spending by state-owned enterprises, including to fund a doubling of Seychelles’ fuel import bill, adding to inflationary pressures and undermining competitiveness gains.

With a very low level of foreign exchange reserves, limited external financing options and large external debt obligations, the Government concluded that a pegged exchange rate regime was no longer viable. Therefore, on 1 November 2008 Seychelles eliminated all foreign exchange controls and floated the rupee. On the day of the float, the exchange rate depreciated from 8.9 rupees to the US dollar to around 15–broadly in line with the previous parallel market rate. Consistent with international best-practice, the CBS will operate in the foreign exchange market to avoid excessive volatility, meet the Government’s foreign exchange needs and accumulate international reserves over time, but will not seek to influence the exchange rate level.

The Government and CBS are committed to supporting the float through tightened fiscal and monetary policy, thereby minimizing over-shooting of the exchange rate, reducing second-round inflationary effects and ensuring that nominal exchange rate depreciation translates to increased external competitiveness.

Monetary Policy

Prior to liberalizing the exchange rate, the Central Bank introduced a market-based monetary policy framework directed at establishing price stability through greater emphasis on reserve money management. In early-2008 the CBS started actively trading in the secondary market for government securities and in early-October introduced weekly auctions for both Treasury Bills and a central bank deposit facility. Implementation is proceeding well, with T-Bill auctions well-covered, higher domestic interest rates supporting demand for the rupee and a positive yield curve emerging. The CBS is committed to achieving price stability through tighter liquidity conditions and increased interest rates.

The Government and CBS have also been working intensively with public and private financial institutions, both before and after the float, to assist their transition towards the new exchange regime and monetary policy framework. Our authorities are confident that introduction of facilities for trading T-Bills, foreign exchange and deposits at the CBS will promote more efficient liquidity management and support the development of an active inter-bank market.

Seychelles is also committed to addressing risks identified by the IMF’s recent safeguards assessment rapidly and comprehensively.

Fiscal Policy

The Government achieved a significant fiscal tightening in 2008, in line with the Budget announced in December 2007. The primary fiscal balance improved from a 2.3 per cent of GDP deficit in 2007 to an estimated 5.6 per cent of GDP surplus in 2008 (excluding the transfer of valuation gains from the CBS). This is being achieved through a combination of new measures, tight controls on nominal expenditure and revenue buoyancy following a period of high growth and inflation. Nonetheless, the overall fiscal balance is expected to record a 3½ per cent of GDP deficit in 2008, reflecting scheduled interest payments on public sector debt of around 10 per cent of GDP.

Looking ahead, the Government will maintain primary fiscal surpluses of around 6½ per cent of GDP in 2009-2010 - even as nominal GDP growth slows - through measures that will improve the structural fiscal position by some 5 percentage points of GDP. The authorities recognise the importance of tightening fiscal policy to support the objectives of the exchange rate float and monetary policy. The Government is also striving to maximize the funds available for debt repayment as it works towards normalizing relations with official and commercial creditors. A comprehensive list of revenue and expenditure measures supporting the fiscal projections are outlined in the authorities’ Memorandum of Economic and Financial Policies (MEFP), many of which have already been introduced.

The fiscal position will also be supported by strengthened public financial management, tax administration and public debt management. Following up on the recommendations of a recent IMF public financial management review, the Ministry of Finance is considering options to further rationalise expenditure–including with the assistance of the World Bank - and will implement measures to strengthen budget preparation, implementation and monitoring processes. The Seychelles Revenue Commission has launched tax audits of the 20 largest enterprises and bolstered its capacity. On public debt management, the Government will submit to the National Assembly a Public Debt Law before the end of 2008 and will formulate a medium-term public debt strategy that complies with the stringent limits on the contracting or guaranteeing of new loans specified under its proposed Stand-By Arrangement.

Structural Reforms

The program’s fiscal objectives are supported by the replacement of universal subsidies with a targeted social safety net. The Government has repealed universal product subsidies and is enforcing a cost-recovery policy in the provision of public utilities, thereby eliminating a social welfare system that had been in place for over 20 years. In its place, a Welfare Agency has been established to manage a new system of means-tested income support that will protect the most vulnerable segments of the population while ensuring that incentives to work are maintained. Importantly, the social safety net will be time-limited to guard against welfare dependency. The Government also recently announced a modest increase in the statutory minimum wage, public sector wages and social security benefits, partially offsetting substantial declines over the last two years.

The Government is committed to reforming the public sector to support the fiscal position, boost productivity and promote private sector activity. The public sector accounts for over 50 per cent of the Seychellois workforce, with the government currently engaged in areas that could be more efficiently provided by the private sector. In recent years the Government has privatized a large number of state-owned enterprises and this process will continue. A high-level government taskforce, headed by the Minister of Finance, is conducting a comprehensive review of the range of services provided by the government to achieve further rationalization. Moreover, in late October the Government announced a 12.5 per cent reduction in the public sector workforce by 1 January 2009. This will be achieved primarily through a voluntary departure scheme, supported by a retraining and placement program to assist employees to transition to the private sector. A low unemployment rate and significant importation of labour, primarily in the construction and tourism sectors, provide clear evidence of the private sector’s capacity to absorb this cadre of available workers. Through containing public sector wage increases, the reduction in government employees will place downward pressure on the Government’s wage bill.

The Government will undertake a fundamental review of the tax system in 2009 that will aim for simplification, a broadening of the tax base and low harmonized tax rates. A number of important measures have already been taken in this direction, including the removal of various GST and income tax exemptions and an adjustment to the GST rate on tourism services. The next step is the removal of all provisions for discretionary exemptions in the Trade Tax and Business Tax Acts from 1 January 2009. With the assistance of the Fund, the Government is aiming to complete the review of the tax system in mid-2009.

International Support

Policy adjustment on its own will not be sufficient to relieve Seychelles’ debt and balance of payments crisis. Closing Seychelles’ near term financing gaps and returning future debt service payments to a sustainable level will also require upfront balance of payments assistance under an IMF-supported program, debt restructuring and direct financial support from donors.

On 30 September the Government announced that it will seek the support of creditors in the restructuring of around $US800 million of external debt. Seychelles’ public debt is over 150 per cent of GDP, two-thirds of which is external and some $US313 million is in arrears. With the assistance of legal and financial advisors, the Government is committed to developing a comprehensive debt restructuring strategy focused on the principles of transparency, inter-creditor equity and open dialogue with all creditor groups. As a starting point in this process, approval of an IMF-supported adjustment program will provide the basis for discussions with the Paris Club creditors, who have indicated their willingness to consider Seychelles’ debt under an Evian approach.

More broadly, Seychelles will require the assistance of donors to meet its financing needs over the life of the program and to support the investments necessary to place the economy on a sustainable growth path. The authorities welcome the positive signals that they have received from the World Bank and African Development Bank and look forward to engaging the support of bilateral development partners in the near future.


President Michel announced the Government’s economic reform program in an address to the nation on 31 October. The President emphasised in his speech that implementation will be challenging, with recovery from the current economic crisis only possible after a process of substantial adjustment. President Michel also stressed that this is a defining moment in Seychelles’ history, highlighting the importance of making a break from the policies of the past and emphasising that strong implementation of the Government’s economic reform program will underpin sustained growth and prosperity over the medium term. Importantly, the Government’s reform program has attracted broad support politically, amongst the local business community and within civil society.

The sentiment of the President’s address is captured in the program’s macroeconomic projections, which show that - through adherence to their comprehensive economic reform program and with the support of the international community - Seychelles’ GDP is expected to contract slightly in 2009 before staging a recovery from 2010, inflation is forecast to peak in the second quarter of 2009 before declining steadily over the projection period, and the current account balance is projected to improve significantly from 2009.

As the above reforms take hold and macroeconomic stability is restored, the Government will increasingly focus on addressing structural impediments to Seychelles’ growth and development. The authorities are working with the IMF, World Bank and African Development Bank on developing a comprehensive medium-term structural reform program. Once this work is finalised, the Government intends to request a longer-term engagement with the Fund under a successor Extended Fund Facility arrangement.

Finally, my Seychellois authorities would like to thank the Managing Director, Deputy Managing Director Kato and Ms. Sayeh for their support. They also extend their deepest gratitude to the IMF’s Mission Chief, Mr. Paul Mathieu, and his team for their hard work and dedication in assisting the design of Seychelles’ economic reform program.