Statement by Jong-Won Yoon, Executive Director for Seychelles and Ms. Nghi Luu, Senior Advisor to Executive Director

Resilient growth is observed in 2012 in Seychelles. Weakness in tourism has been offset by increases from less-traditional markets. The current account and adjustments has administered prices in the second half of 2011, and a cycle of depreciation and inflation ensued. The fiscal accounts suffered in the first half of 2012 from the restructuring arrangement for Air Seychelles. The banking system remains solid and continues to maintain healthy capital adequacy ratios. Despite strong program performance, Seychelles remains highly vulnerable to external shocks.


Resilient growth is observed in 2012 in Seychelles. Weakness in tourism has been offset by increases from less-traditional markets. The current account and adjustments has administered prices in the second half of 2011, and a cycle of depreciation and inflation ensued. The fiscal accounts suffered in the first half of 2012 from the restructuring arrangement for Air Seychelles. The banking system remains solid and continues to maintain healthy capital adequacy ratios. Despite strong program performance, Seychelles remains highly vulnerable to external shocks.

The Seychelles’ Extended Fund Facility (EFF) Arrangement has played a central role in restoring macro stability and growth to the economy, and has been instrumental to the development of the structural reform agenda. Since the Seychelles economy was in near collapse in 2008, fiscal and monetary policies have been tightened, inflation has fallen significantly, debt restructuring is near completion and the rupee has stabilized. Extensive reforms have been implemented since the three-year EFF commenced in December 2009, and sustaining momentum on structural reforms remains a key priority for the authorities. Fiscal discipline has been a key feature of this government, and we believe the task of reducing public debt to less than 50 per cent of GDP by 2018 remains firmly on track.

The Seychelles economy is maturing and while a number of challenges remain, the Seychellois economy is facing them from a position of strength. Our Seychellois authorities are reform-minded and remain committed to the EFF with continued strong program ownership. The IMF program has been underpinned by broad-based public support and the program has continued to surprise on the upside. The authorities see significant benefits in extending the EFF arrangement for another year to help preserve the gains from hard fought reforms, and to deepen structural reform in critical areas such as improving the transmission of monetary policy. Consolidating the significant progress achieved over the past few years will ensure that the reform agenda becomes entrenched in the medium term economic framework.

On behalf of the Seychellois authorities, we thank Staff for the engaging and productive discussion and the high quality of Staff advice. Considerable progress has been made in recent years with technical assistance from the Fund, and we wish to stay closely engaged. Authorities will also consult with the Fund on the adoption and changes to policy contained in the Memorandum of Economic and Financial Policies (MEFP) for 2013.

Economic development and outlook

As a small, open economy, Seychelles remains vulnerable to external shocks. As such, prospects for the Seychelles economy depend heavily on policies that mitigate the impact of risks stemming from the fragile state of the global economy. To this end, the floating exchange rate has served the economy well since its free flotation in November 2008.

Tourism (comprising around a quarter of GDP) remains an important source of growth and employment to the Seychelles. Although tourist arrivals from Europe have fallen, this has been largely offset by growth in non-traditional markets, such as Russia and the Middle East. Past efforts to diversify the tourism sector appear to be working, and tourist arrivals this year, as well as income, have exceeded our expectation, given the downturn in the European market.

Real GDP is expected to pick up modestly to 3 per cent in 2013 and 4 per cent in 2014. Inflation is forecast to moderate and the current account deficit is expected to narrow, in line with an expected fall in commodity prices. Reserves are being rebuilt, albeit at a relatively modest pace and comprehensive restructuring of external debt is near completion.

Fiscal Policy

As noted above, the authorities are well on track to meet the target of limiting total debt to less than 50 per cent of GDP by 2018. The fiscal primary target under the program was met by a wide margin, notwithstanding the unexpected revenue windfall related to the sale of d’Arros island. The Seychellois authorities are committed to bringing down public debt and putting public finances on a sustainable footing. We are aware that spending on infrastructure and social services will need to be balanced against debt reduction efforts and careful consideration will need to be given to the impact of potential new loans on debt sustainability. The establishment of a committee to review large public investment projects (such as water and electricity) should help in this regard.

The authorities are also committed to strengthening the fiscal framework. Last month, the Public Financial Management Act was approved by the National Assembly. This Act includes, inter alia, the adoption of the new Charts of Accounts on which the 2013 Budget will be based upon, as well as enhancements to the Public Sector Investment Program and the establishment of the Government Audit Committee. The authorities are also finalizing a strategy to begin implementing a Program Based Budgeting Framework, and in 2013 it will initiate public expenditure reviews for health and education, which will be later extended to other key sectors.

Monetary and Exchange Rate policies

While inflation picked up modestly in mid-2012, it is projected to ease partly reflecting base effects from 12 months ago (higher energy prices and exchange rate depreciation). The recent moderation in inflation has allowed the Central Bank of Seychelles (CBS) to move gradually towards a more accommodative stance on monetary policy. Inflation is forecast to average 5.1 per cent in 2013 and 3.3 per cent in 2014.

While the foreign exchange market has been tight for most of 2012—which have rendered CBS’ reserve buildup exercise more challenging—the situation has improved. We are nevertheless cognizant of the need to strengthen buffers against external shocks. The Central Bank will continue to purchase foreign currency for reserves accumulation purposes on the domestic interbank market and will continue to strengthen reserve management practices, including through the recent establishment of a three-year training program on reserve portfolio management.

In an effort to reduce excess volatility and to stabilize the rupee, the CBS intervened twice in the foreign exchange market in mid-2012. To help strengthen the transmission of monetary policy to achieve the CBS’s primary objective of price stability, authorities will request technical assistance from the Fund to assess the desirability and feasibility of adopting a target for core inflation.

Financial sector policies

Wide-ranging reforms in the banking sector are being pursued, from increasing competition and enhancing the supervisory framework to improving access to credit and strengthening the financial literacy program.

Reducing the cost and improving the efficiency of financial transactions have been important objectives that have helped guide the development of financial sector policies. For example, the CBS is modernizing the National Payment System through the development of an electronic payment system. The countrywide provision of real-time payment services will result in greater financial inclusion and economic growth. The Electronic Cheque Clearing project has also been successfully implemented and will be followed by the rollout of an electronic Funds Transfer System in 2013.

The government is strengthening liquidity management having recently signed a Memorandum of Understanding between CBS and the Ministry of Finance, Trade and Investment to allow funds from treasury bill issuances to be placed in an account at the CBS with the interest cost to be borne by the government.

More broadly, the national stock exchange was launched in early December and as noted in the MEFP, Seychelles’ ranking in the World Bank’s ‘Ease of doing Business’ has improved substantially rising by 29 places to 74th in the 2013 ranking, and there is the potential for further improvements in the next ranking owing to a number of measures introduced over the past 6 months.

Program Implementation

The authorities have a strong track record in program implementation and performance. All performance criteria and structural benchmarks as of end-June have been met, and we remain on track to meet the end-December targets. As Staff notes, our capacity to repay the Fund remains strong when measured across a number of metrics.

The key objectives underpinning the request for a one year extension of the arrangement include fiscal reform, building reserves and improving the sophistication of the market-based monetary policy framework. The EFF extension and augmentation would help to cement the gains achieved in macroeconomic stabilization, assist in debt stabilizing and maintain the momentum on reform.

Structural Reforms–Second Generation

Structural economic policies are being pursued steadfastly, and will have far-reaching implications for households, businesses and government. Despite implementation risks associated with the rollout of some reforms, we have devoted significant effort to the planning and sequencing of reform. At the current juncture, developing sound institutions and strengthening the operation of monetary policy while maintaining fiscal discipline is critical to lifting growth and improving the resilience of the Seychelles economy.

Structural reforms are centered on modernizing the tax system and improving the financial performance of the broader public sector. The government is committed to improving the oversight and management of state-owned and parastatal companies. Work remains on improving the financial stability and reducing the debt of public sector enterprises, and progress here will be important to unlocking future growth potential.

Other important reforms include:

  • The restructuring of Air Seychelles (joint venture with Etihad) is beginning to pay early dividends, with earlier-than-expected profits. Beginning next year, the commencement of flights into the Asian market through Abu Dhabi will help us expand our international network.

  • Reducing the cross-subsidization of electricity costs through the implementation of the tariff study recommendations. The recent completion of the study on utility tariff reform will be instructive to the restructuring of electricity prices in 2013. We recognize that we need to strike the right balance between gradual increases in utility prices while protecting the vulnerable and low-income households.

  • The introduction of value-added tax (VAT) from 1 January 2013, will also weigh on low-income households and we intend to protect low-income households by increasing the minimum wage, increasing benefits provided by the Agency for Social Protection, and exempting VAT on basic commodities and essential services. To ensure the smooth implementation of the VAT, we have stepped up our communication with key stakeholders and the general public on the new system. Over the medium term, modernizing the tax system will require an overhaul of some aspects of the tax system. We will work towards overhauling the tax system by further reducing the business tax rates, broadening the tax base and improving compliance in revenue collections.

Seychelles: Sixth Review Under the Extended Arrangement and Request for an Extension of the Arrangement and Augmentation of Access—Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Seychelles.
Author: International Monetary Fund. African Dept.