Abstract
This paper discusses key findings of the Third Review Under the Stand-By Arrangement for Seychelles. The program is on track, and macroeconomic stabilization has advanced rapidly. The authorities continue to implement the program with a high degree of ownership and success. All quantitative performance criteria (PC) and structural benchmarks at end-September 2009 were met. The structural reform effort is progressing well. Key progress has been made on public financial management, notably through the treasury single account. The 2010 budget features a much improved and complete presentation of government finance.
The Executive Board of the International Monetary Fund (IMF) has approved a three-year, SDR 19.8 million (about US$31.1 million) arrangement under the Extended Fund Facility (EFF) for the Seychelles to support the authorities’ economic program in 2010-12. The approval makes available a disbursement of SDR 0.88 million (about US$1.38 million).
The Executive Board also completed the third and final review under the Stand-By Arrangement (SBA). The completion of the review enables a disbursement amounting to SDR 2.2 million (about US$3.46 million). The SBA was approved on November 14, 2008 (See Press Release No. 08/282). Subsequent to the completion of the third SBA review, and approval of the EFF, the SBA was cancelled.
The authorities’ EFF-supported program aims at putting public finances on a sustainable footing and durably raising growth. The key objectives are to support the public debt restructuring process and reestablish external sustainability; accompany the second generation structural reforms aimed at securing macroeconomic stability and raising growth performance; and put in place a macroeconomic framework to guide policies through 2012.
Following the Executive Board discussion of the Seychelles on December 18, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, issued the following statement:
“The Seychelles authorities have made remarkable advances over the last twelve months in addressing long-standing economic problems and establishing macroeconomic stability. Inflation has been near zero and economic recovery is expected to gain traction in 2010. Program implementation has been exemplary, even in the face of headwinds from the global recession, backed by strong ownership and broad public support. Progress has also been made in negotiations with external creditors aimed at achieving a restructuring compatible with Seychelles’ payments capacity.
“The strong fiscal adjustment in 2009 played a key role in stabilizing the economy. Good progress has also been made in strengthening public financial management, including through the introduction of a treasury single account. The 2010 budget represents another major step forward in improving transparency and the performance of the public sector and in launching a major tax reform. The new market-based monetary policy has been instrumental in achieving price stability. The flexible exchange rate regime, which has made an important contribution to stabilization and eased the burden on monetary policy, remains appropriate. In view of the very good progress achieved so far, the focus now shifts to implementation of second generation reforms.
“The new three-year EFF arrangement puts in place a macroeconomic framework to guide policies through 2012 and support the authorities’ medium-term reform agenda. The key objectives are to consolidate macroeconomic stability, remove constraints to growth, and achieve public debt sustainability. Major improvements in public sector governance practices are needed over the medium term to contain fiscal risks, raise productivity, and reduce the size of the state. It will be important to press ahead with efforts to strengthen financial discipline and accountability in the parastatal sector, bolster the financial system, overhaul tax policy and administration, reinforce their debt management capacity, and pursue public external debt restructuring negotiations,” added M. Kato.
Annex
Recent Economic Developments
The global recession and piracy in the Indian Ocean hit Seychelles hard in 2009, but there are now early signs of a revival of business activity and employment creation. Real GDP is projected to contract by 7.5% in 2009, an improvement on the 10.7 percent contraction projected in June, as the reduction in tourism earnings and related construction activity is attenuating. The economic recovery is expected to strengthen, with economic growth rising to 4 percent in 2010. Inflation has been near zero since March and the exchange rate has appreciated from lows early in the year. Official external reserves continue to recover from near depleted levels.
The government has exceeded its fiscal targets this year with a primary surplus of 13.4 percent of GDP in the first nine months of 2009. Expenditure has been tightly controlled and revenue has held up well despite the difficult economic environment. Social assistance outlays have risen during the year, but have remained within budget allocations.
The reform agenda is gaining momentum with the adoption of a new Public Enterprise Monitoring and Control Act by the National Assembly in September; the introduction of a treasury single account; and the audits of the seven largest public enterprises. New Central Bank and Financial Institutions Acts have been put in place, to strengthen the framework for monetary policy and financial sector regulation and development.
Discussions with external creditors aimed at a comprehensive restructuring of Seychelles’ unsustainable public external debt are making good progress. The authorities successfully negotiated a debt restructuring with Paris Club creditors in April 2009 and signed a bilateral rescheduling agreements with Malaysia and South Africa on comparable terms. They have also made good progress in talks with private creditors, and a debt exchange offer to holders of external bond, notes, and certain commercial bank loans was launched on December 7, 2009.
Program Summary
The authorities’ program supported by the November 2008 Stand-By Arrangement addressed the foreign exchange distortions, implemented a large fiscal adjustment, and stabilized the macroeconomic environment. The focus has now shifted to responding to the need for a second generation of reforms to transform the economy, secure macroeconomic stability and improve economic performance. The authorities’ program for the three years to 2012 under the Extended Fund Facility includes the following targets: (i) average annual real GDP growth of 4-5 percent; (ii) single digit annual inflation; (iii) foreign exchange reserves equivalent to 2.5 months of import coverage by end-2012; and (iv) maintaining a primary fiscal surpluses of about 4.5-7 percent of GDP in the 2010-12 period.
The program includes reforms that focus on:
Improving public financial management and transparency and governance standards in the public enterprise sector.
Placing public finances on a firmly sustainable footing through a major reinforcement of fiscal monitoring and control and improved expenditure efficiency, while affecting a strong rise in public investment, which has been neglected during the recent crisis years. A rationalization of the size of the public sector is underway.
A fundamental medium-term reform of the tax system was launched with the 2010 budget. The objective is to have a simple, fair, and equitable system, which will promote growth, improve self-compliance, and level the playing field for investors.
Strengthening of the financial sector. The Central Bank of Seychelles (CBS) will implement its action plan for strengthening supervision, and increase minimum capital requirements. The government will also transfer non-bank supervision to the CBS. Steps will also be taken to consolidate and divest publicly owned financial institutions with a view to attract strategic investors in the banking sector, bring fresh capital and stimulate competition in the banking sector.
Restructuring public external debt in a manner that is consistent with the medium-term payments capacity. The authorities aim to secure an immediate and sizable cash flow relief in the short- to medium-term and a sustained reduction of the debt service burden. Significant primary fiscal surpluses are targeted through the medium-term to allow a reduction in domestic debt and provide space for private sector growth.
Other supporting reforms include the promotion of a better business climate, increased flexibility and efficiency in labor laws, pension reform, improved national statistics, and better sectoral policies for air access, tourism, fishing, and the environment.
Seychelles: Selected Economic and Financial Indicators, 2007–12
Historic GDP data have been revised upwards in April 2009.
In 2007 and earlier, includes domestic currency balances earmarked for pending import requests (“pipeline”).
In 2010 includes contingency spending of 1.1 percent of GDP
Assumes April 2009 Paris Club agreement is implemented; does not include the impact of any further restructuring of public external debt.
Includes arrears and the external debt of the central bank.
Nominal exhange rates shown for 2009 are actual rates as of end-October 2009; REER is change from Dec. 2008 through Sep. 2009.
Seychelles: Selected Economic and Financial Indicators, 2007–12
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | ||||
| Program | Projection | Projection | |||||||
| National income and prices1 | (Percentage change, unless otherwise indicated) | ||||||||
| Nominal GDP (millions of Seychelles rupees) | 6,877 | 8,756 | 10,280 | 10,402 | 11,057 | 11,891 | 12,872 | ||
| Real GDP | 9.7 | -0.9 | -10.7 | -7.6 | 4.0 | 5.0 | 5.0 | ||
| CPI (annual average) | 5.3 | 37.0 | 35.1 | 32.9 | 2.3 | 2.5 | 3.2 | ||
| CPI (end-of-period) | 16.8 | 63.3 | 5.4 | 1.9 | 2.2 | 3.0 | 3.0 | ||
| GDP deflator average | 11.4 | 28.4 | 31.4 | 28.5 | 2.2 | 2.4 | 3.1 | ||
| Money and credit | (Percentage change, unless otherwise indicated) | ||||||||
| Net claims on private sector | 9.3 | 58.4 | 24.3 | -12.1 | 27.3 | … | … | ||
| Broad money (M3(p)) 2 | -7.6 | 27.2 | 5.6 | -0.7 | 25.6 | … | … | ||
| Reserve money | -23.1 | 0.6 | 20.6 | 32.2 | 18.4 | … | … | ||
| Velocity (GDP/ M3) | 1.5 | 1.5 | 1.6 | 1.8 | 1.5 | … | … | ||
| Money multiplier (M3/reserve money) | 4.2 | 5.3 | 4.7 | 4.0 | 4.2 | … | … | ||
| Savings-Investment balance | (In percent of GDP) | ||||||||
| External savings | 20.8 | 44.7 | 29.7 | 22.6 | 32.7 | 30.1 | 28.8 | ||
| Gross national savings | 8.0 | -12.7 | -1.8 | 6.8 | -0.9 | 2.5 | 4.7 | ||
| Of which: government savings | -4.4 | 4.2 | 1.0 | 2.8 | 2.7 | 5.6 | 7.8 | ||
| Gross investment | 28.8 | 32.1 | 27.9 | 29.4 | 31.8 | 32.6 | 33.6 | ||
| Of which: government investment | 5.5 | 2.1 | 4.3 | 5.3 | 6.8 | 7.4 | 8.6 | ||
| Government budget | |||||||||
| Total revenue, excluding grants | 32.0 | 32.8 | 35.1 | 35.6 | 30.7 | 31.5 | 31.3 | ||
| Expenditure and net lending | 40.9 | 39.8 | 35.6 | 35.1 | 32.8 | 33.4 | 32.1 | ||
| Current expenditure | 36.3 | 28.6 | 34.2 | 32.8 | 28.0 | 25.9 | 23.5 | ||
| Capital expenditure and net lending 3 | 4.6 | 11.2 | 0.5 | 2.3 | 4.9 | 7.4 | 8.6 | ||
| Overall balance, including grants | -8.7 | -3.3 | 0.0 | 2.8 | 0.9 | 0.4 | 1.4 | ||
| Primary balance | -2.0 | 3.8 | 11.4 | 13.3 | 7.0 | 6.0 | 4.7 | ||
| Total public debt 4,5 | 129.8 | 135.6 | 149.7 | 140.1 | 109.5 | … | … | ||
| Domestic | 65.8 | 52.3 | 41.8 | 41.6 | 37.4 | … | … | ||
| External 4,5 | 63.9 | 83.3 | 108.0 | 98.5 | 72.2 | … | … | ||
| External sector | (In percent of GDP, unless otherwise indicated) | ||||||||
| Current account balance including official transfers | -20.8 | -44.7 | -29.7 | -22.6 | -32.7 | -30.1 | -28.8 | ||
| Total stock of arrears (millions of U.S. dollars) 4,5 | 160.4 | 321.7 | 195.1 | 239.2 | … | … | … | ||
| Total external debt outstanding (millions of U.S. dollars) 4,5 | 710.2 | 767.1 | 732.6 | 754.7 | 708.1 | … | … | ||
| (in percent of GDP) 4,5 | 69.2 | 83.3 | 108.0 | 98.5 | 72.2 | … | … | ||
| Terms of trade (= - deterioration) | -1.2 | 0.7 | -2.1 | -2.1 | … | … | … | ||
| Real effective exchange rate (end-of-period, percent change) 6 | -25.4 | -18.4 | … | 13.0 | … | … | … | ||
| Gross official reserves (end of year, millions of US dollars) | 10 | 51 | 108 | 153 | 202 | 252 | 302 | ||
| In months of imports, c.i.f. | 0.1 | 0.6 | 1.3 | 1.5 | 1.9 | 2.2 | 2.5 | ||
| Exchange rate 6 | |||||||||
| Seychelles rupees per US$1 (end of period) | 8.0 | 16.6 | … | 10.6 | … | … | … | ||
| Seychelles rupees per US$1 (period average) | 6.7 | 9.5 | … | 14.1 | … | … | … | ||
Historic GDP data have been revised upwards in April 2009.
In 2007 and earlier, includes domestic currency balances earmarked for pending import requests (“pipeline”).
In 2010 includes contingency spending of 1.1 percent of GDP
Assumes April 2009 Paris Club agreement is implemented; does not include the impact of any further restructuring of public external debt.
Includes arrears and the external debt of the central bank.
Nominal exhange rates shown for 2009 are actual rates as of end-October 2009; REER is change from Dec. 2008 through Sep. 2009.
Seychelles: Selected Economic and Financial Indicators, 2007–12
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | ||||
| Program | Projection | Projection | |||||||
| National income and prices1 | (Percentage change, unless otherwise indicated) | ||||||||
| Nominal GDP (millions of Seychelles rupees) | 6,877 | 8,756 | 10,280 | 10,402 | 11,057 | 11,891 | 12,872 | ||
| Real GDP | 9.7 | -0.9 | -10.7 | -7.6 | 4.0 | 5.0 | 5.0 | ||
| CPI (annual average) | 5.3 | 37.0 | 35.1 | 32.9 | 2.3 | 2.5 | 3.2 | ||
| CPI (end-of-period) | 16.8 | 63.3 | 5.4 | 1.9 | 2.2 | 3.0 | 3.0 | ||
| GDP deflator average | 11.4 | 28.4 | 31.4 | 28.5 | 2.2 | 2.4 | 3.1 | ||
| Money and credit | (Percentage change, unless otherwise indicated) | ||||||||
| Net claims on private sector | 9.3 | 58.4 | 24.3 | -12.1 | 27.3 | … | … | ||
| Broad money (M3(p)) 2 | -7.6 | 27.2 | 5.6 | -0.7 | 25.6 | … | … | ||
| Reserve money | -23.1 | 0.6 | 20.6 | 32.2 | 18.4 | … | … | ||
| Velocity (GDP/ M3) | 1.5 | 1.5 | 1.6 | 1.8 | 1.5 | … | … | ||
| Money multiplier (M3/reserve money) | 4.2 | 5.3 | 4.7 | 4.0 | 4.2 | … | … | ||
| Savings-Investment balance | (In percent of GDP) | ||||||||
| External savings | 20.8 | 44.7 | 29.7 | 22.6 | 32.7 | 30.1 | 28.8 | ||
| Gross national savings | 8.0 | -12.7 | -1.8 | 6.8 | -0.9 | 2.5 | 4.7 | ||
| Of which: government savings | -4.4 | 4.2 | 1.0 | 2.8 | 2.7 | 5.6 | 7.8 | ||
| Gross investment | 28.8 | 32.1 | 27.9 | 29.4 | 31.8 | 32.6 | 33.6 | ||
| Of which: government investment | 5.5 | 2.1 | 4.3 | 5.3 | 6.8 | 7.4 | 8.6 | ||
| Government budget | |||||||||
| Total revenue, excluding grants | 32.0 | 32.8 | 35.1 | 35.6 | 30.7 | 31.5 | 31.3 | ||
| Expenditure and net lending | 40.9 | 39.8 | 35.6 | 35.1 | 32.8 | 33.4 | 32.1 | ||
| Current expenditure | 36.3 | 28.6 | 34.2 | 32.8 | 28.0 | 25.9 | 23.5 | ||
| Capital expenditure and net lending 3 | 4.6 | 11.2 | 0.5 | 2.3 | 4.9 | 7.4 | 8.6 | ||
| Overall balance, including grants | -8.7 | -3.3 | 0.0 | 2.8 | 0.9 | 0.4 | 1.4 | ||
| Primary balance | -2.0 | 3.8 | 11.4 | 13.3 | 7.0 | 6.0 | 4.7 | ||
| Total public debt 4,5 | 129.8 | 135.6 | 149.7 | 140.1 | 109.5 | … | … | ||
| Domestic | 65.8 | 52.3 | 41.8 | 41.6 | 37.4 | … | … | ||
| External 4,5 | 63.9 | 83.3 | 108.0 | 98.5 | 72.2 | … | … | ||
| External sector | (In percent of GDP, unless otherwise indicated) | ||||||||
| Current account balance including official transfers | -20.8 | -44.7 | -29.7 | -22.6 | -32.7 | -30.1 | -28.8 | ||
| Total stock of arrears (millions of U.S. dollars) 4,5 | 160.4 | 321.7 | 195.1 | 239.2 | … | … | … | ||
| Total external debt outstanding (millions of U.S. dollars) 4,5 | 710.2 | 767.1 | 732.6 | 754.7 | 708.1 | … | … | ||
| (in percent of GDP) 4,5 | 69.2 | 83.3 | 108.0 | 98.5 | 72.2 | … | … | ||
| Terms of trade (= - deterioration) | -1.2 | 0.7 | -2.1 | -2.1 | … | … | … | ||
| Real effective exchange rate (end-of-period, percent change) 6 | -25.4 | -18.4 | … | 13.0 | … | … | … | ||
| Gross official reserves (end of year, millions of US dollars) | 10 | 51 | 108 | 153 | 202 | 252 | 302 | ||
| In months of imports, c.i.f. | 0.1 | 0.6 | 1.3 | 1.5 | 1.9 | 2.2 | 2.5 | ||
| Exchange rate 6 | |||||||||
| Seychelles rupees per US$1 (end of period) | 8.0 | 16.6 | … | 10.6 | … | … | … | ||
| Seychelles rupees per US$1 (period average) | 6.7 | 9.5 | … | 14.1 | … | … | … | ||
Historic GDP data have been revised upwards in April 2009.
In 2007 and earlier, includes domestic currency balances earmarked for pending import requests (“pipeline”).
In 2010 includes contingency spending of 1.1 percent of GDP
Assumes April 2009 Paris Club agreement is implemented; does not include the impact of any further restructuring of public external debt.
Includes arrears and the external debt of the central bank.
Nominal exhange rates shown for 2009 are actual rates as of end-October 2009; REER is change from Dec. 2008 through Sep. 2009.