Context: The robust recovery from the 2008 balance of payments and debt crisis has resulted in improved economic and social outcomes. Continued policy discipline and reforms are needed for the microstate to mitigate its geographical and population constraints and maintain momentum in developing a diversified and resilient economy. Focus: With the fiscal stance anchored by the authorities’ debt reduction objective, macroeconomic discussions concentrated on the smooth functioning of monetary and exchange rate policies. On the structural agenda, the dialogue focused on policies to promote sustained and inclusive growth, particularly on the appropriate role for state-owned enterprises (SOEs). Review: The program is on track. The authorities met the end-December quantitative performance criteria except for narrowly exceeding the ceiling on reserve money. The structural agenda remains broadly on track despite some delays. Staff recommends completion of the second review under the Extended Arrangement and modification of the performance criteria for end-June and end-December 2015, and supports the authorities’ request for a waiver for the end-December 2014 performance criterion for reserve money. Outlook and risks: With the external position having stabilized since the last review, fundamentals are strengthening. However, the economy remains highly vulnerable to global developments, including weakness in the key European markets, while domestic risks center on the role of the SOEs. Recommendations: The authorities’ objective of reducing public debt below 50 percent of GDP by 2018 remains an appropriate and attainable anchor for fiscal policy. The monetary policy framework should be further enhanced by increasing its forward orientation in the context of a flexible exchange rate. Structural measures should focus on fostering inclusiveness and private sector-led growth, while improving economic governance and the focus of SOEs. Data: Data provision is broadly adequate for surveillance. Priority areas include improved GDP statistics, strengthening external sector statistics, and extending coverage of the international investment position.

Abstract

Context: The robust recovery from the 2008 balance of payments and debt crisis has resulted in improved economic and social outcomes. Continued policy discipline and reforms are needed for the microstate to mitigate its geographical and population constraints and maintain momentum in developing a diversified and resilient economy. Focus: With the fiscal stance anchored by the authorities’ debt reduction objective, macroeconomic discussions concentrated on the smooth functioning of monetary and exchange rate policies. On the structural agenda, the dialogue focused on policies to promote sustained and inclusive growth, particularly on the appropriate role for state-owned enterprises (SOEs). Review: The program is on track. The authorities met the end-December quantitative performance criteria except for narrowly exceeding the ceiling on reserve money. The structural agenda remains broadly on track despite some delays. Staff recommends completion of the second review under the Extended Arrangement and modification of the performance criteria for end-June and end-December 2015, and supports the authorities’ request for a waiver for the end-December 2014 performance criterion for reserve money. Outlook and risks: With the external position having stabilized since the last review, fundamentals are strengthening. However, the economy remains highly vulnerable to global developments, including weakness in the key European markets, while domestic risks center on the role of the SOEs. Recommendations: The authorities’ objective of reducing public debt below 50 percent of GDP by 2018 remains an appropriate and attainable anchor for fiscal policy. The monetary policy framework should be further enhanced by increasing its forward orientation in the context of a flexible exchange rate. Structural measures should focus on fostering inclusiveness and private sector-led growth, while improving economic governance and the focus of SOEs. Data: Data provision is broadly adequate for surveillance. Priority areas include improved GDP statistics, strengthening external sector statistics, and extending coverage of the international investment position.

On June 17, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Seychelles.

Macroeconomic outcomes remain solid, and most of the external pressures experienced in 2014 have abated. Weakness in the main exports combined with strong domestic demand in 2014 led to depreciation pressures on the exchange rate. Beginning in late 2014, tighter monetary policy, a recovery in tourism, and falling global fuel prices, together with the effects of the depreciation on imports, helped to contain the external pressures. The combination of spending discipline and buoyant fiscal revenues—driven by strong imports—resulted in a primary surplus of over 4½ percent of GDP in 2014, exceeding the target. However, disappointing tourism arrivals ensured that growth remained subdued in 2014. Financial sector soundness indicators remain in the comfortable range; the Central Bank of Seychelles had to take management control of a small off-shore bank in October 2014 after it lost its correspondent relationship, but there should be no significant repercussions on Seychelles’ economy.

With a continuing recovery in tourism and the effect of lower fuel prices, projected growth for 2015 is slightly higher than earlier envisaged at 3½ percent; the exchange rate has recovered modestly against the dollar. The depreciation began to pass through to inflation, reaching 4.0 percent in May 2015 (year-on-year). The large current account deficit in 2014 is expected to contract sharply in 2015, helped by monetary policy tightening and lower fuel prices. In addition to a decline in FDI-related imports, import demand will be restrained by the depreciation, continued tight monetary policy, and a tight public sector wage round.

Executive Board Assessment2

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the strong implementation of their Fund supported economic program, notwithstanding a difficult external environment. The growth outlook is favorable, but the economy remains vulnerable to global developments while domestic risks are linked to state owned enterprises. Against this background, Directors underscored the importance of continued sound policies and structural reforms to strengthen macroeconomic and financial stability, build policy buffers, and foster sustained and inclusive growth.

Directors welcomed the authorities’ commitment to reducing public debt below 50 percent of GDP by 2018. They observed, however, that achieving this target while continuing to address critical infrastructure needs will require improving revenue mobilization and spending efficiency in the context of a sound medium term budget framework.

Directors considered that the authorities’ tight monetary stance has been appropriate in light of the recent external pressures and the rapid credit growth. Noting the risks to financial and macroeconomic stability that continued credit expansion would entail, Directors welcomed the authorities’ commitment to develop macro prudential tools and stressed the need for a determined implementation of reforms in this area.

Directors welcomed plans to develop a more forward looking monetary policy framework, based on liquidity and inflation forecasting and a strong coordination with the fiscal authorities. Directors encouraged the authorities to further strengthen international reserves while maintaining appropriate exchange rate flexibility, which has served the economy well.

Directors noted that the fragile financial situation of some state owned enterprises represents a significant fiscal risk. Accordingly, they encouraged the authorities to push ahead with their strategy to strengthen governance and performance of public enterprises. Directors also stressed that any new expansions of state owned enterprise operations or mandates should be carefully vetted and based on a strong and clear rationale for public sector involvement.

Directors agreed that further reforms are necessary to promote a dynamic private sector. They supported measures to further improve the business and investment climate, including by opening up key sectors so far protected from competition. Addressing skills mismatches in the labor market remains an important policy priority.

Directors welcomed Seychelles’ subscription to the IMF’s Special Data Dissemination Standard and its recent accession to the World Trade Organization.

Seychelles: Selected Economic and Financial Indicators, 2012–18

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Sources: Central Bank of Seychelles; Ministry of Finance; and IMF staff estimates and projections.

Includes onlending to the parastatals for investment purposes.

Includes debt issued by the Ministry of Finance for monetary purposes.

Includes private external debt.

1

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.

2

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.