Abstract
This staff report discusses Seychelles 2013 Article IV Consultation, Seventh Review Under the Extended Arrangement and Request for Modification of Performance Criterion. The repayment of domestic debt, a preference for foreign financing, and shallow domestic financial markets have resulted in significant structural rupee liquidity in the banking system. Tourism has been the main driver of growth, but there is a tension with the number of tourists the islands can absorb. Despite the challenging global environment, tourist arrivals have grown strongly, with diversification toward nontraditional markets more than offsetting stalling European arrivals. The Seychellois rupee is broadly in line with medium-term fundamentals, and tourism remains competitive among peers.
On May 8, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Seychelles.1
Background
In the few years since the 2008 debt crisis, Seychelles has made remarkable strides, quickly restoring macroeconomic stability and creating room for private-sector activity. Macroeconomic developments in the tourism-based island economy have been favorable, despite the challenging global environment. Notably, growth held up as the tourism industry successfully attracted arrivals from non-traditional markets as European arrivals slumped, while a surge in foreign direct investment (FDI) supported construction in recent years. For the most part, inflation remained contained, and the external position improved markedly following liberalization of the exchange rate in 2008 and debt restructuring started in 2009.
In 2012, despite robust tourist arrivals, growth moderated to 2.9 percent as large investment projects were completed. Inflation spiked in July 2012 to 8.9 percent fueled by global as well as domestic developments, but has since abated as a result of successful monetary tightening. The external position continued to improve, albeit modestly. In particular, the current account deficit declined slightly, but remained high at around 22 percent of GDP, but was fully financed by FDI and external borrowing, leading to a modest rise in reserves. Debt restructuring is nearly complete, with only one loan agreement awaiting signature.
Fiscal policy in 2012 continued to support debt sustainability. The primary surplus is projected to have risen to 6.2 percent of GDP in part due to sizable windfall revenues which were partly saved. Buoyant revenue and grants paved the way for needed capital expenditure. Notwithstanding, public debt increased by over 3 percentage points of GDP due mostly to currency depreciation and the government assuming liabilities of Air Seychelles.
Monetary policy was tightened sharply in 2012 in response to rising inflation and an unhinging of the exchange rate, and has since been relaxed. Starting in late-2011, rising global food and fuel prices coupled with adjustments in administered prices pushed prices higher. This was reinforced by current account pressures resulting from lower exports of transportation services in the wake of the restructuring of Air Seychelles. The looming inflation-depreciation spiral was broken in mid-2012 by two small foreign exchange market interventions by the Central Bank of Seychelles and a tightening of monetary policy. By end-2012, inflation had fallen to 5.8 percent and the exchange rate had strengthened beyond its end-2011 level.
Broad-based structural reform over the past five years has worked to improve financial performance of the public sector and increase private sector participation in economic activity. Statistical capacity continues to be strengthened. Seychelles subscribes to the IMF’s General Data Dissemination Standard (GDDS) and is making progress at compiling higher frequency economic data which will support strengthened macroeconomic oversight and analysis.
Executive Board Assessment
Directors commended the authorities for their strong policy implementation. Macroeconomic stability has been restored and growth has remained resilient. While the outlook is favorable, the economy is vulnerable to an uncertain global environment and domestic risks. Directors called for continued commitment to sound policies and structural reforms to preserve macroeconomic and financial stability, build policy buffers, and foster strong and inclusive growth.
Directors welcomed the steps to improve financial discipline at the central government level and the recent introduction of the VAT. They agreed that strengthening the oversight and financial position of parastatals, including through adequate price mechanisms, and further progress in public financial management will be key to ensuring fiscal sustainability. For the medium term, Directors supported the authorities’ fiscal policy stance which aims at targeting a primary fiscal surplus and reducing public debt to 50 percent of GDP. They welcomed that the debt restructuring is nearly complete and encouraged the authorities to exercise caution when contracting new external debt.
Directors called for continued efforts to improve the monetary framework in order to stabilize inflation expectations and policy interest rates. Absorbing excess liquidity over time will be important to strengthen the monetary anchor and monetary transmission mechanism. Directors considered that a further increase in international reserves, as market conditions permit, would provide a stronger buffer against shocks. Directors noted that the financial system is sound and welcomed the steps being taken to improve the functioning of the credit market.
Directors commended the efforts towards improving the business and investment climate, which is key to avoid a potential middle-income trap and to support broad-based growth. They encouraged the authorities to foster private sector-led growth by addressing infrastructure gaps, engendering lower cost and improved access to credit, correcting data weaknesses, and moving ahead with plans for greater workforce education and capacity building.
Seychelles: Selected Economic and Financial Indicators, 2010–14
Excludes debt issued in 2012 for monetary purposes (5.4 percent of GDP), as proceeds are kept in a blocked account with the Central Bank.
Seychelles: Selected Economic and Financial Indicators, 2010–14
| 2010 | 2011 | 2012 | 2013 | 2014 | |||
|---|---|---|---|---|---|---|---|
| Actual | Actual | Est. | Proj. | Proj. | |||
| (Percentage change, unless otherwise indicated) | |||||||
| National income and prices | |||||||
| Nominal GDP (millions of Seychelles rupees) | 11,74 | 13,119 | 14,145 | 15,292 | 16,461 | ||
| Real GDP | 5.6 | 5.0 | 2.9 | 3.3 | 3.9 | ||
| CPI (annual average) | -2.4 | 2.6 | 7.1 | 4.5 | 3.4 | ||
| CPI (end-of-period) | 0.4 | 5.5 | 5.8 | 4.3 | 3.1 | ||
| GDP deflator average | -3.6 | 6.4 | 4.8 | 4.6 | 3.6 | ||
| (Percentage change, unless otherwise indicated) | |||||||
| Money and credit | |||||||
| Credit to the economy | 21.4 | 6.2 | 2.5 | 13.0 | … | ||
| Broad money | 13.5 | 4.5 | -2.3 | 0.1 | … | ||
| Reserve money | 34.7 | -2.7 | 6.9 | 12.3 | … | ||
| Velocity (GDP/broad money) | 1.6 | 1.7 | 1.9 | 2.1 | … | ||
| Money multiplier (broad money/reserve money) | 4.2 | 4.5 | 4.1 | 3.6 | … | ||
| (Percent of GDP) | |||||||
| Savings-Investment balance | |||||||
| External savings | 23.0 | 22.7 | 21.7 | 23.2 | 18.4 | ||
| Gross national savings | 13.6 | 12.4 | 17.3 | 15.1 | 15.5 | ||
| Of which: government savings | 7.8 | 10.6 | 14.3 | 12.1 | 11.0 | ||
| Gross investment | 36.6 | 35.1 | 39.0 | 38.2 | 33.8 | ||
| Of which: government investment | 8.6 | 8.1 | 12.0 | 9.2 | 7.8 | ||
| Government budget | |||||||
| Total revenue, excluding grants | 34.1 | 35.8 | 37.6 | 36.4 | 35.6 | ||
| Expenditure and net lending | 32.5 | 35.7 | 40.2 | 38.5 | 36.0 | ||
| Current expenditure | 27.2 | 27.6 | 28.8 | 28.8 | 27.3 | ||
| Capital expenditure and net lending | 5.3 | 8.1 | 11.4 | 9.8 | 8.7 | ||
| Overall balance, including grants | 2.5 | 2.5 | 2.4 | 1.8 | 2.0 | ||
| Primary balance | 8.6 | 5.4 | 6.2 | 5.1 | 4.4 | ||
| Total public debt | 81.6 | 74.3 | 77.3 | 72.0 | 65.3 | ||
| Domestic1 | 32.5 | 28.0 | 27.7 | 25.7 | 18.6 | ||
| External | 49.1 | 46.2 | 49.6 | 46.3 | 46.7 | ||
| (Percent of GDP, unless otherwise indicated) | |||||||
| External sector | |||||||
| Current account balance including official transfers | -23.0 | -22.7 | -21.7 | -23.2 | -18.4 | ||
| Total stock of arrears (millions of U.S. dollars) | 30.3 | 9.0 | 2.7 | … | … | ||
| Total public external debt outstanding (millions of U.S. dollars) | 478 | 490 | 512 | 558 | 597 | ||
| (percent of GDP) | 49.1 | 46.2 | 49.6 | 46.3 | 46.7 | ||
| Terms of trade (= - deterioration) | -6.7 | -6.4 | -0.4 | 0.6 | 1.2 | ||
| Real effective exchange rate (average, percent change) | 4.4 | -7.4 | … | … | … | ||
| Gross official reserves (end of year, millions of U.S. dollars) | 254 | 277 | 305 | 317 | 326 | ||
| Months of imports, c.i.f. | 2.3 | 2.5 | 2.6 | 2.7 | 2.7 | ||
| Exchange rate | |||||||
| Seychelles rupees per US$1 (end-of-period) | 12.1 | 13.7 | 13.0 | … | … | ||
| Seychelles rupees per US$1 (period average) | 12.1 | 12.4 | 13.7 | … | … | ||
Excludes debt issued in 2012 for monetary purposes (5.4 percent of GDP), as proceeds are kept in a blocked account with the Central Bank.
Seychelles: Selected Economic and Financial Indicators, 2010–14
| 2010 | 2011 | 2012 | 2013 | 2014 | |||
|---|---|---|---|---|---|---|---|
| Actual | Actual | Est. | Proj. | Proj. | |||
| (Percentage change, unless otherwise indicated) | |||||||
| National income and prices | |||||||
| Nominal GDP (millions of Seychelles rupees) | 11,74 | 13,119 | 14,145 | 15,292 | 16,461 | ||
| Real GDP | 5.6 | 5.0 | 2.9 | 3.3 | 3.9 | ||
| CPI (annual average) | -2.4 | 2.6 | 7.1 | 4.5 | 3.4 | ||
| CPI (end-of-period) | 0.4 | 5.5 | 5.8 | 4.3 | 3.1 | ||
| GDP deflator average | -3.6 | 6.4 | 4.8 | 4.6 | 3.6 | ||
| (Percentage change, unless otherwise indicated) | |||||||
| Money and credit | |||||||
| Credit to the economy | 21.4 | 6.2 | 2.5 | 13.0 | … | ||
| Broad money | 13.5 | 4.5 | -2.3 | 0.1 | … | ||
| Reserve money | 34.7 | -2.7 | 6.9 | 12.3 | … | ||
| Velocity (GDP/broad money) | 1.6 | 1.7 | 1.9 | 2.1 | … | ||
| Money multiplier (broad money/reserve money) | 4.2 | 4.5 | 4.1 | 3.6 | … | ||
| (Percent of GDP) | |||||||
| Savings-Investment balance | |||||||
| External savings | 23.0 | 22.7 | 21.7 | 23.2 | 18.4 | ||
| Gross national savings | 13.6 | 12.4 | 17.3 | 15.1 | 15.5 | ||
| Of which: government savings | 7.8 | 10.6 | 14.3 | 12.1 | 11.0 | ||
| Gross investment | 36.6 | 35.1 | 39.0 | 38.2 | 33.8 | ||
| Of which: government investment | 8.6 | 8.1 | 12.0 | 9.2 | 7.8 | ||
| Government budget | |||||||
| Total revenue, excluding grants | 34.1 | 35.8 | 37.6 | 36.4 | 35.6 | ||
| Expenditure and net lending | 32.5 | 35.7 | 40.2 | 38.5 | 36.0 | ||
| Current expenditure | 27.2 | 27.6 | 28.8 | 28.8 | 27.3 | ||
| Capital expenditure and net lending | 5.3 | 8.1 | 11.4 | 9.8 | 8.7 | ||
| Overall balance, including grants | 2.5 | 2.5 | 2.4 | 1.8 | 2.0 | ||
| Primary balance | 8.6 | 5.4 | 6.2 | 5.1 | 4.4 | ||
| Total public debt | 81.6 | 74.3 | 77.3 | 72.0 | 65.3 | ||
| Domestic1 | 32.5 | 28.0 | 27.7 | 25.7 | 18.6 | ||
| External | 49.1 | 46.2 | 49.6 | 46.3 | 46.7 | ||
| (Percent of GDP, unless otherwise indicated) | |||||||
| External sector | |||||||
| Current account balance including official transfers | -23.0 | -22.7 | -21.7 | -23.2 | -18.4 | ||
| Total stock of arrears (millions of U.S. dollars) | 30.3 | 9.0 | 2.7 | … | … | ||
| Total public external debt outstanding (millions of U.S. dollars) | 478 | 490 | 512 | 558 | 597 | ||
| (percent of GDP) | 49.1 | 46.2 | 49.6 | 46.3 | 46.7 | ||
| Terms of trade (= - deterioration) | -6.7 | -6.4 | -0.4 | 0.6 | 1.2 | ||
| Real effective exchange rate (average, percent change) | 4.4 | -7.4 | … | … | … | ||
| Gross official reserves (end of year, millions of U.S. dollars) | 254 | 277 | 305 | 317 | 326 | ||
| Months of imports, c.i.f. | 2.3 | 2.5 | 2.6 | 2.7 | 2.7 | ||
| Exchange rate | |||||||
| Seychelles rupees per US$1 (end-of-period) | 12.1 | 13.7 | 13.0 | … | … | ||
| Seychelles rupees per US$1 (period average) | 12.1 | 12.4 | 13.7 | … | … | ||
Excludes debt issued in 2012 for monetary purposes (5.4 percent of GDP), as proceeds are kept in a blocked account with the Central Bank.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.